Why the SC Adjusted Gross Revenue Ordinance is a Temporary Stay for Telecommunications Companies

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Shares of telecommunications companies posted gains on the stock exchanges on September 3 after the Supreme Court authorized the installment payment of their Adjusted Gross Income (AGR) over a 10-year period, starting April 1, 2021. Vodafone Idea gained 26.7%, Bharti Infratel (a telecommunications infrastructure company) 11.5% and Tata Communications 2.4% on the Bombay Stock Exchange, two days after the Supreme Court gave struggling telecommunications players a longer cord to repay nearly 1.5 lakh crore they owe the government as revenue leaves in exchange for acquiring licenses and frequencies. The court asked telecommunications operators to pay 10% of the contributions associated with the AGR by March 31, 2021.

“The Supreme Court verdict provides much needed clarification on the AGR issue,” said Sachin Gupta, senior manager of Crisil. It is positive in the short term because of the cash flow respite granted with installment payments over 10 years. “However, the liabilities remain significant, which will put pressure on the balance sheets of the telecommunications operators concerned,” Gupta said. Most telecom operators have already paid AGR dues above 10 percent of their liability. This would mean no additional cash outflow for these companies until February 2022, Gupta added. The problems related to the AGR have put telecom operators like Vodafone-Idea and Bharti Airtel in a dilemma. They were already struggling under the onslaught of Reliance Jio, which is now the leading player in the telecoms market, both in terms of turnover and subscribers, which numbered 398.3 million as of June 30, 2020.

Now, a bit of history on the issue of AGR. 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 a Category-1 or IP-1 infrastructure provider 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 royalty was set at 8 percent of the AGR while the spectrum usage fee was 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 Department of Telecommunications (DoT) said the definition of AGR includes other elements, such as dividends. , interest, capital gains on profits from the sale of assets and securities, and gains from currency 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-essential sources, such as rent, profits on the sale of fixed assets, dividends, interest and miscellaneous income. The relief for telecom operators was short lived. On October 24, 2019, the Supreme Court quashed the TDSAT order and upheld the definition of DoT AGR. The incumbent telecommunications operators approached the court for a review, but the plea was dismissed on January 16 of this year. However, the Supreme Court agreed, on January 21, to take up a plea for modification filed by telecommunications operators, seeking to negotiate a “sustainable payment schedule”. This followed the Union Cabinet decision on November 20 last year to grant telecoms operators a two-year moratorium on payments. The Cellular Operators Association of India (COAI) initially requested a period of 14 years for the payment of membership fees.

On February 14 this year, the Supreme Court criticized telecoms operators for unpaid dues and warned of contempt proceedings if they did not pay by March 17. After the rap, the DoT asked telecom operators to pay AGR dues by the end of the day on February 14. According to reports, the original disputed amount of Rs 23,000 crore snowballed several times to reach the current figure of nearly Rs 1.5 lakh crore, as the DoT argued that all of the contributions accumulated over the years Last 15 years had to be paid with interest and penalties.

In view of these developments, this Supreme Court order is a relief for the telecom players, but they still have to cough up the massive dues over a period of time. According to reports, Vodafone-Idea has the highest AGR dues, at Rs 58,200 crore, as set by the DoT. Of this he has only paid Rs 7,900 crore so far. Bharti Airtel owes Rs 43,780 crore in AGR dues, of which Rs 18,004 crore has been paid. Tata Teleservices, which paid around Rs 4,197 crore, is due to pay Rs 12,601 crore more, according to reports.

While the Supreme Court allowed installment payments of AGR dues over a 10-year period, the DoT sought 20 years and incumbents were eagerly awaiting more than 10 years to make AGR payments. “The industry will need higher average revenue per user (ARPU) than the current level to pay AGR dues within the 10-year time frame,” said a note from Care Ratings. Industry ARPU is estimated at Rs82 in the June 2020 quarter, well below the average ARPU of Rs124 in fiscal 2016, before Reliance Jio entered the telecommunications market. .

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