The already struggling telecom sector is facing a gigantic task of paying Rs 1.48 lakh crore worth of pending AGR (Adjusted Gross Revenue) dues to the Department of Telecom (DoT). The issue that initially started over the definition of AGR has now reached a point where it could even lead to shutting down of operations for one of telcos. Let's try to understand the issue:
What is AGR?
Adjusted Gross Revenue (AGR) is the usage and licensing fee that telecom operators are charged by the Department of Telecommunications (DoT). It is divided into spectrum usage charges and licensing fees, pegged between 3-5 percent and 8 percent respectively.
How AGR came into the picture?
The telecom sector was liberalised under the National Telecom Policy, 1994 after which licenses were issued to companies in return for a fixed license fee. To provide relief from the steep fixed license fee, the government in 1999 gave an option to the licensees to migrate to the revenue sharing fee model.
Under this, mobile telephone operators were required to share a percentage of their AGR with the government as annual license fee (LF) and spectrum usage charges (SUC). License agreements between the Department of Telecommunications (DoT) and the telecom companies define the gross revenues of the latter. AGR is then computed after allowing for certain deductions spelt out in these license agreements.
What is the dispute about?
The dispute between DoT and the mobile operators is mainly on the definition of AGR. The DoT argued that AGR includes all revenues (before discounts) from both telecom and non-telecom services. The companies claimed that AGR should comprise just the revenue accrued from core services and not dividend, interest income or profit on sale of any investment or fixed assets.
The definition of AGR has been such a contentious issue because it has huge financial implications for both telcos and the government. The revenue shared by telcos with the government goes into the consolidated fund of India. It was estimated, after the SC’s judgment, that the telecom operators owe the government about ₹92,000 crore in back charges, interest and penalties on license fee alone.
While the government has been deprived of the extra revenue, the financial implications for telecom companies — who now have to cough up overdue amounts piled up for years — are serious too. Especially at the current juncture, when profits for telcos are under pressure from severe competition and the falling ARPUs (average revenue per user).
The issue has even divided the government agencies, with both TRAI (Telecom Regulatory Authority of India) and TDSAT (Telecom Disputes Settlement and Appellate Tribunal) supporting the telecom companies.
In 2015, the TDSAT said AGR included 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, etc. The DoT, however, filed an appeal before the Supreme Court, citing that the TDSAT had no jurisdiction on the validity of terms and conditions of licenses.
What's next for Telecom Companies
Telecom companies owe Rs 1.47 lakh crore to the DoT, including Rs 92,600 crore as licence fee and Rs 55,100 crore as spectrum usage charges. Bharti Airtel owes Rs 35,600 crore, while Vodafone Idea has to pay Rs 53,000 crore. Reliance Communication has pending dues worth Rs 21,200 crore and Tata Group has to pay Rs 13,800 crore. Of the total pending amount, Vodafone Idea and Airtel have to pay Rs 88,600 crore.
Vodafone Idea has said it won't be able to continue operations if it doesn't get relief on AGR dues. Airtel is better placed and its stock has touched an all-time high in anticipation of the duopoly. Airtel and Vodafone have already paid Rs 10,000 crore and Rs 2,500 crore, respectively, on February 17, 2020. SC rejected Vodafone's plea seeking "no coercive action" to recover the pending dues. As per the latest SC ruling, telcos have to pay up the pending dues by March 17.
Position of Government in this situation
- The payout by telecom and non-telecom companies is likely to lead to windfall gains for the central government, which could help it close some of the fiscal deficit gap for the current financial.
- At the same time, however, the government will be under pressure to ensure that the telecom market does not turn into a duopoly if Vodafone Idea does indeed decide to shut shop.
- It will also have to manage the payouts to be done by non-telecom companies as most of them, such as Oil India, Power Grid, Gail, and Delhi Metro Rail Corporation are public sector units.
Position of public in this dispute
- If Vodafone Idea does exit, an Airtel-Jio duopoly will be created, which could lead to bigger bills, considering it was the cutthroat competition in the sector that made mobile telephony and Internet almost universally affordable.
- If you’re a taxpayer, you can cheer a bit about the higher contribution to the exchequer, which could help bridge gaps in the fiscal deficit and bolster government revenues to rescue an ailing economy.
- Investors in any telecom company needs to brace themselves up, as this is a huge blow to the industry. Given that most telcos haven’t provided for these dues in their accounts, they are likely to report one-off losses. In addition to a lower EPS (earnings per share), they may have to prepare for more debt or financial instability that could erode the telcos’ net worth too.
Written By: Harshit Agarwal
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