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Can Supreme Court Revive The Economy?
This is an opportune moment to shift the approach to ‘incentivizing’ rather than ‘penalizing’. Keeping in mind that the AGR Case is keenly being observed by foreign investors, a liberal approach for payment of dues at this juncture by the Hon’ble Supreme Court will tremendously boost the faith of investors and will mark the dawn of a new era in the Indian Economy.
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Much has been discussed about the role undertaken by the Legislature and the Executive and the measures undertaken by them, such as decriminalization, preventing tax terrorism, easing regulatory compliances to attract foreign investors and reviving the economy from the crisis caused due to the novel coronavirus (Covid-19). However, apart from the Legislature and the Executive, another organ of the functionary, i.e., the Judiciary, plays a pivotal role in impacting the economic growth of the Country. Till now, the Judiciary has been keen on adopting harsh measures to tackle the menace of economic offences. Blanket decisions such as the cancellation of all licenses in the coal block scam and the 2G spectrum, without examining each case, have unwittingly contributed to the loss in investor confidence and remains an impediment in attracting foreign investments. However, the recent developments in the AGR Case empower the Judiciary to aid the revival of the economy and boost investor confidence in addition to saving millions of jobs of citizens involved directly and indirectly in the Telcom Sector.
The Dawn of a New Era: Relief to the Telecom Companies
A good starting point would be the grant of additional time as prayed for, to the Telecom Companies by the Supreme Court, particularly because this sector has been the guinea pig for various controversial economic policies forcing companies to indulge in high-cost litigations lasting many years.
A booming industry in the late '90s and early '2000, the Telecom Sector in India attracted immense foreign investments, most notable being the acquisition of the ‘Hutchison Essar Limited’ group by the UK giant, ‘Vodafone Inc.’ for USD 11 Billion. As per official data, more than USD 37 Billion of Foreign Direct Investment was made in the Telecom Sector from 2000 –2010. Undisputedly, most investors saw an enormous opportunity in the Telecom Sector in India. However, since inception, the Sector has been embroiled in expensive and prolonged litigation causing a significant impact on the growth of the Sector.
The first major setback for the industry was seen with the retrospective tax imposed on Vodafone in 2009. In this case, the Government retrospectively raised a tax demand of Rs. 20,000 Crore since Vodafone had not deducted the tax at the source. After 3 years, the Supreme Court concluded the highly contentious matter in favor of the Vodafone Group and quashed the demand of the Government.
However, subsequently, there was a paradigm shift in the approach of the Supreme Court. It adopted a harsher approach to curb the surge in economic offences in the ‘interest of the state’. In 2012, the Supreme Court, pursuant to allegations of corruption in the allocation of the 2G spectrum, cancelled 122 spectrum licenses issued to Telecom Operators redrawing the entire industry. It is reported that the judgment had an impact on over 53 million phone connections. Foreign investors such as Norwegian Operator ‘Telenor’, which had joined hands with Unitech in 2008, lost all of its licenses after the Supreme Court Judgment and was ultimately forced to exit the market in 2017. Undoubtedly, the financial loss for Telecom Companies was irreparable. Similarly, in 2014 the Supreme Court held the process of allocation of 214 coal block licences to be illegal and arbitrary and consequently cancelled such licences granted for the period 1993 - 2011. The blanket cancellation of licenses, without examining each case on merits, has come under intense criticism from the respective industries.
Apart from impacting the business houses in the respective sectors, the verdicts to cancel licenses also eroded the faith of the business community in continuing business in India. That is to say that businesses realized the high risk of a decision revoking economic policy at a belated stage and the possibility of a criminal prosecution, even if one is remotely involved in the process. Eminent lawyer, Harish Salve holding the Supreme Court responsible for the economic slowdown stated that “Foreigners invested billions of dollars, and with one stroke of the pen, the Supreme Court knocked all of them out. That’s when the decline of the economy began.” As per reports, the estimated loss due to the cancellation of such licenses is ‘1 percent-plus of GDP’.
