Explained: What is AGR & Why Telecom Companies are in Trouble?


4 min read
Explained: What is AGR & Why Telecom Companies are in Trouble?

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Telecom operators like Airtel, Vodafone are required to pay licence fee and spectrum charges in the form of ‘revenue share’ with the government. So, Whenever telecom companies earn money it is required to pay a certain percentage of it to the government, every time. It's called licensing fee.

But the government doesn’t take a % cut from the entire revenue. The revenue amount used to calculate this revenue share is termed as the Adjusted Gross Revenue or AGR.

The Spat:

According to the Department of Telecommunications (DoT), the calculations should incorporate all revenues earned by a telecom company – including revenues from the telecom business and also non-telecom sources such as deposit interests and sale of assets. Telecom companies aren't in favor. As per them, the AGR should comprise the revenues generated from telecom services only and non-telecom revenues should be kept out of it.

Together, they approached the apex courts and the courts ruled in favour of the DOT and asked telecom companies to pay their dues.

As per DoT, a few bunch of other government-owned companies like Power Grid, , GAIL, GNFC, and Oil India also own some telecom assets and they did make some money out of it.

GAIL had obtained an Internet Service Provider license back in 2002 so DoT asked GAIL to pay up AGR dues whopping ~1.72 lakh crore. But thankfully Supreme Court intervened and offered relief to the likes of GAIL stating that this was a misuse of its original judgment and all PSUs are finally got the bail.

Airtel and Vodafone also seeking relief by paying dues over the next 20 years.

The Supreme Court said,

“We won’t allow the telecom companies to assess their own dues. Not even in the wildest dreams. Won’t spare the telcos or the DoT. Will send all the MDs to jail.”

They rejected the 20-year time and asked Telcos to provide a detailed roadmap on how they plan to clear their dues including personal guarantees from the owners.

The fact is, the Telecom companies can’t make the payment within a few months either since some of them currently dealing with bankruptcy proceedings might be able to clear their dues if they can sell their assets with any interruption.

Time for Plan B :  Spectrum sale.

What is Spectrum? It is the most valuable asset in a telco’s balance sheet and government’s way of auctioning radio frequencies. Who gets to use how much, depends on the spectrum you own.

When apex court observed that recovery of dues may not be possible from telcos undergoing insolvency the they asked government if their spectrum can be sold under the Insolvency and Bankruptcy Code (IBC).

The Next Problem: The government told the court that spectrum owned by these telcos cannot be sold under the IBC as it is national property, and  has challenged the NCLT’s order in the Supreme Court permitting the sale of spectrum. However, both RCom and Airtel are in the favor of court and argued that spectrum is transferable and can be sold and bought.

According to DoT estimates, RCom owes ₹25,199 crore, including spectrum usage charges (SUC) and license fees, which is nearly half of ₹49,054 crore calculated under the company's insolvency proceedings. Aircel owes ₹12,389 crore to the DoT. The court directed 15 telcos, including the ones that have shut operations, to pay ₹1.47 trillion in AGR dues within three months.

It’s all there for the taking.

Image source: https://www.business-standard.com/

Importance of Telecom companies:

India is currently the world’s second-largest telecommunications market with a subscriber base of 1.20 billion and contributes substantially to India’s Gross Domestic Product (GDP). Gross revenue of the telecom sector stood at Rs 121,527 crore (US$ 17.39 billion) in FY20 (April-September 2019). FDI inflow into the telecom sector during April 2000 – March 2020 totalled US$ 37.27 billion and As per a report by Ericsson, India has the world’s highest data usage per smartphone at an average of 9.8 GB per month. The number of internet subscribers in the country is expected to double by 2021 to 829 million and overall IP traffic is expected to grow four-fold at a CAGR of 30 per cent by 2021.  

Telecom companies are making big investments in India. For instance, In April 2020, Vodafone Group Plc infused Rs 1,530 crore (US$ 217.05 million) and in December 2019, Airtel disclosed its plans to invest US$ 2.86 billion in its business as part of company’s annual target. These investments will definitely boost the economy by providing more employment, infrastructure, ease of living and much more than that.

Although the case has been adjourned to 14 August 2020 but policymakers must find a solution which should fulfill requirements from both sides.

Hope for the best!

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Akshay Seth
Research Analyst (SEBI Regd.)
Linkedin | akshay.equity@gmail.com

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