Navigating Turbulence: Lessons from India's Telecom AGR Crisis
The AGR dispute highlights the urgent need for clear regulatory frameworks and proactive risk management to maintain the competitiveness and integrity of India's telecom sector.
On September 1, 2020, the Supreme Court concluded the historic AGR (Adjusted Gross Revenue) case, which had shaken the Indian telecom sector for over two decades, with a landmark judgment. The outcome left the telecom operators owing a staggering INR 169,000 crores (approximately $22.8 billion USD). Recently, the Supreme Court dismissed the curative petitions from the telecom companies, dashing the last hopes for a correction of the Department of Telecommunications' (DoT) calculations regarding the AGR dues. The conclusion of this long-standing issue marks a critical point for the sector, with the term "bizarre" barely capturing the absurdity of how prolonged and convoluted the proceedings were. The legal entanglement between the DoT and the telecom operators extended far beyond reasonable limits, resulting in a scenario where the government now faces the challenge of collecting dues from bankrupt entities and from Vodafone-Idea, which is financially strained with huge impending payments post-moratorium (Read analysis here). This note aims to dissect the reasons behind the prolonged duration of this case and to analyze the series of missteps by both the government and the telecom companies that led to this dire situation.
Pending Promises: Defining Revenue through TRAI-Guided Fair Consultation
DoT had intentionally left the critical term "definition of revenue" undefined in its migration package from fixed license fees to a revenue-sharing model, announced on July 22, 1999 [clause iii], which is outlined below for clarity:
"Effective August 1, 1999, the license fee as a percentage of the gross revenue will be payable. The Government will determine the final revenue share percentage after consulting with the Telecom Regulatory Authority of India (TRAI). Meanwhile, the Government has set a provisional license fee at 15% of the licensee's gross revenue, excluding PSTN-related call charges paid to DOT/MTNL and service tax collected on behalf of the Government. Upon receiving TRAI's recommendations and making a final decision, any necessary adjustments to these provisional dues will be made based on the agreed-upon revenue share percentage and the finalized definition of revenue."
In essence, the migration package required unconditional acceptance from the telecom companies with the understanding that the "Definition of Revenue" would be established later, following a fair consultation process led by TRAI.
Broken Promises: DoT Sidelines TRAI’s Expert Recommendations
As outlined in the migration package, the Department of Telecommunications (DoT) initially consulted the Telecom Regulatory Authority of India (TRAI) but subsequently ignored all its recommendations without providing any justification. Moreover, the DoT failed to disclose the consultative report it used, avoiding public scrutiny and debate. The TRAI Act [page 10, sec 11] does allow the DoT to request TRAI to reconsider its recommendations, yet an essential issue overlooked in the Supreme Court—and only superficially addressed by the TDSAT, which does not have the jurisdiction to set license conditions, only to interpret them—is whether the DoT is justified in dismissing significant recommendations without explanation. This practice casts doubt on the effectiveness of the consultation process. What value does TRAI add if its recommendations can be dismissed without transparent reasoning by the DoT? This problem is highlighted in the extracts from the DoT's feedback to TRAI [page 7, 2.3(j)], where it proposes a definition of Adjusted Gross Revenue (AGR) for computing the license fee, diverging from TRAI's advice without clarifying the reasons for this deviation.
2.3 Revenue Share Definition - DoT Comments : (j)The government proposed to follow a definition of Adjusted Gross Revenue (AGR) for the purpose of computing license fee which is different from the definition recommended by the TRAI.
Please note that the DoT's response to TRAI lacked any rationale for deviating from TRAI's recommendations
Missed Opportunity: TRAI's Failure to Demand Clarity from DoT on Revenue Definition
TRAI should have formally requested the DoT to provide the rationale behind proposing a different definition of revenue. However, it appears this was not pursued. The relevant section from the TRAI Act [page 9, last paragraph] is quoted below for reference:
"Provided also that the Authority may request the Central Government to furnish such information or documents as may be necessary for the purpose of making the recommendation under sub-clauses (i) and (ii) of clause (a) of this section and the government shall supply such information within a period of seven days from receipt of such request."
