The Supreme Court (SC) has rejected the telecom companies' definition of Adjusted Gross Revenue (AGR). The government and the telecom companies were locked in a legal battle in the 14-year-old case over the definition of AGR, on the basis of which the telecom department calculates levies payable by companies.
With the judgement, the SC has exposed the incumbent telcos to potential demands by Department of Telecom (DoT) of up to Rs 92,641 crore.
The case pertained the definition of AGR on which telcom companies pay licence fee of 8 percent.
SC has prescribed new definition of AGR and held all revenues accruing to telcom companies constitute as AGR.
So, even dividend income, rental income, interest income etc to be considered as revenues for calculation of licence fee.
Amount payable as per the government affidavit dated July 17, 2019 is Rs 92,641 crore.
ALSO READ: Big setback for telecom firms as SC rejects definition of AGR, exposes them to hit of Rs 1.3 lakh crore
Off the total amount of Rs 92, 641 crore, p
enalty and interest constitutes Rs 10,923 crore and Rs 58,528 crore, respectively. Who owes how much? Bharti Airtel at Rs 21682 crore Vodafone-Idea at Rs 28308 crore Reliance Communications at Rs 16456 crore Tata group at Rs 9987 crore Aircel at Rs 7852 crore BSNL at Rs 2098 crore Telenor at Rs 1950 crore Reliance Jio at Rs 13 crore What is AGR?
The AGR is divided into spectrum usage charges and licensing fees, pegged between 3-5 percent and 8 percent respectively.
As per DoT, the charges are calculated based on all revenues earned by a telco – including non-telecom related sources such as deposit interests and asset sales. Telcos, on their part, insist that AGR should comprise only the revenues generated from telecom services.
The figures above include licence fee, interest and penalty.
63 percent of payable amount is interest
The SC has also mandated that telcos have to pay not just the principal amount, but also the interest amount and penalty. And the interest amount on the principal and penalty is massive, a fallout of the case dragging from 2005-2006. Out of the total 92641 cr payable, the interest component is as 58528 cr, which is a whopping 63 percent.
Total potential payout 92641 crore
Balance License payable is 23188 cr
Penalty at Rs 10923 cr
Interest at Rs 58528 cr
Investors were hoping that given the stress in the system, the telcos would get some relief and be asked to pay only the principal amount but that relief has been denied as the SC called the telcos case “frivolous”.
With the wisdom of hindsight we can say, had the verdict been delivered earlier, atleast the interest component would be lower and a few years ago the health of the industry was also better.
The judgment will have a bearing on SUC case which involves a payout of Rs 41,000 crore
Along with an 8 percent licence fee, telcos pay a 3 percent spectrum usage charge (SUC) which is also computed on AGR. Now that the definition of AGR is expanded to include all kinds of income, the total SUC payable is also likely to go up. Unverified reports suggest the government calculation of how much telcos owe as SUC to the government is as high as Rs 41,000 crore. So the total payout of licence fee and SUC is potentially at Rs 1.3 lakh crore
The street is worried whether the 3 player market now becomes a 2-player market
Stock of Vodafone Idea ended down 10 percent in today’s trade. the telecom company has a net debt at Rs 1 lakh crore and its cumulative loss stands at nearly Rs 20,000 crore over the last 4 quarters. The company in its annual report has highlighted a contingent liability of Rs 17100 crore, though its not provided for yet, given its strained balance sheet the question is how will Vodafone Idea make a potential payout of 28308 crore?
While this news is also a setback for Bharti Airtel, its relatively in a better position than Vodafone Idea given its stronger balance sheet , which is why stock recovered from the lows today and ended up 3 percent. Bharti in a statement said they are disappointed with the verdict of SC and that the government must review the impact of this decision. The impact on Jio is negligible with the payout pegged at Rs 13 crore.
Telecom NPAs ?
The government ought to be worried about the NPAs. The sector is reeling under a debt of over Rs 7 lakh crore amid pressure on revenue and profitability due to price competition. The sector has seen the demise of Etisalat, Loop, Sistema among others and is yet to recover from 2012 cancellation of 122 licences and now this will be a new blow. India's largest bank State Bank of India in reaction to this development said exposure to these telcos is mainly by way of bank guarantees and it will have to assess the impact of the order.
Good bye 5G auctions ?
The government was keen on the 5G auctions happening in FY20 itself; infact even the budget estimates from telecom sector seem to factor in some revenue from the auctions. With the payout overhang on the telcos , can we realistically expect them to bid? Even if there is some reform on the spectrum pricing it is possible telcos will give the 5G auctions a pass this year. Telcos have sought time for 6 months for computation of amounts payable, which means the overhang stays till fiscal year end making 5G auctions difficult .
So while SC verdict may be a win for the government in this case, it is a loss of revenue for the government if the auctions get pushed forward especially in a year of low GST collections and tax sops.
Will the govt support the sector? If yes, how?
The govt seemed very cognizant of the stress in the sector when they released a consultation paper to review its decision to bring down the interconnect usage charge to zero by January 2020. It appeared the government wanted to support the sector, now the sector is likely to need the support even more, what can the government do? It can make the terms of payment easier (like in the case of auctions – payment can be done in installments) . It can pass the judgement to defer the decision of making termination cost to zero by a longer period. There were some unverified reports of government considering a floor price on voice calls, though it seems difficult since TRAI has a forbearance policy on pricing. Finally, the sector is taxed at almost 30-32 percent with GST, AGR, licence fee, USO etc. Can the government lower the taxes and levies on the sector?
Telcos that don't exist
Another issue is collecting money from telcos which don’t exist anymore. The top court order also includes monies payable by Stel, Sistema, Loop, Telenor, Quadrant or even RCOM. RCOM according to the affidavit owes the government Rs 16500 crore.