The New Definition of AGR
Think AGR should only include revenues earned
from telecom services. In 2015, the definition of AGR was changed, to include
all revenue except capital receipts and revenue from non-core sources. Non-core
sources are things like rent, profit on sales of assets, interest and other
incomes. And now, in 2019, the Supreme Court ruled that AGR should include all
revenues for which the telecom sector should start looking for money which is
no fun because the Telecom Sector is already into a debt of more than INR 7 lakh
crore and that is what is affecting the authorities.
In
a massive set back to the Telecom Companies, the Supreme Court on 24th
October, 2019 has upheld the Government’s demand of INR 92,641 crore in licence
fees. The case pertains to the definition of something called AGR or Adjusted
Gross Revenue on which the telecom companies pay a license fee of 8%. Telco’s
would historically calculate only their core revenues as their gross revenues
or AGR but the government said that all forms of revenues, be it dividend
income, rental income, interest income, all that needs to be calculated in the
definition of AGR. So for the government, the AGR amount was much larger than
what the Telco’s has computed and therefore the license fee that the government
computed was much higher than the Telco’s. This was the backdrop of the entire
case.
According
to the government from 2006 if we take into account the balance license fee,
the interest on the license fee, the penalty and the interest on the penalty,
it will add up to a massive amount of INR 92,641 crores. According to the
affidavit, the government presented in July 2019 the breakup was as follows for
the various companies:
|
Company
|
Approx. amount in cr.
|
|
Bharti Airtel Group
|
INR 21,700
|
|
Vodafone Idea
|
INR 28,300
|
|
Reliance Communications
|
INR 16,500
|
|
Jio
|
INR 13
|
The
interesting thing is that of this total amount INR 92,641 crore the actual
balance license fee is only about 25% and a whopping 63% is the interest on the
license fee and interest on the penalty and that is a fall out of the case
being dating back to 2005-06. Now with the wisdom of hindsight we could say,
had the Supreme Court decided earlier then perhaps the interest amount would
not be so high. But these judgment also has various implications, one being
license fee is 8% of AGR but Telco’s also pay a Spectrum usage charge which is
3-5%of AGR. So now as the definition of AGR has changed, the amount that the
Spectrum Usage Charges (SUC) the Telco’s have to pay will also go up and
according to reports the total amount to be paid taking into account the
interest, the penalty, and the principle amount could be as high as INR 41,000
crores. So the total potential payout stands at INR 1.3lac crore.
Now
the question is what happens to Vodafone Idea, as it the weakest in the
three-player market. Its debt stands at INR 1 lac crore for the last four
quarters, its been reporting losses to the tune of INR 5000 crore which means
accumulated loss in the last 12 months is almost at INR 20,000 crore, its Net
Debt/EBITA is very high. So how will they fork out their INR 28,300 crore? Is
the three-player telecom market set to shrink further to a two-player market?
The
implication of that is, if Vodafone Idea is unable to to make that payment will
it result in telecom NPA’s? Already we have seen the demise of many companies
like Reliance Communications no longer exists, S Tel, Etisalat, Loop Telecom,
so you don’t want to add another big company like Vodafone Idea to that
considering that the industry itself is sitting on an overall debt of more than
INR 7lac crore and its revenues are constantly shrinking. Amidst pricing and
competitive pressures the risk of telecom NPA is serious. The only way to stem
that is, if the government in any way steps in to alleviate the stress. So,
what can the government do? Now as the SC has ruled the Telco’s have to make
that payment, they will have to make it but maybe government can make the terms
of the payment a lot easier. So similar in the case of Spectrum auction, how
they say for the first 2 years you don’t have to make that payment and then the
rest is amortized over 16 years, 18 years, maybe something like that could be
done here. Also the telecom industry has been long arguing that you bring down
the total levies and taxes on the industry because it stands as high as 30-32%,
if you take into account the license fee, SUC, USO, as well as the GST of 18%.
If the government brings
down the taxes it’s a loss of revenue for them but it does reduce the pressure
on the Telecom Companies. Another angle that you need to consider is what
happens to the 5G revenues and the 5G auctions, which the government was
planning? Remember as early the Indian mobile congress which was held a couple
of months ago, Ravi Shankar Prasad had said that we are very keen on having the
5G auctions in FY20 itself and there will be some reform spectrum pricing. Now
with this potential pay out of INR 1.3 lac crores looming on the industry, even
if there is some change in the spectrum prices, even if you’ll bring the
reserve prices will the Telcos be in any position to participate in the 5G auction.
So, in a way if you look at it from a government’s
point of view, it’s a win for the government in terms of getting a license fee,
a pay out from the Telcos, but they are possibly going to lose out on the 5G
revenues at a time when the GST elections are falling short and there are tax
sops which are given to the corporate. So it’s a landmark judgement, remember
the telecom industry is still reeling from the 2012 judgement when 122 licenses
were cancelled for the industry and now this 2019 judgement by the supreme
court is going to be a body blow for the telecom industry with various
implications for all stakeholders.