The Supreme Court’s decision on October 24 in favour of DoT (department of telecommunications) could be a death knell for the telecom sector.
The apex court has upheld most items that the DoT wanted to be included in the AGR (adjusted gross revenues) definition. AGR is the basis on which telcos share their revenues with the government (DoT) in the form of spectrum usage charges (SUC) and license fees.
The total amount claimed by DoT from telcos is Rs 92,641 crore, which includes Rs 23,189 crore as the disputed amount, Rs 41,650 crore of the levy of interest, Rs 10,923 crore as penalty and Rs 16,878 crore as interest on penalty. Just about three years ago, the total dues were just Rs 29,474 crore.
The AGR has been a long-standing dispute between DoT and the telcos, primarily Bharti Airtel and Vodafone Idea who will now have to shell out about 54 per cent of the pending amount — Rs 21,682 crore for Airtel and Rs 28,308 crore for Vodafone Idea.
Although 46 per cent of the amount is due towards Reliance Communications, Tata Teleservices, Aircel and others but these telcos don’t exist anymore.
The decision will have a far-reaching impact on the sector, which is already battling with prolonged tariff wars and high debt burden. The profitability of incumbents is seriously under duress. Airtel, for instance, posted net losses of Rs 2,392.2 crore in the quarter ended June 2019. Vodafone Idea recorded net loss of Rs 4,873.9 crore in the same quarter.
“Telecom sector is under immense financial stress… Further demand of Rs 92,000 crore will dampen the sentiment of telecom operators and raising funds for broadband, network expansion and Digital India will hit a significant roadblock. The impact is not limited to telecom operators but will have a domino effect on larger digital value chain. This requires immediate intervention by all stakeholders to get the sector back in shape,” said Prashant Singhal, emerging markets, technology, media and telecom leader at EY India.
This is a 16-year-old dispute between DoT and telcos. DoT argued that a wider number of items — interest income, dividend, profits on the sale of assets, insurance claim and forex gain — should be included as components of AGR. Telcos, for obvious reasons, didn’t agree.
Telcos like Airtel argued that if they buy a commercial property and sell it for a premium, it doesn’t seem right that DoT wants to take a share from it — even if the licences given to telcos contain clauses that include sharing non-telecom revenues with the department.
The fuss over defining AGR has dragged on long enough that the actual dispute amount is now a small proportion (25 per cent) of the total dues that the DoT has asked for.
Both TRAI and TDSAT (Telecom Disputes Settlement and Appellate Tribunal) have supported the telcos on this issue, but DoT stuck to its own position. For instance, TRAI excluded non-telecom revenue from AGR definition in 2015 but DoT challenged its recommendations. Telcos claim that they have already paid 85 per cent of the demand raised by DoT.
In a statement, Airtel has expressed its disappointment with the verdict. “The issue of inclusion of revenue from non-telecom activities and interpretation of the heads included in the definition of AGR under the license conditions has been through several rounds of litigation, which have been in favour of the telcos till now. The telcos have invested billions of dollars in developing the telecom sector… This decision has come at a time when the sector is facing severe financial stress and may further weaken the viability of the sector as a whole. Of the 15 old operators impacted by the order, only two private sector operators remain in service today. The government must review the impact of this decision and find suitable ways to mitigate the financial burden on the already stressed industry,” the statement said.
With SC backing its demand, the DoT might be looking at a bumper revenue generation this year. But it will surely weaken the telcos to the point of meaningless existence.