How Reliance Jio’s Entry Tied Regulatory Knots Around India’s Telecom Ecosystem

From exploiting loopholes in India’s telecom regulations to allegations of regulator bias and loss of government revenue, the Mukesh Ambani-led company raised a host of issues.

New Delhi: Six years after acquiring 4G spectrum through a backdoor yet legal manner, Mukesh Ambani-owned Reliance Jio presented its first regulatory challenge to the authorities and organisations that collectively manage India’s telecom ecosystem.

It started innocently in the summer of 2016: how long could the company’s extended “test trials” be allowed to continue before it launched commercial operations?

Before long, a number of issues –the most prominent of which was the company’s free data strategy – snowballed into a sticky regulatory mess that had multiple common threads: the exploitation of loopholes in India’s telecom regulations, allegations of regulator bias, loss of government revenue and the threat of being the final nail in the coffin for the banking system’s precariously-placed telecom loans.

Further underpinning all of this, however, was a fundamental disconnect between the Department of Telecommunications (DoT) and the Telecom Regulatory Authority of India (TRAI) that continues, to a certain extent, till today.

Last November, Bharti Airtel chief Sunil Mittal, whose company has weathered Jio’s impact better than other competitors, slammed Ambani’s company, alleging that nearly “$40-50 billion had been written off by various companies”, with much of this due to Jio and its free data pricing strategy.

“Having such a long, free promotional period and in some sense, decided by laws of the land in their favour, is unheard of. In my opinion, in Europe or US, this would have been stopped. It would have been seen as predatory,” the Airtel boss added.

Round 1: Test trials and ‘Welcome Offer’

Consider how things started. Reliance Jio kicked off “test trials” of its 4G services from May 2016 by giving out SIM cards to only its employees, and their friends and family. These restrictions slowly loosened as the months went along and by the end of August 2016, the company had anywhere between 2.5 million and three million users without officially launching commercial operations.

The incumbent telecom lobby – Airtel, Vodafone and the erstwhile Idea – was furious. At nearly every regulatory forum, the three operators complained that Reliance’s “extensive field trials” were a ploy to grab a chunk of users before officially launching commercial operations – a commercial launch would entail licence payments to the government as well as strict adherence to a number of regulatory requirements.  

The only problem for them is that Reliance wasn’t doing anything strictly illegal: at the time, there was nothing in a telecom operator’s licence conditions that specifically laid out when a company should officially stop networking testing and launch commercial operations.

According to multiple people with direct knowledge of the matter, both the DoT and TRAI dithered over what course of action should be taken. As The Wire had reported at the time, while both parties could’ve taken action independently (TRAI more so than DoT), there was a certain hesitancy that characterised the way authorities viewed Reliance.

In the weeks after Reliance started its test trials, the telecom regulator reached out to the telecommunications department, asking it for clarification on how long an operator’s test trials could go on. The DoT, according to senior TRAI officials, delayed in responding immediately. A month or so later – after some back-and-forth over whether the issue of field trials was a question of plugging a policy loophole or a quality-of-service problem – the department formally wrote back to TRAI in the first week of September 2016, asking it to issue recommendations on the matter.

The letter, which formally put the onus on India’s telecom regulator, came four days after Reliance Jio ended its test trials and launched commercial operations. On May 1, 2017 – nine months after the DoT asked TRAI to look into the issue – the telecom regulator floated a consultation paper on ‘Network Testing before Commercial Launch of Services’.

In one of its questions in the consultation paper, TRAI cuts to the heart of the dilemma:

“Can a TSP be allowed to provide all the services free of cost to test users/subscribers even before commercial launch of services, is one of the issues that arose during the recent past. One view is that providing full-blown services during test phase may have implications on the IUC, pricing, QoS and other regulatory aspects and as such can be viewed against the spirit of level playing field.”

Was this a case of closing the barn door much after the cows had gotten out? Multiple market analyst estimates pointed out that Reliance Jio had succeeded in gaining a customer base of anywhere between 2.5 to 3.5 million users.

The public consultation finally wrapped up towards the end of the year, with the regulator’s eventual recommendations being put out on in the public domain on December 4, 2017.

Its official advice was that there should be “a limit of 90 days” on how long a test phase involving test subscribers should last.   