It seems neither TRAI asked for, nor did DoT provide, any explanation for disregarding TRAI's recommendation on the "definition of revenue." This omission led to significant confusion among operators who struggled to understand why they were required to share revenue from business areas unrelated to the provisions of the Telegraph Act of 1885.
Judicial Oversight: TDSAT Disregards SC’s Permission for DoT to Reassert Past Contentions
TDSAT in its judgment dated 30th Aug 2007 had rejected Union of India's plea that SC had empowered it on 19th Jan 2007 to urge all its contentions (including those which were settled earlier on 7th July 2006) before TDSAT. The extracts of the SC order dated 19th Jan 2007 is reproduced below for reference.
"Heard the parties. Pursuant to the direction of the TDSAT in the impugned order, a fresh recommendation has been made by the TRAI. in view thereof, we see no reason to interfere. The appeal is dismissed. The appellant (DoT), is, however, given liberty to urge all the contentions raised in this petition before TDSAT"
The extracts of TDSAT's judgment of 30th Aug 2007 [page 12] is reproduced below.
"We have considered the contentions of both parties and we are of the view that the appeal against the order of this Tribunal having been dismissed by the Supreme Court, the order has become final and cannot be reopened. When an order becomes final, it cannot be challenged before the authority passing the order. It is a basic principle of our jurisprudence that an authority passing an order cannot itself sit in appeal against the order. Therefore, we reject the contention of the learned ASG that he should be allowed to re-agitate the issues which were raised by way of appeal against our order dated 7th July 2006 before the SC."
This proved very costly, as this was one of the bases used by SC to in its order dated 11th Nov 2011 to undo all the outcomes that happened before TDSAT to date. The first Para of page 34 of the SC judgment dated 11th Nov 2011 is reproduced below.
"It will be clear from the language of the order dated 19th Jan 2007 that while dismissing the appeal, the court has given liberty to the appellant, namely, Union of India, to urge the contentions raised in the Civil Appeal No.84 of 2007"
Judicial Oversight: SC’s Delay in Addressing TDSAT’s Jurisdiction
When the Supreme Court passed its order on January 19, 2007, it did not address the issue of TDSAT’s jurisdiction, which it later scrutinized in its judgment dated November 11, 2011—this scrutiny formed the basis for rejecting TDSAT's earlier judgment of August 30, 2007. The relevant extract from the SC judgment 11th Nov 2011 judgment [page 49] clarifies:
"The result is that the Tribunal has no jurisdiction to decide upon the validity of the terms and conditions incorporated in the license of a service provider, but it will have jurisdiction to decide 'any' dispute between the licensor and the licensee on the interpretation of the terms and condition of the license."
This raises a critical question: if TDSAT lacked jurisdiction, why was this issue not investigated in 2007 when the matter first reached the Supreme Court? Why wait four years to make this determination in 2011? Addressing this sooner could have saved considerable time and effort.
Critical Omissions: SC’s Selective Deliberation in the AGR Dispute
SC in its judgment dated 11th Nov 2011 decided and deliberated on four substantial questions of law. 1) Whether DoT has the right to re-agitate the same issues decided by TDSAT on 7th July 2006 in lieu of SC dismissing DoT's appeal No.84 of 2007; 2) Whether TDSAT has jurisdiction to decide the terms and condition of the license; 3) Whether DoT not filing an appeal against the order dated 7th July 2006 of TDSAT passed in favor of the licensee, the said order has become final; 4) Whether the licenses can challenge the computation of AGR, and if so at what stage and on what grounds.
But it did not include other questions of law, i.e a) whether DoT can reject TRAI's recommendations without assigning any reasons (arbitrarily), b) whether it is fair on behalf of DoT to structure a contract with such ambiguity, the terms of which the DoT can decide unilaterally at a later stage, and that too without assigning any reasons?