In 2019, the Telecom Companies were again burdened by the verdict of the Supreme Court in Union Of India Vs Association Of Unified Telecom Service Providers Of India. This dispute between the Telecom Operators and the Government arises out of the 1999 ‘relief model’ or the ‘revenue-sharing fee’ model, under which the companies are required to share a percentage of their Adjusted Gross Revenue (“AGR”) with the Government as an annual license fee and spectrum usage charges. The dispute arose when the Department of Telecommunications (“DoT”) raised a demand on the basis that AGR includes ‘all revenues from both telecom and non-telecom services’. Challenging this definition of AGR, the Cellular Operators Association of India, in 2005 argued that ‘AGR shall only comprise of revenue accrued from the telecom services, and should not include revenue accrued from dividends, interest income or profit on the sale of any investment or fixed assets.’ In a major relief to the Telecom Operators, the Telecom Disputes Settlement and Appellate Tribunal (TDSAT) was pleased to hold that AGR shall not include capital receipts and other revenue from ‘non-core’ sources including rent, interest, dividend, and other miscellaneous income. However, the relief was short-lived as in 2019, the Supreme Court reversed the TDSAT Order and upheld the definition of AGR as stipulated by the DoT. The financial implication of this verdict is over Rs. 1 lakh Crores and has put the future of many Telecom Providers like Vodafone-Idea and Hughes Communication on thin ice. Industrialist, Kumar Mangalam Birla, Chairman of Vodafone-Idea Ltd., has come on record to state that Vodafone-Idea will ‘close shop’ if no relief is provided to the Telecom Operators. Undisputedly, loss of Vodafone-Idea, one of the largest service providers in the Country will be disastrous, particularly in the midst of an unprecedented slowdown.
Eventually, seeing the possibility of catastrophic implications on employment, foreign investment and economic growth, the Government approached the Supreme Court for allowing the companies to pay their dues within 20 years, as desired by the Telecom Operators. This pending issue provides a window of opportunity for the Supreme Court to protect the interest of investors, the drivers of the Indian economy. Allowing such an extension of time will not only save some major operators but will also send a signal to all those doing business or those desirous of investing in India that their investment will not be discarded overnight and their interests will be protected equally. Alternatively, the Supreme Court could consider devising a new mechanism, such as a tribunal, for the speedy recovery of money. It is recommended that rather than penalizing non-payment, the Tribunal may incentivize early payment by offering discounted interest rates for the initial years and a gradual increase in interest over a period of time in the time period sought by the Companies. In simple words, the Court may formulate a new approach and in addition to the grant of time requested by companies, charge lower interest for the first few years till the company is able to secure sufficient funds without compromising their business activities. This will be beneficial for all stakeholders since the Government will receive the entire payable amount and the companies will be able to formulate a concrete mechanism for payment of dues, retain employment, continue making technological advancements and maintain a conducive environment for a healthy economy.
That being said, it must be noted that in addition to the continuous litigation, the Telecom Industry has been faced with stiff competition, particularly since the entry of Reliance Industries in the Telcom sector with ‘Jio’. Many believe that the ‘free offers’ provided by the Reliance Jio group qualified as anti-competitive practices. They believe that such ‘free offers’ were untenable in the future and destroyed the market-equilibrium putting the future of all telecom providers in jeopardy. Inevitably, in the telecom sector, all major operators lost significant market share in a short period and consequently were compelled to deal with additional loss in revenue, while coping with the outcome of the AGR verdict and mounting debts. However, the Competition Commission of India rejected such complaints and said that “If one were to construe such investment as anti-competitive, the same would deter entry and/or expansion and limit the growth of markets.” However, this view may set a bad precedent especially for capital intensive infrastructure businesses, as investors with deep pockets, will be able to hijack any sector by indulging in disruptive practices till the time the competitor completely collapses.
All in all, the inconsistent approach of the Supreme Court in dealing with commercial issues, particularly concerning the telecom industry over the years has adversely impacted the economic growth of the Country. The telecom industry is under billions of dollars in debt and some of the largest players are battling for survival since the AGR verdict in 2019. However, any relief in the AGR Case might just be the sigh of relief the telecom Sector needs. Moreover, this is an opportune moment to shift the approach to ‘incentivizing’ rather than ‘penalizing’. Keeping in mind that the AGR Case is keenly being observed by foreign investors, a liberal approach for payment of dues at this juncture by the Hon’ble Supreme Court will tremendously boost the faith of investors and will mark the dawn of a new era in the Indian Economy.
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.