“There should be a limit of 90 days on the test phase involving test subscribers. However, if the TSP fails to conclude network testing due to valid reasons, it may make a representation to the Licensor, seeking additional time for network testing giving detailed justification, which may be decided by the Licensor on case to case basis.” 

Jio started an employee referral programme for SIMs (where employees could invite up to ten friends) in May 2016 and started commercial operations from September 5, 2016 – a total of 120 days.

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Also read: Reliance Jio’s Free Data Comes Full Circle for India’s Taxpayers and Consumers

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This essentially means that if TRAI’s recommendations were in effect before the launch of Reliance Jio, its four-month test trial period would have not been allowed. A senior telecom lobbyist, who declined to be identified, described the whole episode to The Wire as a “classic case of regulatory arbitrage”.

The incumbent telecom lobby was, to put it mildly, left disappointed. A day after TRAI issued its recommendations, chief of the Cellular Operators Association of India (COAI) Rajan Mathews issued a testy statement: “While the testing recommendations are useful, they may have come too late as it is not envisioned that there will be any new operators entering the Indian market in the near future.”

DoT, TRAI on the same page?

In February 2017, Reliance boss Mukesh Ambani announced that Jio had crossed the 100 million customers mark – 170 days after its launch on September 5, 2016. This meant that the company had added an average of seven customers every single second.

“Today is a historic day. Jio launched services on Sep 5 and just 170 days later it has crossed 100 million customer mark on its 4G LTE all-IP wireless broadband network…A heartfelt thank you to each of us. This milestone belongs to you,” said Ambani.

This milestone was achieved, in no small part, due to the company’s decision to spend anywhere between $20 billion and $25 billion in building a modern telecom network and then giving it away of free of cost to whoever wanted to sign up for a Jio SIM.

In September 2016, the company announced its ‘Welcome Offer’ – a three-month period of free voice and data services. At this point, sources say, both the telecom regulator and the DoT were not overly worried about the effect on competition, government revenues or telecom loans.

“Jio’s initial pricing did raise some eyebrows, but didn’t come as a major shock. I think at the time, while there was some worries on what this could do to licence fee collection and government revenues. But certainly no concern over health of telecom industry or repaying public sector bank loans, which came later,” a senior government official, who declined to be identified, told The Wire.

In fact, while low-key rumblings and allegations of predatory pricing slowly made its way through industry and regulatory circles, J.S. Deepak (the then telecom secretary) publicly defended Jio’s cut-throat pricing strategy.

In an interview to the Times of India on September 28, 2016, Deepak was asked whether Reliance Jio was engaging in predatory pricing and replied in the negative. “Predatory pricing is different,” he said. “India is a huge market and telecom is an industry of scale. The economies of scale permit provision of telecom services at very low costs. Low prices to the consumer will not necessarily mean that companies are bleeding.”

Officials at TRAI largely agreed with this view at the time and also didn’t see anything wrong with Reliance Jio’s ‘Welcome Offer’ for two reasons.

Firstly, in the second half of 2016, Reliance Jio could not be construed as having anything close to “significant market power” – a metric based on which the telecom regulator classifies the pricing strategy of a player as either predatory or anti-competitive. This, incidentally, was also Reliance’s first defence.

Secondly, at the time, TRAI officials believed that there was nothing in the regulator’s Telecommunication Tariff Order (1990) or Telecom Consumer Protection Regulations (2012) prevented Reliance from offering a singular promotional package that offered free voice and data services.

It was on the second issue industry, experts say, that the regulator may have been on less firm ground.

Various amendments to the 1990 order over the years have indicated that tariff plans need to be consistent with three crucial regulatory principles – non-discrimination, non-predation and interconnection usage charges (IUC) compliance.

Believing that the last principle had been violated, the incumbent telecom lobby raised protest – in late September 2016, they wrote to TRAI chairman R.S. Sharma, saying that Jio’s free offer “violated the Telecom Tariff Order of 2004” as the tariff rates on offer were being “offered at below the call termination charge of 14 paise a minute that is paid to a telco”.

Or in other words, a group of companies including Airtel, Vodafone and Idea believed that Jio’s free data strategy played fast and loose in terms of complying with IUC regulations.

The telecom regulator replied within a week, giving a clean chit to Jio’s tariffs on all three counts and declared that it “can’t be considered as IUC non-compliant, predatory and discriminatory at present”.

