Big blow for telcos as Supreme Court backs DoT definition of AGR

MUMBAI | NEW DELHI: The Supreme Court ruled that adjusted gross revenue (AGR) for telcos should include all revenue accrued to carriers, including that from noncore activities, backing the telecom department’s stance in a 16-year-old case. But it left the authorities in a bind over how to recover more than Rs 1.3 lakh crore in dues, penalties and interest from a sector already under financial stress without causing further damage.“The government is in a fix and the problems are plenty. If we go ahead and demand the AGR dues, most will not be able to pay,” a senior government official told ET, asking not to be named. “If we increase the payment period, then it will increase the interest and penalties.”Of the 15 companies that had been served demands for licence fees worth a total of more than Rs 92,000 crore and spectrum usage charges (SUC) of a combined Rs 41,000 crore, only three — Bharti Airtel, Vodafone Idea and Reliance Jio — are operating. The rest have either exited or are undergoing bankruptcy proceedings such as Aircel and Reliance Communications.Licence fees and SUC are both calculated on the basis of AGR.Vodafone Idea, facing a demand of more than Rs 39,000 crore as per Department of Telecommunications’ (DoT’s) court filings, will be the worst affected as it copes with falling revenue, a shrinking user base and quarterly losses of nearly Rs 5,000 crore combined with debt of more than Rs 99,000 crore, analysts said. Shares plunged to a 52-week low before closing 23.4% down at Rs 4.33 on the BSE Thursday.Vodafone Idea said in a release that it’s considering filing a review petition.Bharti Airtel, which faces demands of more than Rs 41,000 crore in licence fees and SUC, fell nearly 10% soon after the news, but recovered to end 3.3% higher at Rs 372.45, on hopes of revenue market share gains due to a weaker Vodafone Idea, said experts. Tata Teleservices, which has sold its consumer mobility business to Bharti Airtel, owes the government about Rs 12,907 crore in licence fees and spectrum usage charges, as per DoT.71749366 By some industry estimates, the liability for Vodafone Idea could be even higher at Rs 58,000 crore and for Bharti Airtel at Rs 43,000 crore, including licence fee, penalties, interest, compounded interest and SUC.The official cited above said that the government itself has admitted that the sector is under stress with debt of more than Rs 7 lakh crore and a 25% fall in AGR in the two years to March 31. “Operators have asked for some relief and we are working on that but now the problem is much bigger,” he said.The government will have to take quick action, otherwise “one of the telcos” will be in serious distress, which may further change the industry structure, the official added, without naming the operator.The top court in a 153-page order ruled in favour of the DoT in the case that dates from 2003, saying that all revenue accruing to telecom operators, including those from handset sales, rent, dividends, interest income, profit from sale of scrap, termination fees and roaming charges, would also be included in AGR. However, gains from the sale of capital assets and insurance claims by telecom companies will not be a part of it. Telcos had argued that only revenue derived from licensed services should be considered part of AGR.“In the instant case, the demand had been raised by the licensor, and after that, untenable objections have been raised which had no foundational basis, and the licensees have taken inconsistent stands,” ruled a bench led by Justice Arun Mishra, dismissing the objections of the mobile phone companies. The other members of the bench were justices AA Nazeer and MR Shah.“The conduct of the licensees was highly unfair, and anyhow and somehow, they had attempted to delay the payment,” the bench observed.Operators have thus far calculated AGR on the basis of a telecom tribunal judgement in 2015, which includes some noncore elements. Accordingly, operators had paid up only what they estimated was due as licence fees and spectrum charges, but DoT continued to demand the remainder.Soon after the order, officials at the department scrambled to discuss the way forward and how to soften the blow, with more meetings to be held over the next few days. They expect representations from operators to follow soon, said government officials aware of the development.Bharti Airtel said it was “disappointed” by the verdict, which will “further weaken the viability of the sector as a whole.” Vodafone Idea said that the order had “damaging implications” for the industry. The telco said it will study the legal possibilities, which include a “review application.”“The question that arises is whether this is the financial straw that finally breaks the back of operators,” Cellular Operators Association of India (COAI) director general Rajan Mathews said. COAI is an industry body that represents private operators.Meetings in the telecom department will also have to consider the viability of spectrum auctions and when they can be held in light of the verdict. “How can spectrum auctions happen in the next few months when operators are in no position to pay after the ruling?” said one of the officials cited above. “What complicates matters is that some of the airwaves are expiring by FY21.”Telecom minister Ravi Shankar Prasad had recently said that spectrum auctions will be conducted within this financial year.Analysts projected a grim outlook.“Telecom sector is under immense financial stress admitted by all stakeholders. Further demand of Rs 92,000 crore (in licence fees) will dampen the sentiment of telecom operators and raising funds for broadband, network expansion and Digital India will hit a significant roadblock,” said Prashant Singhal, emerging markets, technology, media and telecom leader, EY.He added that the impact will not be limited to just telecom operators but will have a domino effect on the larger digital value chain. “This requires immediate intervention by all stakeholders to get the sector back in shape.”Tower firm Bharti Infratel fell 8.5% to end at Rs 237.45 on fears that its tenancies will be hurt due to the weaker finances of its main tenants – Vodafone Idea and Airtel. The stock was also hit by the uncertainty over its merger with Indus Towers.Lenders such as Yes Bank, State Bank of India, Union Bank, Bank of India and IndusInd Bank also fell on fears of the effect the verdict may have on the debt repayment capability of companies such as Vodafone Idea, said analysts. According to the Reserve Bank of India, banks’ exposure to the telecom sector amounted to Rs 90,600 crore as of November 2018.

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