Any retrospective waiver of dues to the government will not only violate the SC verdict, but also be contrary to the rule of law
Dr Manoj Kumar
The Supreme Court has, on October 24, 2019, put to rest all the contentions and counter-contentions surrounding the outstanding dues of telecom service providers (TSPs) to the government. However, much of the rationale and terms of the 1999 migration package remains only on paper now, with TSPs dodging the adjusted gross revenue (AGR) liability even after the court verdict.
This essay is an adaptation of another opinion of the author published.
Some observations of the top court need to be highlighted here to understand the unfolding of events prior to October 24 and thereafter.
“189. Further, the conduct of the licensees has also to be considered in the backdrop of the fact that the regime of revenue sharing was extremely beneficial than the previous regime of the fixed licence fee, and they have tremendously benefited by it as is apparent from the statistics of the revenue earned under the revenue sharing regime. When the government has parted with the privilege as to revenue on sharing basis under the licence, and an agreement entered into, it ought to have been precisely followed…”
After the hue and cry of some of the TSPs on their sustainability and inability to meet the licence fee obligations, the government let its claim on the fixed licence fee go and moved to a migration package providing for revenue sharing on contractual terms to support the growth of the sector, allow the TSPs to rise and shine and thereafter pay as they earn.
As a result, gross revenue of the TSPs grew rapidly -- in some cases, it rose to about Rs 1,00,000 crore from Rs 60,000 crore. Year after year, the TSPs earned handsomely - and if they meant to stick to their share of the bargain, they were obliged to pay the agreed revenue share to the government based on the agreed terms. Remember, some even secured fresh licences on the same terms!
But, over the years, the TSPs avoided payments and instead disputed the computations of their liabilities. In fact, to make matters more confusing for themselves, their shareholders, creditors and the government, one tiger TSP analysed by us even avoided recognising the existence of potential liabilities, for which there was a need to make provisions from the gross revenues earned.
On the one hand, it insisted that the demands could be worked out only after the Supreme Court decides the disputes and on the other hand, it did not recognise the liabilities for maintaining provisions. The rap by the SC is telling enough:
“189…..The conduct of the licensees was highly unfair, and anyhow and somehow, they had attempted to delay the payment. It passes comprehension how they have contended that the demand has to be worked out after this Court renders its decision. Demand had been raised way back in 2003, which is ultimately the subject matter… As the objections are baseless and wholly untenable, it cannot be said that there was a bona fide dispute concerning various items. The disputes raised could not be termed to be bona fide at all.”
All the chickens had to come home to roost one day. On October 24, they have!
The provisions set out in the Indian Accounting Standards 37 make it obligatory on companies to recognise a present obligation -- legal or constructive -- arising out of a past event to make a provision in their books to cover such an obligation in future.
If there is more than 0.5 probability of such an obligation, provision must be made for the same. It is also necessary that a reliable estimate is made. Was the probability more the 0.5? Was it possible to estimate the obligations by the TSPs? Going by the assessment of the conduct of the TSPs, the answer appears to be in the affirmative.
Consider the following questions and their answers:
Are there any pending liabilities arising out of actual gross turnovers: Y es.
If liability was disputed, was any part/full provision made for the corresponding liability from the gross turnover pending resolution of disputes: No.
Was the said corresponding amount not paid to the Depratment of Telecommunications (DoT) converted into business assets/ventures by the TSPs/dividends paid to shareholders of TSPs : Yes.
For the period between 2001-02 and 2018-19, the tiger TSP achieved approximate gross revenues of Rs 8,93,800 crore, on which the licence fees and spectrum charges would come to approximately Rs 1,14,600 crore.
In fact, the latest balance sheet of the tiger TSP for 2018-2019 shows that it was maintaining a minuscule provision of about Rs 2,050 crore towards DoT dues till December 2018 and thereafter downgraded and reversed even that by shifting it from being recognised as an obligation for provision to an un-provisioned contingent liability, based on external opinion.
Page No.214 of Annual Report for Financial year 2018-19
Page No.223 of Annual Report for Financial year 2018-19
Now, the tiger and another transnational company have approached the government to give them a safe passage out of the predicament they find themselves in. This is the result of their actions over many years of diverting the funds meant for AGR payments to the government-- which has now been upheld by the Supreme Court -- into businesses and ventures across geographies and verticals including Direct to Home (DTH), value added services, towers/infra, overseas telecom ventures and the like.
The government is well within its rights to constitute a Committee of Secretaries to review the policy framework concerning the telecom sector. But the government would be on a slippery wicket if it were to try and review or indeed reinterpret the findings and implementation of the Supreme Court decision.
Any retrospective waiver of dues of the TSPs to the government will not only violate the October 24 order of the Supreme Court, but also be contrary to the rule of law.
Not only do the TSPs continue to own the very assets or businesses they created using the funds meant to be paid to the government, the market value of such business assets or ventures as also promoter holdings is more than enough to cover the dues.
Additionally, the robust insolvency regime in place now is capable of ensuring that businesses find their way to capable managements with respect for the rule of law. Hence, the government may be well advised to take all actions necessary to ensure that the amount diverted by the TSPs be recovered instead of rewarding diversion of funds with any amnesty or safe passage.Dr Manoj Kumar is the Founder & Managing Partner of Hammurabi & Solomon Partners. Views are personal.Are you happy with your current monthly income? Do you know you can double it without working extra hours or asking for a raise? Rahul Shah, one of the India's leading expert on wealth building, has created a strategy which makes it possible... in just a short few years. You can know his secrets in his FREE video series airing between 12th to 17th December. You can reserve your free seat here.