What the SC’s dismissal of telcos’ pleas on AGR means for them

The July 23 order by a three-judge bench of the Supreme Court on the issue of adjusted gross revenue (AGR) computation of major telecom companies is being seen by many analysts as a big blow to Indian telcos, with the cash-strapped Vodafone-Idea poised to take the biggest hit.

The SC bench led by Justice L.N. Rao dismissed the pleas of Vodafone Idea, Bharti Airtel and Tata Teleservices filed separately in January this year saying the apex court should allow correction of alleged mathematical errors in the AGR computation done by the Department of Telecommunications (DoT).

In September 2020, the SC had passed an order upholding DoT’s computation of AGR and allowed the telcos to pay the dues in a staggered fashion over a period of 10 years starting April 1, 2021.

As per DoT’s calculations, Vodafone-Idea had the highest AGR dues, at Rs 58,254 crore.

Of this, it has already paid Rs 7,854 crore.

Bharti Airtel, meanwhile, owed Rs 43,980 crore in AGR dues, of which Rs 18,004 crore has been paid.

Tata Teleservices, which has paid about Rs 4,197 crore, needs to cough up Rs 12,601 crore more to pay off its dues, say reports.

What is AGR and how is it calculated
For this, we need to go a little bit into the modern-day history of India’s telecom sector.

The telecom sector was liberalised under the National Telecom Policy, 1994, paving the way for the entry of private players.

For a fixed licence fee, licences were issued in various categories—unified licence, which allowed a firm to offer both wireless and wireline services; licences to Internet Service Providers (ISPs); and licences to provide passive infrastructure, such as towers and fibre (called Infrastructure Providers Category-1 or IP-1 licence).

In 1999, the NDA government gave licensees the option of migrating to the revenue sharing fee model.

As per the model, telecom operators were to share a percentage of their AGR with the government as annual licence fee and spectrum usage charges.

The licence fee was pegged at 8 per cent of AGR while the spectrum usage charges were fixed at 3-5 per cent.

Over the years, the definition of AGR in the license conditions underwent revisions with regard to the applicable rates for license fee and spectrum usage charge.

While operators wanted to be charged on the basis of their core business, which is conducted by using the spectrum allotted, DoT said the definition of AGR includes other items, such as dividend, interest, capital gains on account of profit from the sale of assets and securities and gains from foreign exchange fluctuations.

In 2015, the Telecom Disputes Settlement and Appellate Tribunal (TDSAT) ruled that AGR includes all receipts except capital receipts and revenue from non-core sources, such as rent, profit on the sale of fixed assets, dividend, interest and miscellaneous income.

The relief was short-lived.

On October 24, 2019, the SC set aside the TDSAT order and upheld the DoT’s definition of AGR.

The telecom incumbents approached the court for a review, but the plea was rejected on January 16, 2020.

However, the SC agreed on January 21, 2020, to take up a modification plea filed by telcos, seeking to negotiate a ‘sustainable payment schedule’.

This followed the Union cabinet’s decision on November 20, 2019, that telcos be given a two-year moratorium on payments.

The Cellular Operators’ Association of India had originally sought a 14-year period for payment of dues by the incumbents.

However, on February 1, 2020, the SC slammed telcos over unpaid dues and warned them of contempt proceedings if they did not pay up by March 17.

As per reports, the original disputed amount of Rs 23,000 crore snowballed several times over to the present figure of close to Rs 1.5 lakh crore (for all telcos, including those subsequently liquidated), as DoT contended that the entire dues accumulated over the last 15 years be paid with interest and penalty.

Impact on telcos
With this last-ditch effort by the telcos to get relief from the SC coming to naught, they have little option left but to pay up.

But considering the financial health of Vodafone-Idea, paying up such a large amount will not be easy.

The company is already steeped in debt.

Following Vodafone-Idea’s financial results for the fourth quarter of the previous fiscal, brokerage firm ICICI Securities said on July 5 that the telco’s net debt at Rs 1.8 lakh crore was up from Rs 1.15 lakh crore, on inclusion of the company’s AGR liability.

“We highlight that the payment commitments of around Rs 16,000 crore for annual spectrum payment and Rs 8,400 crore for AGR dues are coming up in March, April, 2022. Furthermore, it also needs to renew bank guarantees of Rs 7,000 crore (and need to give some additional guarantee) in the coming months.”

The company posted a loss of Rs 11,643.5 crore for the fiscal fourth quarter, its seventh successive quarter in the red, hurt by loss of subscribers, high finance costs and a one-time charge related mainly to its statutory dues.

Vodafone-India lost 2 million subscribers in the fourth quarter of 2020-21, taking its total count to 269.8 million.

However, its 4G subscribers rose by 4.2 million compared to 3.6 million in the third quarter, taking its total count to 113.9 million.

“This is better, but far off from Bharti/ Jio’s additions of 13.7 million/ 15.4 million,” says a report from brokerage firm Motilal Oswal. Shares of Vodafone Idea fell 9.6 per cent on the BSE to close at Rs 8.36 on July 23.

Meanwhile, rival Bharti Airtel reported a net profit of Rs 759 crore compared to a loss of Rs 5,237 crore in the corresponding period of the previous fiscal.

Revenues for the quarter rose by 11.9 per cent year on year to Rs 25,747 crore, mainly driven by sustained growth in customer addition.

“Strong momentum in revenue, backed by continued growth in customer additions and improved margins support the growth prospects for the company,” says Geojit Financial Services in a report. Surely, Bharti Airtel seems to be in a better position to take the AGR blow. India Today