Is Apex court's judgement on AGR in telecom 'disastrous'? Will telecom fares increase?

Last Updated: Fri, Oct 25, 2019 13:22 hrs
Telecom Tower (Image Courtesy: Reuters)

The telecom sector on Thursday expressed deep disappointment over the Supreme Court's judgment on the definition of adjusted gross revenue (AGR) which it said will negatively impact incumbent operators by over Rs 92,000 crore. "The Supreme Court's judgment is the last straw in contributing to financial distress," said Rajan S Mathews, Director General of the Cellular Operators Association of India (COAI).

The apex court on Thursday ordered a number of telecom carriers to pay the government as much as Rs 92,000 crore ($13 billion) in dues, which includes penalties and interest. "The Supreme Court order includes Jio although the amount owned by them is not very large compared to other operators," said Mathews without specifying the amount owed by Jio.

An ANI report quoting unnamed sources sources pegged Jio's dues at Rs 13 crores. While Jio entered the market in September 2016, Airtel and Vodafone and Idea have been operating over the last 10 years in the Indian telecom market.

The bench headed by Justice Arun Mishra said telecom companies would have to shell out the dues. The industry has claimed that the AGR only include license and spectrum fees. The government, on the other hand, was insistent that it sould include much more, which would take the dues of the sector to thousands of crores.

Government and telecom firms had challenged the TDSAT order. Telecom firms have to pay around 3 per cent of AGR as spectrum charges and another 8 per cent as license fees.

The row has been on since 2005 when the COAI challenged the government's method of adjusted gross revenue (AGR) calculation to include profit on the sale of fixed assets, dividend, interest and miscellaneous income.

The Telecom Disputes Settlement and Appellate Tribunal (TDSAT) has said in 2015 that the AGR includes all receipts, except capital receipts and revenue, from non-core sources such as rent The tribunal ruled that AGR should include, apart from license fees and spectrum user charges, also rent, dividends and profits on the sale of assets.

"This is a disastrous blow for the industry and may well be the last straw that breaks the camel's back, given the precarious financial position of operators," Cellular Operators Association of India (COAI) Director General Rajan Mathews had been quoted as saying in an IANS report.

Audit and Analyst firm EY said the new demand would hit the sector in network expansion, Digital India and sentiments. "Telecom sector is under immense financial stress admitted by all stake-holders. Further demand of Rs 92,000 crore will dampen the sentiment of telecom operators and raising funds for broadband, network expansion and Digital India will hit a significant roadblock," said Prashant Singhal, Emerging Markets, Technology, Media and Telecom Leader, EY India.

Singhal further added that the impact will not be limited to just telecom operators but will have a domino effect on larger digital value chain. "This requires immediate intervention by all stake-holders to get the sector back in shape," he said. The sector is under heavy losses and has a debt of Rs 7.5 lakh crore. Earlier, Airtel said government must review the impact of this decision as the telcos have invested billions and currently facing severe financial pressure.

An Airtel spokesperson suggested, "the Government must review the impact of this decision and find suitable ways to mitigate the financial burden on the already stressed industry."

In its statement, Airtel said: "We are disappointed by the verdict of the Supreme Court. The definition of AGR has been a long standing dispute between the DoT and the Telecom Service Providers (TSPs) dating to 2005. The issue of inclusion of revenue from non-telecom activities and interpretation of the heads included in the definition of AGR under the license conditions has been through several rounds of litigation, which have been in favour of the TSPs till now.

"The telecom service providers have invested billions of dollars in developing the telecom sector and providing world-class services to consumers. This decision has come at a time when the sector is facing severe financial stress and may further weaken the viability of the sector as a whole. Of the 15 old operators impacted by the order, only two private sector operators remain in service today."

COAI's Mathews added further, "It remains to be seen whether the industry will be able to recover from this setback. The immense financial pressure on the sector will also adversely impact Digital India rollout," he said in a statement. The sector is already reeling under a daunting debt of Rs four lakh crore and is in dire financial straits as operators are making negative returns on their investments,"

"The telecom earnings before interest, tax, depreciation, and amortisation (EBITDA) continue to contract while the interest expense of industry continues to increase." The taxes and levies for the Indian telecom sector ranging from 29 to 32 per cent are one of the highest globally, he said.

"The sector has the lowest tariffs in the world backed by investment of over Rs 10 lakh crore in setting up world-class mobile networks over the past 20 years, but is going through one of its most disruptive phases," added Mathews.

With over 1.19 billion subscribers, the telecom sector is a key contributor to the Indian economy in terms of consumer benefit, employment, revenue generation and contributes 6.5 per cent to the GDP, according to the COAI. The association represents leading telecom, internet, technology, and digital services companies.

The Supreme Court had asked 8 carriers to pay the amount. Reliance Communications with dues of Rs 16,000 crore has already shut shop and exited. Airtel with a debt of Rs 1.06 lakh crore and Vodafone Idea (merged) have a debt of Rs 1.15 lakh crore.

Broking firm Morgan Stanley said in a report that if the telecom firms were to eventually have to pay as per the ruling, the potential payments could be $3 billion for Airtel and $4 billion for Vodafone Idea. On Friday, shares of Vodafone Idea trading on the Bombay Stock Exchange sank by nearly 5 percent in the intra-day session (at the time of writing this story) to Rs 4.10 apiece. The stock's 52 week high has been reported at Rs 27.51.

Stocks of RIL traded to a 1.45% intra-day loss to Rs 1415.45 per share while Bharti Airtel Ltd was quoting Rs 365, down by 2 percent.

How the ruling may impact fares:

It has been believed that the ruling could nudge telecom fares higher. Jio recently ended a 3 year free run on incoming call-services.

An IANS story quoting an unnamed senior telecom executive said that tariff hikes are not on the mind... It is not possible since rivals will use that as an opportunity to lure customers... Tariff hike is not the solution to the issue that has emerged out of the order the executive was quoted as saying.

Analysts said India's telecom war could end super-cheap tariff structure soon. Credit Suisse said that the incumbents may raise some tariffs by giving more data or value added services once Trai provides clarity on interconnect usage charges after January 2020.

So far, incumbents have not responded with a similar hike in tariffs but it is expected that they will follow suit - sooner or later - because of their own distressed financial situation. Airtel, for instance, posted net losses of Rs 2,392.2 crore in the quarter ended June 2019. Vodafone Idea recorded net loss of Rs 4,873.9 crore in the same quarter.

With agency inputs from ANI and IANS.