The Nutgraf : Back to the Future

The Nutgraf is a 10-min newsletter sent at 10 AM IST every Saturday. It connects the dots and synthesizes one big event in business, technology and finance that happened over the week in India. In a way you’ll never forget.

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Welcome to The Nutgraf, the breeziest way to make sense of the craziest weeks that we live through.

Since PGK is on holiday the next few weeks, this is Rohin taking over. Be nice, please. 

This week is telecom week.

Back to the future of Indian Telecom

On Thursday, India’s Supreme Court did its beleaguered telecom sector a huge favour. It imposed a ginormous and collective retrospective charge of Rs 134,000 crore (roughly $19 billion) on every operator that has walked the sector’s cursed earth. 

The collective net debt of the telecom space is close to $28 billion.

In a final judgement on a case that’s been dragging through India’s labyrinthine and sclerotic judicial system since 2003, the Supreme Court upheld the government’s rather expansive view of what counts as “adjusted gross revenue” (AGR) for operators. AGR is the annual revenue on which operators pay a percentage to the government each year as licence and spectrum fees.

Sort of like your income taxes. And just like you, telecom operators, too, maintain that their actual income is way lesser than the government thinks it is. 

That’s where the comparison ends though. To understand why, we’ll need to indulge in a bit of time travel. Buckle up!


March 1999: We groggily stumble out of our car. People are ecstatic. In spite of numerous private mobile operators, India’s teledensity stood at a pathetic 2.3%.

A primary reason was the inordinately high licence fees imposed on operators, at times as high as Rs 6,000 (~$85 today) per active subscriber! To recoup that, they charged as much as Rs 16 ($0.22) per minute. The market, naturally, remained minuscule and operators—of which there were 22—were saddled with massive losses.

So, the BJP government, led by Atal Bihari Vajpayee, took the drastic step of deregulating telecom by shifting to a revenue share licensing model. He also laid out clear swimlanes for roles and powers of overlapping regulatory bodies like Trai, DoT and TDSAT (a pseudo-judiciary disputes settlement body).

The money operators saved from not paying extortionate licence fees allowed them to both drastically reduce call tariffs and invest in massive network build outs, setting in place a virtuous cycle. A cycle that culminated in India becoming one of the world’s most competitive and lucrative telecom markets, featuring both the lowest tariffs and the most valuable companies.

But Vajpayee’s new telecom policy (unironically also called the New Telecom Policy 1999) also contained the seeds of the industry’s eventual destruction.

For that, let’s travel forward a bit!


September 2006: We’re outside the offices of TRAI, India’s telecom regulator. The bureaucrats inside have just finished putting out a report on the contentious issue of AGR.

Private telecom operators, of which there are five, are locked in a confrontation with the government. They’re complaining that the government’s definition of AGR is too expansive and seeks to include items like income from dividend and interest, capital gains, foreign exchange gains, handset sales and property rentals. 

Since their licences demand an annual fee “as a percentage of gross revenue under the licence”, the operators maintain that revenues earned outside of the licence’s scope should not be part of AGR.

For instance, here’s how they defended excluding dividend income:

Investment of idle cash to earn dividend does not require a telecom licence and dividend is earned on account of non-telecom activity viz. investment of idle cash in securities. The petitioners also contended that dividend is an income from investments of surplus funds in equity share, preference share, mutual funds etc. The petitioners contended that income from dividend can be generated by Licencee Company even in the absence of a telecom licence.

Now you might think that a reasonable argument. Perhaps TRAI might have, too. 

But the Department of Telecom, or DoT, wasn’t buying it. DoT is the arm of India’s Ministry of Telecom through which it controls the sector and formulates policies (Trai, for large parts, merely regulates).

Dividend income absolutely had to be included in AGR, said DoT, because

           Exclusion of interest/dividend from revenue may encourage telecom companies to introduce schemes where-by the customers are allowed monthly tariff/airtime at very low (or even nil) charges in return for making substantial deposits that may then be invested to earn interest/dividend income.

The Indian government basically argued that operators might offer services free of cost and make licence-free revenue by earning interest on deposits from subscribers. 

Trai disagreed and said dividend income ought to be excluded.

The same pattern repeated itself. Operators said an income head should be excluded from AGR, DoT said it should be included, and Trai took a pragmatic position (read: sided with operators).

Not just Trai, but even TDSAT clearly sided with the operators.

            “If we are to read the word total gross revenue of the licensee company in the context in which it is found in the clauses of the Migration Package, we have no difficulty in accepting the argument of the petitioners that it can only be from the total gross revenue of the licensee company derived from the licensed activity only.”

Two out of three telecom bodies were clearly of the view that AGR could not mean any revenue under the sun.

The operators were in a good place.


August 2015: Almost a decade later, everything has gone to the dogs. 

After the Supreme Court’s 2012 en-masse cancellation of 122 licenses awarded to 8 mobile operators over allegations of corruption, only 5 private operators remain standing. There were 15 at one point.

Spectrum auctions in March had earned the government $16 billion, but did so by saddling still-standing operators with 50% more debt on their balance sheets. Balance sheets that cumulatively already held $40 billion in debt.

Meanwhile, behind the scenes, Reliance Jio is mere months from launching its all-4G, albeit in “beta” mode. 

