This is how the telecom sector was rescued from bankruptcy in 1999

India’s brush with mobile telephony started in the mid-1990s, but the beginning was far from smooth.

A woman speaks on the telephone in Auwar Village in Pratapgarh district of Uttar Pradesh | Representational image | Sanjit Das for Bloomberg

New Delhi: The ongoing telecom crisis is the second time in nearly three decades that the industry finds itself at an existential turn.

The last time it happened, in the late 1990s, the government stepped in to overhaul the licence regime and bail out the stressed sector.

Private mobile service providers entered the Indian market in the wake of the 1991 economic reforms, as the government ended its monopoly over the telecom sector. It was yet the nascent days of mobile telephony in India, and the technology came with prohibitive prices.  

The first mobile services were launched in 1995. By 1998, however, 13 service operators were running losses because of the “high licence fee, interconnection charges and spectrum usage charges imposed by the Department of Telecommunications”. Companies like JT Mobile, Koshika Telecom and Aircell had their licences terminated because of unpaid fees. The problems in the sector were attributed to the fixed-licence-fee model under which companies were expected to operate.

ThePrint takes a look at why the regime didn’t work and the steps the government subsequently took to rescue the sector from bankruptcy. 

How the problem began

In 1992, the Department of Telecom (DoT) invited bids to launch mobile services in four metros — Mumbai, Delhi, Kolkata and Chennai. Bidders were given one of two choices — a minimum licence fee, which varied for each of the metros (from Rs 1 crore to Rs 3 crore), or a payment of Rs 5,000/subscriber, whichever was higher. 

By 1995, this pool included 21 ‘telecom circles’ spread across the country. Here’s where the problem started. 

The 21 circles were in categories of A, B and C based on the potential of the circle to generate revenue. ‘A’ included Gujarat, Karnataka, Tamil Nadu, Andhra Pradesh, Maharashtra; ‘B’ included Haryana, Punjab, Kerala, Rajasthan, West Bengal, Uttar Pradesh (West), Madhya Pradesh, Uttar Pradesh (East); and ‘C’ included Bihar, northeast, Assam, Odisha, Himachal Pradesh, and Jammu & Kashmir. 

Each circle had a fixed licence fee based on the government’s estimates of revenue projections. With these projections, operators made huge investments to roll out mobile telecom networks. 

However, the government turned out to have grossly overestimated the number of customers who would opt for mobile services. A study conducted at the time by ICICI concluded that 17 per cent of subscribers had barely used their cell phone and 37 per cent were paying telecom bills of less than Rs 500 a month. 

Another study conducted in 1999 by the Telecom Regulatory Authority of India [TRAI], a government agency, noted how infrastructure propped up by private companies at great expense was going underutilised and the companies were struggling to recover costs. 

According to the study, the “financial failure” of the telecom service providers boiled down to factors such as unutilised infrastructure, fewer subscribers than expected, and the licence fees, which ate up a “significant amount of the finances of the service provider”.

A ‘better’ licence model

The government subsequently acknowledged that the fixed licence fee regime wasn’t practical, and came out with the New Telecom Policy of 1999. 

Under the policy, companies were allowed to clear licence fees dues up to 1999 and opt for a new model based on revenue-sharing. The new model mandated companies to pay a percentage of their adjusted gross revenue (AGR), 8 per cent, as an annual licence fee.

Most telecom companies bounced back. For example, Bharti Airtel Ltd, previously known as Bharti Tele-Ventures Ltd, reported Rs 97 crore in marginal earnings before interest and tax in the financial year 2002-2003. It reportedly picked up further in the following five years.

However, it is the same AGR that lies at the heart of the current crisis, with the Supreme Court upholding a controversial definition that makes telecom companies liable to pay nearly Rs 1.47 lakh crore in dues. 

While telecom companies insist AGR should only comprise revenue earned from telecom services, the definition now also includes money received from non-telecom services, thus enhancing the sum players need to pay for a telecom licence.