AGR uncertainty ends, but is it legal closure?

The SC has pronounced its judgment on the AGR case on September 01, 2020 and allowed a 10-year payment term (as against 20 year proposed by DoT) with 10% upfront payment for repayment of the AGR dues amounting to around Rs. 90,000 crore for the three telcos.

Telecom companies have to give an undertaking for paying the AGR dues as per the SC order. The payment timeline begins from April 1, 2021, and the first instalment needs to be paid before March 31, 2021. any default in payment would invite interest, penalty and contempt of court.

According to the DoT’s calculations, Bharti Airtel owes the exchequer Rs 43,780 crore, of which the company has paid Rs 18,004 crore. Vodafone Idea has paid Rs 7,854 crore of its Rs 50,399 crore dues. Tata Teleservices has paid about Rs 4,197 crore and the balance is about Rs 12,601 crore.

Bharti Airtel owes Rs 25,976 crore to the Department of Telecommunications, Solicitor General Tushar Mehta told the Supreme Court. The carrier needs to pay Rs 3,871 crore every year, about 8.6% of the annual operating income. The additional interest cost over 10 years will be Rs 12,376 crore, assuming an interest rate of 8%. The dues go down to Rs 2,600 crore annually if no interest is charged.

Vodafone Idea owes the DoT Rs 50,400 crore, Solicitor General Tushar Mehta told the Supreme Court. The repayment will require tariff increases, additional capital, and cost cuts. At an assumed rate of interest of 8% a year on the staggered payments, the company will have to pay Rs 7,511 crore annually and will create an additional interest liability of Rs 24,710 crore over 10 years. Even if no interest is charged on the staggered payments, the annual payout will be Rs 5,040 crore.

Spectrum related dues
The court, in much-needed relief to Jio and Airtel, asked the National Company Law Tribunal to decide whether their use of spectrum that once belonged to bankrupt companies should be part of a corporate insolvency resolution process (CIRP).

The court’s order means that Jio doesn’t have to pay for the AGR dues of over Rs 25,000 crore, owed by Reliance Communications and Bharti Airtel for Aircel and Videocon, because the two companies had got into trading and sharing agreements with the companies under the Insolvency and Bankruptcy Code (IBC) to use their spectrum.

The union government has filed an appeal with the National Company Law Tribunal that resolution plans of Reliance Communications and Aircel should not be approved until spectrum related dues are cleared.

The Counsel for  Aircel said that the company has filed an affidavit, which states that since 2016, there have been 8 spectrum trading agreements between Aircel and Airtel and they had the approval of the DoT.

EXPERTS VIEWS
 “This relatively shorter payment timeframe exerts additional pressure on the cash flows and necessitates sizeable ARPU increase and can have an impact on the industry structure. The proposed payment pattern adds to the burden of the industry which was already saddled with elevated debt levels. This will also exert pressure on the cash-flows and leaves limited room for network CapEx and expansion, especially for the relatively weaker player. Assuming these payment terms are implemented on the balance amount to be paid, the telcos will have to shell out an amount of Rs. 9,000 crore by March 31, 2021 as upfront payment, followed by 10-annual instalments of around Rs. 12,000 crore at 8% rate of interest starting February 2022 till February 2031.”
Ankit Jain, Assistant Vice President, Corporate Ratings, ICRA

 “The government had earlier allowed deferral of the spectrum auction instalments for FY2021 and FY2022.However, this 10-year payment for the AGR dues dampens the relief on auction payments to some extent and is likely to weigh heavily on the balance sheet of the weaker telecom operator, especially when the two-year moratorium gets over and auction payments start in FY2023. The annual instalments for the auction payments are to the tune of Rs. 32,000 crore for the industry starting FY2023, which along with Rs. 12,000 crore annual instalment for the AGR dues starting February 2022 will necessitate substantial increase in the ARPUs to more than Rs. 350 and has the potential to have a longstanding impact on the industry structure.”
Anupama Arora, Vice President and Sector Head, Corporate Ratings, ICRA

“Ten years is definitely below market expectations. Review petition is surely an option for the telcos which they would like to explore. However given that the Court has allowed for a staggered payment over 10 years, without any additional security is very positive for the telcos and they can live to fight another day.”
Saurav Kumar, Partner, IndusLaw

“It is very disappointing, especially when the government had agreed to grant a 20-year payment schedule. It will put Vodafone Idea in a very difficult situation as its valuation will reduce, the customers will move away. It will also push the sector to a duopoly.”
Hemant Joshi, independent analyst