Round 2: Happy New Year offer

The first warning sign came in December 2016 – when Jio announced an extension of free data and voice services through a new ‘Happy New Year (HNY) offer’. With the ‘Welcome Offer’ package coming to an end, the HNY offer was announced as a separate and new promotional package that would last for another a three-month period.

In reality, the new offer was almost identical to the previous one, with the only difference being that the users would now have a company-imposed daily FUP (fair usage policy) limit of 1 GB.

The de facto extension of free data services raised concerns within the TRAI – primarily because there were well-established rules for how long promotional packages could last. The rule, which first originated from an advisory issued by the organisation in 2002, restricted the validity of promotional packages offered to customers to a “maximum of 90 days from the date of launch”.

Letters written by COAI and Reliance Jio – which were sent to TRAI, both of which have been seen by The Wire – laid out their respective positions. The telecom lobby believed that Jio’s HNY offer was merely a clever way of getting around the 90-day rule while Reliance fiercely maintained that they were two clearly demarcated

“It was around in the beginning of January 2017 that we started to feel that we needed to take a stance on Reliance Jio’s pricing. But there was a certain hesitancy as to what procedure should be followed,” a senior TRAI official, who declined to be identified, told The Wire.

It was to then Attorney General Mukul Rohatgi that the regulator turned towards for guidance. As The Wire pointed out at the time, the decision was curious – the setting and governing of tariffs is almost entirely in the regulator’s domain, with TRAI being the final authority on the matter.

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Also read: Did Mukul Rohatgi Give a Regulatory Carte Blanche to Reliance Jio?

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Ten days after TRAI wrote to Rohatgi, the attorney general replied with a letter on January 27, 2017, which effectively handed a regulatory carte blanche to Jio. It was the Rohatgi’s legal opinion that the 2002 letter was “only advisory in nature” and that it was perfectly fine for telecom operators to offer separate promotional packages in quick succession.

He then went onto settle the predatory pricing issue largely in favour of Jio by writing that “promotional offers are not subject to regulatory principles of non-discrimination, non-predation and IUC compliance in terms of the extant statutory rules, regulations and directions of TRAI”.

Once the attorney general had replied with his legal opinion, the matter was largely taken out of TRAI’s hands.

However, a month after the regulator requested Rohatgi’s recommendations – and nearly six months after Reliance started its free services – it meekly issued a new consultation paper on “regulatory principles of tariff assessment”. The paper posed two crucial questions (the answers to which will eventually decide whether India’s regulatory ecosystem was wrong not reigning in Jio’s pricing):

1. Is there a need to restrict the number of promotional offers that can be launched by a TSP, in a calendar year, one after another and/or concurrently?”
2. What methods/processes should be applied by the tegulator to assess predatory pricing by a service provider in the relevant market?

The regulator’s official recommendations on this consultation paper are still awaited – industry sources say a final pronouncement is expected in the next few weeks, along with the predatory pricing judgements of other regulatory forums such as TDSAT and CCI.

Incidentally, the telecom regulator did finally crack the whip on Jio’s free offers the third time around. The last promotional offer, called Summer Surprise, was a rather convoluted way of giving customers another three months of free services by having them pay in advance for data and voice services that they would use from July 2017 onwards.

The manner in which TRAI went about doing so, however, gave rise more questions than answers. It didn’t call its actions an “order”, but instead it said it had “advised Jio to withdraw the 3 months of complimentary benefits of Jio Summer Surprise”. It refused to make its communication to Reliance public, and in informal interactions with the media, senior officials claimed that because the Summer Surprise offer wasn’t a “promotional offer” but rather a “plan with special benefits”, it had to be stopped.

Turmoil at DoT

Jio’s cut-throat pricing had, in the meantime, not gone unnoticed by the DoT. The DoT had by that time had already waded into at least two contentious issues that divided Reliance and the incumbent telecom lobby – the first being the question of a uniform spectrum usage charge and the second over the question of IUC penalties being levied on Airtel and Vodafone – with the department taking positions that were unfavourable to Jio.

In February 2017, it ran head-first into one more: the issue of falling government revenues and the effect of Jio’s pricing policies on the health of the telecom industry.

