What the SC’s rejection of the arguments of telecom operators on adjusted gross income means for them

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The July 23 order of a bench of three Supreme Court judges on the issue of calculating the adjusted gross income (AGR) of large telecommunications companies is seen by many analysts as a blow to Indian telecommunications operators , with the cash-strapped Vodafone. Idea about to take the biggest hit. The SC bench led by Judge LN Rao rejected arguments by Vodafone Idea, Bharti Airtel and Tata Teleservices filed separately in January this year, saying the Supreme Court should allow the correction of alleged mathematical errors in the calculation of l ‘AGR carried out by the Ministry of Telecommunications (DoT). In September 2020, the SC issued an order confirming the calculation of the AGR by the DoT and authorized telecommunications operators to pay contributions in installments over a period of 10 years from April 1, 2021.

According to DoT calculations, Vodafone-Idea had the highest AGR contributions, at Rs 58,254 crore. From this he has already paid Rs 7,854 crore. Bharti Airtel, meanwhile, owed Rs 43,980 crore in AGR dues, of which Rs 18,004 crore was paid. Tata Teleservices, which paid around 4,197 crore rupees, has to shell out an additional 12,601 crore rupee to pay its dues, according to reports.

What is AGR and how is it calculated?

For this we have to step into the modern history of the telecom sector in India a bit. The telecommunications sector was liberalized under the National Telecommunications Policy of 1994, paving the way for the entry of private actors. For a fixed license fee, licenses were issued in various categories: unified license, which allowed a company to offer both wireless and wireline services; licenses to Internet service providers (ISPs); and licenses to provide passive infrastructure, such as towers and fiber (referred to as Category-1 or IP-1 infrastructure providers license). In 1999, the NDA government gave licensees the option to migrate to the revenue sharing royalty model.

According to the model, telecommunications operators were to share a percentage of their AGR with the government in the form of an annual license fee and spectrum usage fees. The fee was set at 8 percent of the AGR while the spectrum fees were set at 3-5 percent. Over the years, the definition of AGR in the conditions of license has undergone revisions with respect to the applicable rates for license fees and spectrum usage fees. While operators wanted to be billed on the basis of their core business, which is conducted using allocated spectrum, the DoT said the definition of AGR includes other elements, such as dividends, interest, capital gains in respect of the profit from the sale of assets. and securities and gains from exchange rate fluctuations.

In 2015, the Telecommunications Dispute Resolution and Appeal Tribunal (TDSAT) ruled that the AGR includes all revenue except capital revenue and income from non-core sources, such as rent, profits on the sale of fixed assets, dividends, interest and miscellaneous income. The relief was short lived. On October 24, 2019, the SC rescinded the TDSAT order and upheld the definition of DoT AGR. The incumbent carriers approached the court for a review, but the plea was dismissed on January 16, 2020. However, the SC agreed on January 21, 2020 to support a modification plea filed by the carriers, seeking to negotiate a ‘sustainable payment schedule’. This follows the decision of the Union cabinet of November 20, 2019, to grant telecommunications operators a two-year moratorium on payments. The Cellular Operators’ Association of India initially requested a period of 14 years for the payment of membership fees.

However, on February 1, 2020, the SC criticized telecoms operators for unpaid dues and warned them of contempt proceedings if they did not pay by March 17. According to reports, the original disputed amount of Rs 23,000 crore has snowballed several times until today. figure of almost Rs 1.5 lakh crore (for all telephone companies, including those that were subsequently liquidated), as the DoT argued that all contributions accumulated over the past 15 years must be paid with interest and penalties.

Impact on telecommunications operators

With this ultimate effort by telecom operators to get relief from the SC unsuccessful, they are left with little choice but to pay. But given Vodafone-Idea’s financial health, paying such a large sum will not be easy. The company is already in debt. Following Vodafone-Idea’s financial results for the fourth quarter of last year, brokerage firm ICICI Securities said on July 5 that the phone company’s net debt at Rs 1.8 lakh crore was up compared to Rs 1.15 lakh crore, taking into account the inclusion of the AGR liability of the company. “We point out that the payment commitments of around Rs 16,000 crore for the annual spectrum payment and Rs 8,400 crore for the AGR contributions arrive in March, April 2022. In addition, he must also renew the bank guarantees of Rs 7 000 crore (and must give additional collateral) in the coming months. The company recorded a loss of Rs 11,643.5 crore for the fiscal fourth quarter, its seventh consecutive quarter in the red, affected by loss of subscribers, high finance costs and a one-time charge mainly related to its statutory dues . Vodafone-India lost 2 million subscribers in the fourth quarter of 2020-2021, bringing its total number to 269.8 million. However, its 4G subscribers increased by 4.2 million from 3.6 million in the third quarter, bringing its total number to 113.9 million. “It’s better, but far from Bharti / Jio’s additions of 13.7 million / 15.4 million,” said a report from brokerage firm Motilal Oswal. Shares of Vodafone Idea fell 9.6% on BSE to close at Rs 8.36 on July 23.

Meanwhile, rival Bharti Airtel reported a net profit of Rs 759 crore compared to a loss of Rs 5,237 crore in the corresponding period of the previous fiscal year. Revenue for the quarter increased 11.9% year-on-year to Rs 25,747 crore mainly due to continued growth in adding customers. “Strong revenue momentum, supported by continued growth in customer additions and improved margins, supports the company’s growth prospects,” Geojit Financial Services said in a report. Surely, Bharti Airtel seems to be in a better position to take the AGR hit.


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