Why aren't these questions not included in the SC deliberation? The reason it is important to know as the "unilateralism" of DoT after having set the expectation of fair consultation with TRAI, trigged the biggest and longest litigation - lasting for 20 years and impacted the industry 23 billion dollars of unnecessary outflows, which ironically DoT was trying to avoid through its definition of AGR. Strange, isn't it?
Judicial Inconsistency: SC’s Attribution of Blame in the AGR Judgment
In its judgment dated October 24, 2019, the Supreme Court disregarded the extensive history of delays and errors in judicial processes over which the operators had no control. Remarkably, the Court placed the entirety of the blame for these delays on the operators themselves. Despite validating the Department of Telecommunications' (DoT) definition of Adjusted Gross Revenue (AGR), the Court lacked a clear rationale for imposing such substantial penalties, complete with accruing interests, on the operators. This decision was made without adequately considering the aforementioned factors and the operators' limited ability to influence these outcomes.
Selective Exemptions: SC’s Arbitrary Ruling and TDSAT’s Clarification
In its June 11, 2020 order, the Supreme Court exempted Public Sector Undertakings (PSUs) from paying license fees based on the same revenue definition applied to telecom operators. The Court differentiated between the licenses of National Long Distance (NLD) and IP-II, and those of Unified Access Service License (UASL) and Internet Service Providers (ISP), stating that NLD and IP-II licenses include a specific clause “by way of providing service under the license,” which is absent in UASL/ISP licenses.
However, all PSUs also hold an ISP license, where the conditions are identical to those of UASL, and some ISPs like Railtel offer commercial services comparable to UASL. Despite this, the Court’s exemption seems illogical, especially since these PSUs could have isolated their non-telecom revenues by structuring them under separate companies, as suggested by the SC in its 2011 judgment. This raises questions about why PSUs did not separate their telecom activities into different entities, and why such exemptions were not extended to MTNL and BSNL as well.
This perceived arbitrariness was addressed by the Telecom Disputes Settlement and Appellate Tribunal (TDSAT) in its judgment on February 28, 2022, in the NetMagic case. TDSAT ruled that there should be no differential treatment between licensees holding similar licenses, regardless of whether they are private or public entities. NetMagic, possessing an ISP license, successfully argued that it should be treated equivalently to PSUs, leading TDSAT to instruct the Department of Telecommunications (DoT) to reevaluate its demands and exclude non-telecom revenues from the license fee calculations. This decision underscores the need for consistency and fairness in the application of regulatory judgments across all operators.
Finality of Preliminary Assessments: SC’s Restriction on Telecom Operators
SC in its judgment dated 1st Sept 2020, included a table titled "Amounts Recoverable From Major TSPs As Per Preliminary Assessment". Also, in the same judgment, it has prevented the operators from reassessing these dues. Clause 38(i) on page 45/46 is reproduced from the judgment for reference.
"That for the demand raised by the Department of Telecom in respect of the AGR dues based on the judgment of this Court, there shall not be any dispute raised by any of the Telecom Operators and that there shall not be any reassessment."
Now it is not understood how can an Assessment which is marked "Preliminary" can be treated as final? That too when the operators did not have the opportunity to check and verify and also there are issues that the operators are facing from DoT for claiming relief on existing pass-through allowed as per the deduction allowed on the license agreement.
Strategic Missteps: Telecom Operators' Overlooked Opportunities for Early Settlement and Reform
Telecom operators relentlessly pursued the case without fully anticipating the risks of a defeat. They should have opted for an early settlement and advocated for dismantling the revenue share regime as early as 2007 during preparations for the 3G auctions. Surprisingly, no operator addressed this point. The existing subscriber-based revenue share policy was advantageous primarily to combat CDMA technology, which required only half the spectrum GSM needed due to its efficiency. This situation was further complicated when Ratan Tata proposed paying Rs 1500 Cr for 3G spectrum, leading to criticisms from industry leaders who suggested that excess funds should be directed to the Prime Minister's relief fund instead. This narrative damaged the industry’s credibility, creating a perception that operators were primarily interested in obtaining free or subsidized spectrum.
