February 27, 2020
A to Z of AGR (Adjusted Gross Revenue) explained
The Indian government liberalised the telecom sector as per the National Telecom Policy in 1994, under which licences were given in accordance to the Indian Telegraph Act, 1885. Under this century-old law, telecom companies were required to pay a fixed annual licence fee for licences granted to them. Since fixed licence fee was very high, telcos often defaulted on their payments. The government in 1999 announced the National Telecom Policy, which gave these companies an option to migrate from fixed licence fee to revenue sharing fee. As per the new policy, 15 per cent AGR was fixed as annual licence fee and spectrum usage charges. Agreement was between Dept of Telecom (DOT) and Telecom companies. AGR was computed after certain deductions spelt out as per the agreement. Licence fee was 8% and Spectrum usage charges were 3-5% of the AGR.
How the tussle happened:
The main problem began with the definition of AGR. DoT argued that Revenue include all revenues before deductions from core and non-core activities. Whereas Companies argued that AGR only consider the core revenue and exclude non-telecom revenue.
What is core revenue and noncore revenue:
Telecom Company provides telecom service to its subscribers and charges a fee against it. The fee is core revenue. As per definition, the revenue company generated by providing telecom services, is its core revenue.
As a company, it has free cash, land, other assets in its asset side of the balance sheet. Now, for example, Airtel has a Rs. 300 cr Fixed Deposit with XYZ Bank, 500 crore mutual fund investment and a land in Hyderabad. Airtel receives interest from its FD, dividend from its Investment and if it choses to sell its land it will also add to its cashflow. All these incomes or sale proceeds are considered as Non-core revenue.
Start of a decade old battle:
Telecom companies claimed that AGR accrued from core services and not dividend, interest income, profit of sale of any fixed asset or any investment will be considered for revenue sharing. In 2005, Cellular Operators Association of India (COAI) challenged the government’s definition for AGR calculation. In 2015, the TDSAT (Telecom Disputes Settlement and Appellate Tribunal) stayed the case in favour of telecom companies and held that AGR includes all receipts except capital receipts and revenue from non-core sources such as rent, profit on the sale of fixed assets, dividend, interest and miscellaneous income.
However, setting aside TDSAT’s order, Supreme Court on October 24, 2019 upheld the definition of AGR as stipulated by the DoT. On February 13, 2020, Supreme Court of India came down heavily on telecom companies as they missed the deadline of 23rdJanuary to pay the dues.
Total dues are to the tune of Rs. 1.47 Lakh crore including interest and penalties as on date.
Telcos owe Rs 1.47 lakh crore to DoT, including Rs 92,600 crore as licence fee and Rs 55,100 crore as spectrum usage charges; of total amount, Vodafone Idea owes maximum Rs 53,000 crore. Vodafone reported a loss of Rs 50,921 crore for September quarter, the highest loss reported ever for any Indian company, Airtel posted a loss of Rs 23,044 crore for the quarter.
Bharti Airtel said, they have made adequate provisions to pay the AGR dues. But Vodafone Idea is completely debt-ridden and Mangalam Birla categorically said that if Govt doesn’t come up with some lenient measures, Vodafone has to shut the shop.
A day after two of the largest telcos – Vodafone Idea and home-grown Bharti Airtel – announced a combined loss of over Rs 74,300 crore for the second quarter, Finance Minister Nirmala Sitharaman said the Government is considering requests for financial relief for the beleaguered telecom sector. A panel of secretaries headed by Cabinet Secretary Rajiv Gauba is currently looking into measures to relieve stress in the sector, including possible relief from the AGR liability.
Bharti Airtel owes Rs 35,600 crore, while Vodafone Idea has to pay Rs 53,000 crore. Reliance Communication has pending dues worth Rs 21,200 crore and Tata Group has to pay Rs 13,800 crore. Of the total pending amount, Vodafone Idea and Airtel have to pay Rs 88,600 crore.
Pressure on Other Sectors:
1. On Banking: Vodafone Idea’s large lenders include SBI (Rs 11,000 crore), IndusInd bank (Rs 3,500 crore) and IDFC First Bank (Rs 2,500 crore). By contrast, total mutual fund exposure is small at Rs 3,400 crore, out of which Rs 2,074 crore is with Franklin Templeton, which has already been marked down to zero. If Vodafone goes bankrupt, it will create a big hole in the balance sheet of these Banks. Banks are crumbling with bad loans, and with Vodafone falling apart, it will be disastrous for banks.
2. On FDI trust: Vodafone CEO has categorically mentioned, if govt doesn’t take lenient approach and continue with this kind of Tax terrorism Vodafone’s India venture will be collapsed and it will raise serious question marks whether Indian Govt. Is really keen to bring more FDI or not.
3. Duopoly: As things stand now, Airtel will be able to weather the tax storm. It will leave only two major players in the Telecom sector in India along with Reliance Jio. It is not good for competitive pricing. Broader the market, better it is for the consumers.
Increased Data Rates: With diminishing competition, pricing power will be in the hands of corporate and it may lead to higher data cost. After the advent of Jio, data became cheap and it encouraged many peripheral sectors. There was a surge in OTT platforms, online payment and various other things which will require internet data. With higher data cost it may impact those sectors also.
Recently, Kumar Mangalam Birla and Sunil Bharati Mittal had a meeting with Fin min and other senior officials in DoT. Hope something positive emerge out of it for the future.
Article Credits: News, Bloomberg
Photo Credits: Google