On February 23, the Telecom Commission (headed by then telecom secretary J.S. Deepak) shot off a letter that reprimanded and reminded TRAI that its inability to implement its own orders with regard to promotional offers and predatory pricing could jeopardise the banking sector, defer spectrum payments to the government and disrupt the orderly growth of the telecom sector. By Deepak’s reckoning, Reliance free data offers – and its consequent effect on the revenues of other operators – had cost the government Rs 685 crore through the reduced collection of licence fees and spectrum usage charges. (The company’s impact on the universal service obligation fund was much higher, as The Wire noted at the time).

A little over a week after having sent the letter, Deepak was transferred to the commerce ministry and was named as India’s permanent representative to the World Trade Organisation. As The Wire reported at the time, while the transfer had been in the works for some time, the timing and abruptness of the decision was odd and sent tongues wagging.

“It’s what you would call a case of being kicked upstairs. It had of course been discussed for sometime, but the way the announcement was handled, when he [Deepak] had just left to Barcelona… he [Deepak] was furious,” a senior telecom lobbyist told The Wire.

The Telecom Commission’s concerns over falling revenue and the health of other telecom operators were later re-affirmed when then SBI chairman Arundhati Bhattacharya wrote a warning letter to the DoT in June 2017, detailing how the “launch of free services” had led to the sector’s stress reaching “highly unsustainable levels”. At the time, private and public Indian lenders had an exposure of nearly Rs 4 lakh crore to the entire sector.

In the run-up to the Telecom Commission’s letter and after, TRAI was largely unperturbed. Its official position was that the DoT had overlooked the issue of consumer interest and had focused unduly on “maximisation of government revenue”. On the issue of not following through on its own regulations on promotional offers, it quipped in a letter to the Telecom Commission that it had merely followed the attorney general’s opinion on the matter.

Privately, several TRAI officials told The Wire that there had been very little discussion between the regulator and the DoT on the issue. TRAI chairman R.S. Sharma had not discussed the matter with senior DoT officials or Deepak. Sharma, in particular, also allegedly believed that the DoT secretary had acted in haste, and perhaps without the express consent of telecom minister Manoj Sinha.

Larger ripples

Two months after Deepak’s exit, the telecom department also was singing a different tune. A note circulated by additional secretary N. Sivasailam in May 2017 – accessed by The Wire –  instructed that revenue dips on account of licence fee and SUC reduction (post Jio launch) should be seen as “incomes in the hands of consumers”.

In the note, Sivasailam emphasises that the decline in central government revenues shouldn’t been seen as a concern as it means “additional income for consumers”.

This line of argument is both convincing and undeniable: A Kotak Institutional Equities report in July 2017 pointed out that consumer-level wireless spending fell to Rs 33,000 crore in the March 2017 quarter – which was down from Rs 43,700 crore a year ago. As one analysis pointed out, the “reduction in wireless bills works out to Rs 11,600 crore on a quarterly basis or Rs 46,400 on an annualised basis”.

On the other hand, India’s telecom industry bled. Revenue and Ebitda for incumbent operators fell anywhere between 15% to 40%. Idea’s net debt/Ebitda ratio reached a dangerous level of 9:1 based on annualised profit for the September 2017 quarter.

To stem the bleeding, the telecom industry has also led smaller operators in the arms of their larger counterparts. Vodafone and Idea merged in a $23-billion deal, Airtel bought Tata Teleservices for a song and Mukesh Ambani bailed out his younger brother brother Anil.

Latest estimates place Jio has a share of anywhere between 12-14% of India’s telecom market, with future projections claiming that that Airtel, the Vodafone-Idea combine and Reliance Jio will end up with approximately 95% of the market in three years.

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Also read: Has Reliance Jio’s Entry Delayed Digital India’s Goals?

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At one level, industry officials point out that the regulatory dilemmas that Jio’s entry strategy posed are an indictment of the lobbying capabilities of Airtel boss Sunil Mittal.

“Jio dragged and delayed its entry for years. That was more than enough time for Mittal to get the regulatory house in order. Its true there were several decisions that blindsided the industry like the surprising IUC revision. However, Reliance simply won the game of regulatory arbitrage,” a senior executive of a large telecom firm told The Wire.

At another other level, however, India’s telecom department and regulatory authorities unnecessarily dithered when they could have acted. As future regulatory decisions are taken and orders are pronounced – not only by TRAI and DoT, but also the Telecom Disputes Settlement Appellate Tribunal and the Competition Commission of India – it will become clearer as what steps should have been taken over the last two years.