On October 24, 2019 Supreme Court upheld the Department of Telecommunications’ (DoT) definition on what constitutes AGR as provided in clause 19.1 of the telecom licence agreement between the service providers and the government. The judgment marks a milestone in the evolution of telecom policy in India as it paved the way for the government to recover dues of over a whopping Rs. 92,600 crores from the telecom service providers (TSPs) in the form of adjusted gross revenue (AGR).
Telecom operators are required to pay a licensee fee and spectrum charges in the form of ‘revenue share’ to the government. The revenue amount used to calculate this revenue share is termed as the adjusted gross revenue.
In July last year, the Centre had told the apex court that TSPs like Bharti Airtel, Vodafone, MTNL and BSNL had a pending licence fee of over Rs. 92,600 crores. In an affidavit filed in the SC, DoT said that as per calculations, Airtel owed Rs. 21,682.13 crores as licence fee while Vodafone owed Rs. 19,823.71 crores and Reliance Communications had to pay Rs. 16,456.47 crores along with BSNL which owed Rs. 2,098.72 crores whereas MTNL owed Rs. 2,537.48 crores to the government.
The roots of the dispute between TSPs and the government can be traced to the liberalization of telecom sector in early 1990s. The telecom sector was liberalised under the National Telecom Policy, 1994 under which licenses were issued in return for a ‘fixed license fee’. To provide relief from the steep fixed license fee, the government, in 1999, gave an option to the licensees to migrate to the ‘revenue sharing fee model’. The Licence Fee (LF) and Spectrum Usage Charge (SUC) were set at 8 per cent and between 3-5 per cent of AGR respectively, based on the agreement.
The dispute between DoT and TSPs was mainly on the definition of AGR. The DoT argued that AGR includes all revenues (before discounts) from both telecom and non-telecom services. The companies, on the other hand, claimed that AGR should comprise just the revenue accrued from core services and not dividend, interest income or profit on sale of any investment or fixed assets.
In 2005, the 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 the TDSAT’s order, the Supreme Court, on October 24, 2019 upheld the definition of AGR as stipulated by the DoT.
How does the judgment impact investors?
Combined with spectrum usage charges of Rs. 55,100 crores, telecom companies owe the government more than Rs. 1.47 lakh crores. At the current juncture, when profits for telecoms are under pressure from severe competition and the falling Average Revenues Per User (ARPUs), this judgment will decide the survival of major telecom players in the Indian market. The government is exploring several options and relief measures like stress funds for distressed telecoms to ensure their sustainable survival and to maintain their stability in the struggling market.
The SC judgment will have serious implications on the expected rollout of 5G in India this year considering the poor financial shape of the telecom giants, spectrum auctions will probably find few bidders in the market, thereby, a delay in rollout of 5G in the country emerges as a likely scenario. Further the closure of some firms could also lead to one or two players emerging in the telecom market with high pricing power in a potential duopoly situation.
As we have seen, emerging technological changes in the telecom sector are determining the sector’s market dynamics to a great extent. Therefore, policy certainty and government support will play a crucial role in not only reviving the huge sector but also ensure its sustainable growth in the times to come.
This blog has been co-authored by Lakshya Sharma and Raghav Prasad