And to top it all, TDSAT has done an inexplicable but drastic reversal of its July 2006 position on AGR. It now wants even items like rent, profit on sale of fixed assets, dividend, interest and miscellaneous income to be included in operator’s AGR.

“Our prima facie view, based on information available, is that it will have a negative impact on the industry,” says the head of the operator’s industry body before taking TDSAT’s judgement to court

It’s time to come back to the present.


25 October 2019: Remember I told you the Supreme Court had done India’s telecom sector a huge favour by asking it to cough up $19 billion in retrospective fees? (Incidentally, just around 25% of that was the licence fee claimed by the government. The rest is interest, penalty and interest on penalty!

Surely I’m joking, you say. Not one bit.

Because now there isn’t an iota of doubt in anyone’s minds that Indian telecom is effectively a two-player race. Here’s a comparison of the stock prices of Bharti Airtel and Vodafone Idea, the only two operators from the 1999 vintage still standing. While both were saddled with additional dues of between $5-6 billion each, Bharti Airtel’s stock was largely flat as compared to Vodafone-Idea’s precipitous drop. 

Because investors are now crystal clear that Bharti Airtel is the second duopoly player in Indian telecom.

The first is Reliance Jio, which, in three short years, has become the number one player in terms of subscribers and revenue. And because of its young age, its retrospective fine was a mere $6 million.

Third was poor Vodafone-Idea. In April this year, its parents Vodafone and Aditya Birla Group infused Rs 20,000 crore (close to $3 billion) as additional equity. And now it’s saddled with additional retrospective dues of nearly double that.

What a time to be Jio though

Jio has continued its marvelous streak of being the fastest 4G provider in India. Provided you checked only with India’s telecom regulator, Trai.

On Tuesday, mobile analytics firm Opensignal came out with its latest bandwidth report that listed Jio’s data download speeds being 30% slower than Airtel’s. The very next day, Trai released its own speed report, which showed Airtel was 60% slower than Jio.

So Shreedhar, one of our newest writers, collated all available speed data from four different providers. Fascinating graph.

(The Y-axis here is speed in Mbps, FYI.)

This week in SoftBank…

After investing over $9 billion to own 30% of WeWork, SoftBank decided to put in another $9.5 billion to own 80% of its former investee company. And in a boldly contrarian take on valuations, after having invested at valuations between $20 billion and $47 billion, SoftBank said WeWork was now worth $8 billion.

That’s $18.5 billion invested in a company finally worth $8 billion. Perhaps this is the Singularity that SoftBank’s visionary founder Masayoshi Son warned us all about in 2017?

WeWork’s incredible shrinking valuation still left its founder Adam Neumann a billionaire, with SoftBank making him richer by nearly $1.7 billion in order for him to agree to the takeover. 

And to allow SoftBank to escape majority control despite owning 80% of the company. Which would allow it to avoid adding WeWork’s existing and future debt ($22 billion and $47 billion) to its own quite formidable $137 billion debt, calculated Tim Culpan and Shuli Ren at Bloomberg. 

SoftBank swooping in and buying WeWork at a bargain basement price is closer to a distressed private equity transaction than a venture fund with a 300-year growth plan that rests on “Cluster of No.1 Strategy”.

Events of this magnitude ripple though. Ripples that are already being felt.

At OYO. At Fair. And even at SoftBank itself

Its shares are down 27% over the past six months and the collapse in WeWork’s valuation is going to end up as a loss of $3.6 billion, estimates Bernstein analyst Chris Lane.

Lane had, in 2017, likened Son and SoftBank to Warren Buffett and Berkshire Hathaway

            There are similarities to Berkshire Hathaway Inc., the U.S. company led by Warren Buffett, he explains. While Berkshire uses cash from its insurance business to invest in railroads, ice cream shops and Coca-Cola, SoftBank taps cash from its telecoms operations to back startups in ride-hailing, artificial intelligence, e-commerce and robots. Yet SoftBank trades at a discount of more than 40 percent to the assets it owns, while Berkshire has little or no such markdown.

            “The discount is ridiculous,” Lane said in an interview after his report was published. “What’s unusual about SoftBank is that there’s a 40 percent discount across the group.”

Investors seem to agree that the 40% discount was unusual, because that discount today is over 60% by SoftBank’s own estimates. And this after a $5.5-billion share buyback in February designed to boost value.

“What is that gap all about? Isn’t that weird?” Son said after announcing the buyback. “I personally think the share price is too low.”

Walmart and Amazon do the Kabuki

First, they had blockbuster sales events, driven largely by discounts. 

That got them hauled up by the government, for possible predatory pricing.

Which got Walmart complaining to the Indian Prime Minister in a letter, as an uncertain and unpredictable business environment. 

Ending with India’s commerce minister saying he’d been assured by Walmart and Amazon that they were playing nice.  

What we’re… drinking

Kefir. A probiotic, fermented milk drink that is said to have originated in the Caucasus region over a thousand years ago. 

What we’re gifting

If you’re still mulling over the perfect Diwali gift, here’s an option that truly celebrates the season of light. 

Gift a subscription to The Ken. We’ve jazzed it up and introduced the option of a personalised Diwali greeting. Check it out here.

Happy Diwali!