In yet another setback to the telecom service providers, the Supreme Court reiterated on March 18 that the telcos’ AGR (adjusted gross revenue)-related dues would have to be paid in full, along with interest and penalty.

The apex court lashed out at the government and the mobile telephony players for trying to re-calculate the quantum of dues payable by the companies by way of a self-assessment, allowed by the DoT. It argued that the DoT fought the original case in various courts of law, culminating in the Supreme Court, on the basis of what it felt were the dues payable to it (along with interest, penalty and interest on penalty) and that thesis couldn’t be changed now suddenly. The court also observed that the telcos should have made provisions to pay these dues.

There is a significant divergence between the DoT’s original estimate of telcos’ AGR dues and what the companies themselves feel they owe the government through their self-assessment. For instance, while Vodafone Idea’s share of AGR dues, as per the government’s calculations, works out to around ₹53,000, the company thinks it owes the government ₹21,500 crore. Bharti Airtel, which had been originally asked to pay around ₹43,000 crore, has estimated its liability at ₹13,000 crore.

The Indian telecom sector has seen a bloody tariff war play out over the last four years, since Reliance Jio Infocomm (Jio) commercially launched 4G broadband wireless services offering free voice and cheap data. All other operators dropped tariffs to compete with the Mukesh Ambani-led telco, in order to retain their market share. This put significant strain on their balance sheets and led to high debt levels in the telecom industry.

However, the dispute on the interpretation of AGR – which the DoT interprets to include revenue from telcos’non-core operations – has been going on for the last 14 years. Since the matter was decided in favour of the telcos in all the lower courts, the companies never provided for any amount as contingent liability that they may have to pay as higher statutory dues linked to the revised definition AGR. In hindsight, that may not have been the best thing to do since the Supreme Court overturning a lower court’s judgment is not without precedence.

While the Supreme Court’s stance does make matters complicated for the telecom firms, they may draw solace from the fact that it has agreed to hear the DoT’s request, for allowing the AGR-related payments to be staggered over a period of 20 years, in two weeks.

Now that it is clear that there will be no rebate on the quantum of dues payable, which stands at around ₹1.43 lakh crore for the industry, the court’s discretion on allowing the payment to be staggered over a longer period of time becomes all the more important. If there is no respite on that front either, Vodafone Idea will almost certainly fall from the edge of the cliff, as it is in the most precarious state in the industry vis-à-vis its balance sheet weakness.

From the time the news of Supreme Court’s observations broke on March 18, till the time of writing this report at 1:24 pm, Vodafone Idea’s shares had declined by around 58% on the BSE to ₹3.43 per share.

“In our view, the market was generally expecting a favourable outcome in terms of quantum of payment and timeline of payment. We therefore consider the (Supreme Court) decision on the quantum to negatively disappoint the market,” said a research note by BofA Securities. “Given the fact that the Supreme Court is going to hear on the government's rescue plan after two weeks, we believe their remains hope for Vodafone Idea (if the court agrees to the government's plan). From Bharti's perspective, they have to pay higher than initial expectations on AGR dues. We think even in this environment Bharti should be able to manage it.”

After fighting the telcos for 14 years on what it believed was its rightful dues, the government changed its stance over the last few months to try and help the telcos. This was since it became imminent that the telecom sector would most certainly collapse under the burden of heavy AGR dues, especially if they had to be paid immediately. There was also a threat that the sector could be reduced to a duopoly – comprising Jio and Airtel – and that wouldn’t have been in the best interest of subscribers, the economy and the government’s own Digital India mission. The government’s intention had also led to speculation that Vodafone Idea’s promoters, including the Kumar Mangalam Birla-led Aditya Birla Group and UK’s Vodafone Group Plc, may pump in some additional capital into the company to help it tide over the crisis and grow in the future. This was after Birla had publicly stated that the promoters wouldn’t infuse any fresh capital into Vodafone Idea if it didn’t get any relief on its share of AGR dues.

The BofA report also mentioned that, based on the Supreme Court’s final decision on allowing staggered payments, the government could also potentially create a “telco fund”, through which it would lend to the telcos and help them pay their dues immediately. These loans could then be recovered over a period of time at soft interest rates. “Even with possible higher investment, we think VIL's ability to invest in capex will go down helping both Bharti and RIL to capitalize in terms of market share. We also see a faster pace and magnitude of tariff hikes,” the report added.

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