The country’s telecom sector has witnessed severe headwinds
over the past several years, led by intense competition and pricing
pressure that have adversely impacted revenue and profitability.
The telecom companies reported record losses after making
provisions towards the Supreme Court’s ruling on the definition
of adjusted gross revenue (AGR) which requires
private telecom service providers to pay out higher sums towards
license fee and spectrum usage fee. Telecom companies not only owed
the government the shortfall in AGR for the past 14 years but also
an interest on the amount along with penalty and interest on
penalty. The Department of Telecommunication (DOT)
in March 2020 had moved the Supreme Court recommending payments
over a period of 20 years as it is believed that the lumpsum
payment could result in possible bankruptcy and could be the final
straw for the already distressed sector.

While the definition of AGR has been under litigation for over
15 years now, it is commonly a fee-sharing mechanism between
the Government of India (GoI) and the telecom
companies which are required to pay a license fee and spectrum
charges in the form of revenue share to the government. While the
government stated that AGR includes all revenues from both
telecom as well as non-telecom services such as deposit interests
and sale of assets, the telecom operators suggested that it should
include only the revenue from core services and that non-telecom
services should not be included. On October 24, 2019, the
Supreme Court widened the definition of AGR to favor the
government’s view and included all revenues, except for
termination fee and roaming charges.

In a significant move, the Supreme Court of India on July 20,
2020 reserved its order on the government’s petition to permit
telecom companies such as Vodafone Idea, Bharti Airtel and others
to make staggered payments of the AGR over a period of 20 years.
The apex court stated that there is no going back on the DoT’s
demand on the AGR issues, and it will only consider the payment
timeline. In the subsequent hearing held on August 10, 2020 the
Court ordered the government to prepare a plan for recovering
AGR-related dues from bankrupt telecom operators and adjourned the
case to August 14, 2020

In its hearing on June 18, 2020 the apex court directed the
telecom companies to make a minimum payment to show their bona-fide
and provide accounts for the last decade for assessment in
order to create a staggered payment plan, if allowed. The court
remained unconvinced that the telecom companies had sufficiently
justified the timeline requirement and stated that there was no
guarantee of what could happen over 20 years.

On July 20, 2020, the Supreme Court also directed the DoT to
submit insolvency details of bankrupt telecom companies – Reliance
Communications (Rcom), Videocon, and Aircel -
within seven days. The Court further observed that Rcom has massive
unpaid AGR dues and will examine if the insolvency proceedings are
bona-fide as it can be wrongfully used to clear all AGR related
debt. The Court also noted that there can be no going back on AGR
dues and that the computation given by the DoT is to
be considered as final, further adding that there is no
chance for any re-assessment of the said dues. On September 1,
2020, the Supreme Court has given the telecom companies 10 years to
repay their AGR. The companies are to pay 10% of the payment by
March 31, 2021 and the remaining through annual instalments,
failing which their CEOs will be held liable.

The AGR issue casts a significant degree of uncertainty on the
telecom sector and will have a long-term bearing on structure and
recovery of the sector. While the government has been deprived of
the extra revenue, the financial implications for telecom
companies, who now must pay the overdue amounts piled up for years,
is at a crucial juncture with profits under pressure and the
falling average revenue per user. India being the second largest
consumer of mobile data globally, the way forward would be to
leverage the strengths of the sector while navigating the potholes
of regulation, changing technology, consumer dynamics and
pricing.

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