In my view, the revenue share-based licensing model, where spectrum was bundled with the license, should have been discontinued when the Department of Telecommunications (DoT) began auctioning spectrum. This change would have transitioned licensing practices to a more transparent and market-driven approach. Additionally, the fragmented operational structure of some group companies, where each entity held licenses under different jurisdictions and extended loans to one another accruing interest that was added to their Adjusted Gross Revenue (AGR) for license fee calculations, further complicated financial assessments and regulatory compliance.
Conclusion: Lessons from the AGR Dispute's Protracted Litigation
he AGR dispute highlights a complex saga of regulatory and judicial mishaps, strategic errors, and missed opportunities across all parties involved. Initially, the Department of Telecommunications (DoT) failed to fulfill its commitment to transparently define revenue, leaving the industry grappling with ambiguities that stifled logical progression of disputes. Similarly, the Telecom Regulatory Authority of India (TRAI) did not hold DoT accountable for its decisions, undermining its role in facilitating a fair consultation process.
The judiciary, including the Supreme Court (SC) and the Telecom Disputes Settlement and Appellate Tribunal (TDSAT), engaged in a protracted ping-pong of legal interpretations without resolving the core issues efficiently. The SC's delayed judgment on jurisdiction issues and the failure to address key questions of law regarding DoT's unilateral decision-making significantly affected the sector's regulatory landscape.
On the other hand, telecom operators failed to strategically mitigate risks associated with the revenue-sharing model. They missed crucial opportunities for early settlement and persisted in supporting an outdated AGR regime. This regime initially gave them a competitive edge over CDMA technologies, which, despite receiving only half the spectrum allocation, offered greater efficiency than GSM.
The SC’s 2019 decision to impose heavy penalties, including interest on operators, did not sufficiently consider the prolonged history of contentious legal and regulatory battles that preceded it. Furthermore, the 2020 SC ruling that exempted PSU ISPs from certain financial burdens under similar license conditions as private operators introduced an arbitrary distinction, undermining the principle of fair competition.
Ultimately, the protracted litigation and inadequate risk management have endangered consumer interests and undermined the competitiveness of India's telecom industry. The burden now falls on the Department of Telecommunications (DoT) to possibly convert its debt into equity—a move that could destabilize the equity structure of Vodafone Idea (VI), potentially transforming it into a government-owned entity. This situation underscores the crucial need for transparent regulatory processes, judicial foresight, and strategic corporate governance within highly regulated sectors, serving as a cautionary tale for future regulatory frameworks.
Sir,have been following the telecom sector very closely for 6-7 yrs now and Bharti is my largest equity holding cince 5 yrs now.This is the best summary have come across of this entire saga in this much time.The only word which can describe this situation and handling of the matter is "bizzare".This Govt has been in puwer for over 10 yrs now and still not been able to manage this.Its like this matter is only meant to drive Vodafone Idea into the ground.The PSU's have been exempted,Rjio was allowed to buy all Rcom assets cheap without AGR liability of Rcom and no one is bothered that most of AGR is lost to companies which have already gone bankrupt. Have also been a holder of Vodafone Idea shares in part bcoz I truly believe in the telecom story of India and its potential.Only reasonable answer I have right now for the mismanagement of this issue is that Govt wants Vodafone ( a foreign company) out of the strategically important telecom sector. I cannot fathom why SC wouldn't allow recalculation where there is already a moratorium of 4 yrs and even after that there is no guarantee that Govt can actually get any money.I mean, if after the calculations, the figures "of the provisional" demand are correct than so be it. There is something deeper at work here and no one can make sense of it how the Govt and SC have handled this issue. It has been incredibly frustrating to see the ups and downs of this sector and it continues.Cannot see how Bharti is going to agree to pay the Rs.43k cr which is their agr liability either.Bizzare is truly the word.