On September 1, 2020, the Supreme Court gave a 10-year window to the telecom companies in India to pay their dues of over Rs 1.56 lakh crore to the government. This is in response to DOT’s March month petition seeking a 20-year staggered payment cycle of the AGR dues, to save the already suffering telecom sector from potential bankruptcies.
AGR is an earnings—sharing mechanism adopted in 1999 as per which the telecom operators are required to share a portion of their adjusted gross revenue (AGR) with the government, instead of the erstwhile fixed license fees method.
Thus arose a dispute between telecoms and the government on the very definition of AGR. As per DoT, the AGR should include all revenues, earned both from telecom as well as non-telecom services (like sale of assets, deposit interests, etc.). The operators however want to share only the revenue generated from their core telecommunication services.
As a result, both the parties dragged themselves in a decade long legal battle that ended with the October 2019 verdict by the apex court. On October 24, 2019, the Supreme Court agreed with the government’s view and order operators to include all their revenues in the AGR definition, except for termination fees and roaming charges. These dues, when added with spectrum usage charges, amounts to over Rs 1.56 lakh crore. In March 2020, the DoT requested the Supreme Court not to take tough action against the telecoms for non-payment of dues and instead requested a 20-year window for payment. The court has however agreed to provide a 10 year payment period.
So far the operators have paid approximately Rs 30,000 crore and the balance payment of Rs 1.26 lakh crore remains due. Vodafone Idea, Bharti Airtel, and Tata Telecom when clubbed together, have been able to pay only 25% of their total dues so far. However, Mukesh Ambani’s Jio’s dues were the lowest at Rs 194.7 crore and have already been paid by the company.
The Supreme Court verdict came as a devastating blow to the country’s telecom sector which was suffering from the losses caused by Reliance Jio’s entry in October 2016. With its aggressive tariff strategies, Jio marked the beginning of a price war that shook the hitherto telecom giants -- Vodafone Idea, and Bharti Airtel, and deracinated Reliance Communications. Experts believe that Jio’s growth came at cost of the rest of the telecom sector.
‘Jio was at the forefront of aggressive pricing in the sector, resulting in the bankruptcy of weaker players and increasing financial stress for Bharti Airtel and Vodafone Idea,' says a research note from Axis Capital.
According to a TRAI (Telecom Regulatory Authority of India) report, Vodafone Idea lost 4.95 million subscribers in August this year, while Bharti Airtel lost 0.56 million, which were absorbed by the fast-growing Jio.
In 2019, RIL announced an investment of Rs.1.08 lakh crore through a rights issue in a new wholly-owned digital arm. Earlier this year, Reliance industries sold equity stake of Jio to 12 global investors including Facebook, raising $15.2 billion in the fundraising spree which, along with its $7 billion rights issue, made RIL ‘net debt-free’, ahead of its March 2021 commitment. Analysts believe that Jio’s decision to separate its digital business to a new unit will help it in substantially reducing the fee payouts as per DoT’s AGR linked revenue sharing model. According to Sanjiv Bhasin, executive vice president (markets & corporate affairs) at IIFL Securities, “Moving Jio’s noncore digital businesses to a new unit would contain the telco’s AGR-linked license fee/SUC payouts in future and in turn insulate the company from potential financial shocks, ahead of a potential listing in about a year.”
Other telecom players are likely to follow Jio’s footsteps and move their non-core digital business activities to new units, thus limiting the adjusted revenue linked payments. The most impacted operator by this AGR verdict is Vodafone Idea, followed by Airtel. Both of them are required to pay 10% of their outstanding dues by March 2021.
Vodafone Idea is in a dire situation and before the grant of 10 year payment period by SC on September 1, Vodafone CEO Nick Read warned that the company hit by Rs 53,000 crore AGR demand might have to be liquidated if the government refuses to provide assistance. It is still fighting for survival as it needs to pay Rs 6,800 crore per year (after the initial payment) which is even more than its current operating profits of Rs 6,100 crore. It means that its revenues are simply not enough to cover the annual AGR payments.
According to a Jefferies Equity Research report dated September 1, “Vodafone Idea may need additional support from the government in the form of a further 2-year moratorium on deferred spectrum liabilities to remain solvent beyond FY23.”
On the other hand, Airtel is still in a better position as its estimated payment of Rs 3,500 crore (after the first instalment) per year is just 22% of its annual operating profits.
The telecom sector in India is going through turbulent times with cut-throat competition, growing needs of evolution and digitisation, and the AGR woes have simply added to their adversities. These unforeseeable shifts in government policies can put their wheels off-track, putting them out of business. The telecom companies are now contemplating a tariff rise to meet the AGR demands and only the time will tell if they can sustain themselves and find a mutual way out.