The Supreme Court's January 16 decision not to review its order on adjusted gross revenue has dealt a body blow to telecom companies, which are asked to pay about Rs 1 lakh crore in dues to the government within a week. The SC order has ramifications beyond telcos too. Let's understand the AGR case and how the SC ruling impacts mutual funds.
What Is AGR?
Adjusted gross revenue is a fee-sharing mechanism between the government and telecom companies who migrated from the 'fixed license fee' model to a 'revenue-sharing fee' model in 1999. In doing so, telcos had to share a percentage of their AGR with the government.
So, why are telcos up in arms?
Telecom companies have disputed the definition of AGR with the Department of Telecom (DoT). DoT's stand is that AGR includes ALL revenues of telcos, while the companies say AGR should ONLY include revenue from core services and not ancillary income.
Why do they have to pay now?
On October 24, 2019, the Supreme Court had widened the definition of AGR to include DoT's point of view and this left two of the three remaining telecom companies staring at a major hole in their pocket, a really big Rs 1 lakh crore hole!
Of course, they appealed the top court to review the order. On January 16, the apex court refused to oblige.
The two telecom majors now have time till January 23 to clear their dues.
Who gains and who loses?
Of the two telecom majors, it is Vodafone Idea, which may find itself at the end of the road. Brokerage notes and media reports indicate that Bharti Airtel has secured the Rs 34,300 crores to pay the government. Moreover, almost all brokerages believe Bharti Airtel and Reliance Jio will gain from Vodafone Idea's woes. Lenders and investors of Vodafone Idea, too, seem to be left without hope.
The Vodafone-Idea Saga
On December 6, 2019, Kumar Mangalam Birla, chairman of Vodafone Idea, told CNBC-TV18's Shereen Bhan that the company would shut shop without the government relief in the AGR case. So far, there are no indications that this relief is coming.
Citi said the situation is extremely precarious for Vodafone Idea given the AGR liability equates to over twice the size of its current market capitalisation and creates significant uncertainty for the company.
Credit Suisse has suspended its rating and target on Vodafone Idea due to the uncertainty around the company's existence.
In the span of the last one year, Vodafone Idea's stock price has eroded 80 percent of its value, becoming a penny stock and yet the incremental fall continues.
Why does my mutual fund care?
Besides the banking industry, the mutual fund industry is also exposed to the tune of over Rs 3,000 crore to Vodafone Idea.
After a tumultuous year for unit holders, who had to bear the brunt of several credit events like DHFL, CCD, Altico and the entire Essel Group saga, they start 2020 with Vodafone Idea ticking like a time bomb.
Franklin Templeton writes down NAV
Of the four asset management companies exposed to Vodafone Idea, only Franklin Templeton Mutual Fund and UTI Mutual Fund have written down the NAV in affected schemes.
Franklin Templeton has also restricted subscription and allows only inflows (including SIPs) below Rs 2 lakh to continue. This subscription limit is per PAN and across funds and time horizons till the MF reviews its decision.
Sources said this proactive move is to ensure that existing unitholders are protected and there is no cause for illegitimate profiteering by the more savvy investors.
It is important to note here that Franklin Templeton MF has marked down and not side-pocketed the exposure as there is no credit event and no downgrade by rating agencies yet (Sebi criteria for creating a side pocket).
UTI MF exposure
What should you do about investments in affected schemes of Franklin Templeton MF?
Experts believe it is better to remain invested for now. Manoj Nagpal, founder of Outlook Asia Capital, explains, "Since it (exposure to Vodafone Idea) is written down now, Even if Voda does not pay, your NAV cannot go down further. If they pay, the NAV will go up."
What measures has Franklin Templeton taken?
Franklin Templeton said it awaits further clarity in the case as Vodafone Idea is exploring further options, including a curative petition. “(VIL) securities held by various fixed income schemes of Franklin Templeton remain rated at investment grade, thus limiting the options available to us, at this point of time," according to a statement from a spokesperson.
As a prudent measure, and in order to protect value for existing unitholders in these schemes, the fund house said it has taken two immediate steps:
1) Securities of VIL held in various fixed income schemes of Franklin Templeton have been marked down to zero. The valuation adjustment only reflects the realizable price of the relevant securities on the date of valuation and does not indicate any reduction or write-off of the amount repayable by VIL. The schemes will continuously monitor developments in VIL and take appropriate steps to recover the investment proceeds in the best interest of its unitholders.
2) Fresh inflows, for transactions time-stamped after the cut-off time on 16th January 2020 into these schemes have been limited to INR 2 lacs per investor.
"We believe a combination of these 2 measures will help protect the interests of existing shareholders. We will review these decisions on a regular basis and take appropriate action as clarity emerges,” the spokesperson said
What about other AMCs?
Nippon India and Aditya Birla Sunlife MF have taken a mark-to-market hit. All AMCs will review the situation on January 23, the due date to pay the GAR dues.
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