“The SC ruling is positive for Bharti Airtel as it already has provisions. However, it is negative for Vodafone Idea as they have to pay 10 per cent upfront. We need to see whether the parent will fund Vodafone Idea. Otherwise, it will be a two-player game.”
Ajit Mishra, VP-Research, Religare Broking

“The window for Vodafone to raise funds, have better models and paybacks commitment is small which is adding pressure on the stock.”
Abhimanyu Sofat, head of research, IIFL Securities

“For Bharti Airtel, the view that Vodafone Idea is being marginalized is beneficial for them.”
Vivekanand Subbaraman, Ambit Capital

“The verdict is positive for Bharti and RIL, as liability of Aircel (Rs 14,000 crore) and Videocon (Rs 1300 crore) will not fall on Bharti and RCom (Rs 31,000 crore) will not fall on RJio who have acquired their spectrum. Assuming 8 per cent interest rate, Bharti and VIL will now have to pay Rs 3,900 crore and Rs 7,500 crore a year respectively. With zero per cent interest rate, this reduces to Rs 2,600 crore/Rs 5000 crore, respectively. Bharti Airtel should be able to manage the payment with no tariff hike built, while Vodafone Idea with EBITDA of Rs 6,000 crore may find it difficult to manage.”
Hemang Jani, Head Equity Strategist, Broking & Distribution, Motilal Oswal Financial Services

“I don’t think this is permanent or even long term. It is very likely that one or more of the entities involved in the matter will file review petitions. Different companies may have different reasons to seek review. For example, the treatment of Spectrum Usage Charges (SUC) as AGR dues is an error and a strong ground for seeking review.

The government may well file a review. It was the government’s idea to seek 20 years for repayment of dues. Paucity of time in view of the impending retirement of the presiding judge made that inevitable. Since it’s a much larger issue, with very wide ramifications, the Bench has referred it to the Tribunal but it is inevitable that it will make its way to the Supreme Court in the not too distant future. Hence, there is no closure in this case; instead there is the beginning of new offshoots!”
Abhishek Singhvi, third-term sitting member of Parliament and eminent jurist who represented Airtel

“This could lead to cash outflows of 22 per cent of Bharti’s and 111 per cent of Vodafone-Idea’s EBITDA. They would be required to increase their average revenue per user (ARPU) by 10-27 per cent to offset this, which in turn will make tariff hikes imminent. We expect telcos to hike tariff to recover the additional liabilities. Our analysis indicates the affected telcos need to hike their tariffs by Rs 20-30 per month to cover for the AGR dues alone”
Jefferies Equity Research

Background
In October 2019, the Supreme Court of India had pronounced its judgment pertaining to the definition of adjusted gross revenue and inclusion of some non-core revenues in AGR calculations from retrospective basis. The telecom operators pay a revenue share to the DoT in the form of license fee and spectrum usage charges which are linked to the AGR. The SC ruling mandated the operators to include some components of revenues like dividend income, rental income, forex gains, etc while computing AGR on a retrospective basis, which along with interest and penalties on the same translated into sizeable dues for the telcos, amounting to Rs. 1.19 lakh crore for Bharti Airtel Limited (BAL), Vodafone Idea Limited (VIL) and Tata Group (Tata) combined. Of this, these telcos have already paid Rs. 30,000 crore till date and the balance amount remains payable.

The telecom industry, after witnessing a turbulent phase with intense competition and pricing pressures, was on a path to recovery. The telecom operators announced substantial tariff hikes in December 2019, which along with moderation in capex intensity and deleveraging initiatives pointed towards greenshoots of recovery in the sector that was expected to result in expansion in cash flow generation. The tariff hikes have led to restoration of pricing power to the telcos and aided improvement in the operating metrics of the industry with growth in revenues and profit margins.

The industry has been saddled with elevated debt levels amid consistently high CapEx requirements. The debt as on March 31, 2019 stood at Rs. 5 lakh crore, which witnessed a decline to Rs. 4.4 lakh crore as on March 31, 2020 following the series of deleveraging measures undertook by private operators during FY2020, as per ICRA estimates. Moreover, despite the improvement in cash flow and moderation in CapEx intensity, the debt is further expected to increase to Rs. 4.6 lakh crore as on March 31, 2021 owing to addition of AGR dues.

CT Bureau