AGR Case Verdict and Understanding the Dispute
On Tuesday, the Supreme Court gave the verdict in the AGR case. Court ordered the telecom companies to repay their Adjusted Gross Revenue (AGR) in a 10 years time-frame.
This comes after SC upheld the expanded definition of AGR dues in October 2019. A bench of Justices Arun Mishra, S Abdul Nazeer and MR Shah directed telecom companies to make 10% upfront payment of their AGR dues before paying the rest of the amount. The 10 years period begins from April 1, 2021 to March 31, 2031. The annual date to pay the installment is February 7. Failing to do so will result in interest, penalty, along with contempt of court, the SC said. Court also strictly said that no dispute regarding the revaluation of AGR dues will be allowed. Managing Directors of the telecom companies are also required to submit personal guarantees as well as an undertaking to comply with the SC schedule within four weeks.
A Brief History
Before 1999, when companies believed that data will always be an expensive commodity, to operate in India companies were incumbent to pay a certain amount as fixed license fees. Revenue Sharing Model was introduced in 1999 with the idea of exchanging a certain percentage of companies’ revenue for availing certain facilities from government, namely spectrum usage charges and licensing fees. The Revenue Sharing Model held its percentage high until it was finally dropped to 8% in 2008.
Apart from this, charging hefty amounts for calling and internet services worked out only until Jio arrived in 2016. Such services were no longer an extortionate system. But these companies did not foresee a company like Jio. So, the investments made by such companies were made before 2016, were made out of future cash flow projections and borrowings of rs. 1.5 against every one rupee of the capital invested by founders or promoters in the company. The future projections of cash flow were made up of future earnings to be extracted from the customers of the company, still believing data shall stay an expensive commodity. When Jio entered the market, it became a challenge to compete with such low prices and at the same time, to survive. So, they borrowed more money to keep them going, all the while losing customers to Jio.
The Chaos over Definition
Initially, the Department of Telecommunications said that AGR includes all revenues from both core and non-core business activities. The companies argued that AGR should only comprise the revenue stemmed from core services and not dividend, interest income or profit on sale of any investment or fixed assets. However, in the October 2019, supreme Court upheld the definition of DoT, which meant the telecom companies owe about rs. 92,000 crore to the government inclusive of interests and penalties.
Vodafone Idea and Bharti Airtel
Out of 92,000 crores, both Vodafone and Airtel have to 20,000 crores each. Due to Jio, excessive borrowings and other reasons both companies have been suffering. While it is said Airtel just might survive somehow, Vodafone Idea recorded a loss 26% in the last quarter, which is the biggest loss recorded in a financial year quarter in the history of Indian financial market. Other companies have shut down their operations. Videocon and Aircel sold their spectrum to Airtel, while Reliance Communication traded its spectrum with Reliance Jio Infocomm. In regards to the spectrum sale of these companies, the Supreme Court has referred the matter to NCLT. It is said that there could be a liability on Reliance Jio and Bharti Airtel for the spectrum from other telecos.