After a 14-year-long legal battle, the Supreme Court has ruled in favour of the government on the adjusted gross revenue (AGR) issue, upholding the definition suggested by the Department of Telecommunications (DoT). The ruling has major implications for the telecom industry, which is already reeling under huge debt and intense pricing pressure. Further, the quantum of the charges levied is sizeable and has the potential to impact the industry structure. Experts share their views on the ruling and its likely impact on the telecom industry…

Hetal Gandhi, Director, CRISIL Research

Ruling is a massive blow for incumbent telcos

The order is a massive blow for incumbent telcos, which together have to shell out around Rs 750 billion. The industry is already reeling under a debt of Rs 4.3 trillion with three major players accounting for almost 85 per cent of that. With the apex court giving three months’ notice to the players to pay the dues, it would not only significantly hamper the incumbents’ capex plans for the next two fiscals but also impact their sustainability. The incumbents have been continuously losing subscribers to the new operator as they still lag behind in terms of 4G coverage and hence would need significant investments to upgrade their existing networks.

Most of the telcos that owe dues to DoT have either shut shop or moved the National Company Law Tribunal (NCLT). Hence, as far as the industry is concerned, the incumbent operators which account for over 50 per cent of the dues will be most affected as they are seeing a capex of around Rs 350 billion over the next fiscal to expand their 4G footprint. Moreover, the fiberisation levels ahead of 5G network set-up would entail investments of Rs 1 trillion. The ruling will impact the investment plans of the incumbents in the absence of any relief measures from the government.

DoT, in a letter dated November 13, 2019, has ordered the incumbents to follow the Supreme Court order and repay the dues within three months. While DoT has allowed the operators to carry out their own assessment as prescribed in the licence agreement, this is unlikely to reduce the burden on the incumbents significantly.

The current pay-out of the incumbent operators together stands at over Rs 750 billion, which is almost five times the cash flow from operations of fiscal 2019. Hence, funding through internal accruals is ruled out. The operators would have to resort to external funding either through equity infusion or incremental debt.

The incumbent operators are already staring at a combined debt of over Rs 2 trillion-Rs 2.5 trillion. This makes raising additional debt even more difficult. The operators had recently infused equity of Rs 250 billion through rights issue and hence they wouldn’t be keen on another round of equity infusion by promoters. Thus, funding of the AGR dues will remain a key issue in the near term.

The government has already formed a panel to review the telecom sector’s woes post the ruling. Among various relief measures, spectrum payment holiday for two years and floor price tariffs are being contemplated. Our preliminary analysis indicates that setting a floor price for calls at 10 paise per minute will increase the ARPU by at least 30 per cent and generate incremental revenues of Rs 120 billion each a year for the incumbent operators, while spectrum payment holiday of one year will save around Rs 155 billion in cash for incumbents.

Ankit Jain, Assistant Vice President, Corporate Ratings,

ICRA Limited

AGR order can protract recovery of the sector

On October 24, 2019, the Supreme Court issued a judgement directing telecom operators to include certain non-core revenues while calculating their AGR. With this inclusion, the levies that the telcos are required to pay – licence fee (which is 8 per cent of AGR currently) and spectrum usage charge (which is around 4 per cent of AGR) – stand increased on a retrospective basis. This ruling will result in a sizeable payout for the telcos.

This issue dates back to 2003, when the telcos filed a petition before the Telecom Disputes Settlement and Apellate Tribunal (TDSAT) to not include non-licence-based revenues such as dividend, interest income, revenues from different licenses and reimbursements under the Universal Service Obligation Fund while calculating AGR. In 2006, the TDSAT ruled in favour of telcos and revised the definition of AGR, including only the revenues arising from licence activities. This was contested by DoT in higher courts and the same has been sub-judice since then. Meanwhile, the telcos stopped paying the revenue share on non-licence revenues, which they are now required to pay along with interest and penalties as per the SC verdict.

The telecom industry is saddled with high levels of debt, which, as per ICRA estimates, stood at Rs 5 trillion as on March 2019. However, the fiscal year 2019-20 witnessed some degree of deleveraging, and with some debt reduction plans on the anvil, the industry debt is expected to come down to around Rs 4.25 trillion by March 2020. Moreover, the current fiscal has witnessed some degree of pricing restoration as demonstrated by steady uptick in ARPU levels.

Any upward revision in the AGR calculation will result in higher outgo of levies. The telcos are not only required to pay these levies accumulated over the past 14 years, but also interest on such charges, penalty on missed payments and interest on such penalty. The quantum of these charges is expected to be sizeable and has the potential to impact the industry structure over a long term. Apart from telecom operators, the order might impact other players having a connectivity licence, although it remains uncertain at present.

The government has constituted a Committee of Secretaries (CoS) to examine the current situation and come out with its recommendations, keeping in mind the present state of the industry and the impact that the ruling will have on the industry. Any form of relief from the CoS cannot be ruled out, which can involve waiver of a few components or a deferred payment mechanism for the entire charges, among other measures.

If the dues crystallise and telcos are required to pay the entire sum in the next three months, without any relief from the government, the impact on the industry could be long lasting. It could lead to further consolidation in the industry. Moreover, it could delay of the telcos’ capex plans for network expansion. This could, in turn, increase the likelihood of muted participation in the upcoming 5G spectrum auction. However, the immediate impact would be in the form of an increase in debt levels and a further weakening of debt metrics, thus protracting recovery in the sector.

Rajan S. Mathews, Director General, COAI

Supreme Court order to contribute to financial distress

The Supreme Court’s judgment on the definition of AGR will have an impact of over Rs 920 billion on the industry. With over 1.19 billion subscribers, the telecom sector is a key contributor to the Indian economy in terms of consumer benefit, employment and revenue generation. It contributes 6.5 per cent to GDP. The sector has the lowest tariffs in the world, backed by over Rs 10 trillion investment in setting up world-class mobile networks during the past 20 years. However, the industry is going through one of its most disruptive phases. It is already reeling under a huge debt of around Rs 4 trillion and is in dire financial straits, as operators are reporting negative returns on investments. The telecom EBITDA continues to contract while the industry’s interest expense continues to expand. The taxes and levies in the Indian telecom sector, ranging from 29 per cent to 32 per cent, are one of the highest globally. The Supreme Court’s judgment is the last straw in contributing to the financial distress and it remains to be seen whether the industry will be able to recover from this setback. The immense financial pressure on the sector will also adversely impact the Digital India roll-out.

Dr Mahesh Uppal, Director, ComFirst

AGR judgment to hurt investments

The judgment is devastating. Telecom companies will be burdened with liabilities of Rs 920 billion plus interest and penalties. The Supreme Court has held that the licence agreement signed by the telcos leaves little room for interpretation. It allows the telcos to exclude specific revenues for computing licence fees and spectrum usage charges. These include interconnect charges and roaming revenues collected on behalf of other operators. Virtually, all other revenues must be included in the computation. This will hurt their investments especially for network upgrade. Also, this puts a question mark on the forthcoming auction of 5G spectrum. Will the government settle for a significantly lower realisation? The Supreme Court has interpreted the licence agreement that the operators have signed. The licence agreement is onerous. DoT must review it so that only revenues from telecom services are counted towards operators’ levies.