SC Gives Telcos 10 Yrs to Pay Dues: 15-Yr-Long AGR Case, Explained

With the SC’s 1 September ruling providing some relief to TSPs, here’s a deep dive into the long-drawn out AGR case.

The Supreme Court on Tuesday, 1 September, allowed a period of 10 years for telecom companies to clear adjusted gross revenue (AGR)-related dues.

The apex court allowed for an extension to the companies in view of the COVID-19 situation, although it clarified that 10 percent of the dues will have to be paid by 31 March 2021.

The apex court also said that instalments will have to be paid by 7 February of every succeeding year – and that any default will accrue interest and that non-payment will also invite contempt of court proceedings.

The AGR case has been ongoing for 15 years now, holding the fate of multiple telecom service providers (TSPs) such as Airtel and Vodafone Idea in the balance. With the SC’s ruling providing some much-needed relief to the TSPs, here’s a deep dive into what the long-drawn out case has been all about.

The DoT and Telcos Fight it Out

Indian telecom providers have been engaged in a long battle with the Government of India’s Department of Telecommunications (DoT).

In 1994, India’s telecom sector was liberalised under the National Telecom Policy and licences were issued to companies, but high licence fees caused telcos to default on their payments. In answer to the pleas of the telcos, in 1999, the Centre brought out a revised National Telecom Policy, giving them an option to migrate from fixed licence fee model to a new system, according to The Wire.

The roots of the tussle between telcos and DoT emerge here, wherein, under this new model, they agreed to share a certain percentage of their revenue with the government. The concept of AGR was finalised in 2001.

The battle then began in 2005, when Cellular Operators Association of India, which includes telecom giants such as Airtel and Vodafone Idea, challenged the DoT’s definition of AGR. AGR is the basis for calculating the spectrum usage charges and license fees paid by telecom companies to the DoT.

The DoT argued that AGR includes all revenues of the companies, including rent, handset sales and profits from sales of assets and scrap. However, telcos said that only revenue earned from their main telecom services should be considered.

In 2015, the Telecom Disputes Settlement and Appellate Tribunal (TDSAT) ruled that certain non-telecom revenues like rent, profit on sale of fixed assets, dividend and treasury income would be counted as AGR, according to Financial Express.

However, while the ruling did not entirely go against the telcos, leaving some streams out of the definition of AGR, the telcos proceeded to move the Supreme Court against the TDSAT’s order.

What happened next was a major setback for telecom companies like Bharti Airtel and Vodafone Idea, as the apex court on 24 October 2019, in a final verdict on the case, broadly upheld the DoT’s definition of AGR.

What the SC's Ruling Meant for Telcos

The SC’s ruling left telecom providers facing a bill that amounted to approximately Rs 92,000 crore. However, the overall payout by telcos was estimated to be in the range of Rs 1.47 lakh crore – Rs 92,642 crore in unpaid licence fee, and another Rs 55,054 crore in outstanding spectrum usage charges.

At the time, the court had given the telcos three months’ time to clear these dues. A review of the judgment sought by the telcos was dismissed by the SC, which insisted that all dues be cleared by 23 January 2020.

It may be noted here that the total amount to the government is owed by about 15 operators, of which 10 have either closed operations or are undergoing insolvency proceedings in the last 14 years.

Of the remaining players in the industry, the SC ruling affected Airtel and Vodafone Idea the most, with the telecom sector already struggling under a pile of debt. Jio, as a relatively new entrant, was the least affected, having only started commercial operations in 2016.

So, how much were they supposed to pay?

The amount to be paid by Bharti Airtel is Rs 25,976 crore while Vodafone Idea is required to cough up Rs 50,399 crore, a three-judge bench led by Justice Arun Mishra said in July 2020, factoring in payments of Rs 18,004 crore and Rs 7,854 crore, respectively, according to a report by Economic Times.

The SC verdict came as a hard blow to the telecom industry which was already facing huge debt amid an obstacle to growth with falling data revenue, thanks to competition with Jio.

Vodafone Idea was hit particularly hard, having repeatedly stated that with the burden of paying the dues, continuing business in the country would no longer be financially viable.

DoT Makes Move, Provides Relief to Telcos

In January, an Indian accounting and finance services officer in DoT issued an order directing “not to take any coercive action against the licensees” in case they did not comply with the SC’s order, PTI reported.

However, the apex court found this to be a virtual attempt to stay their order and came down heavily on the DoT, causing the department to withdraw the order and ask the telcos to pay up their dues.

"We don't know who is creating this nonsense. Is there no law left in the country. It is better not to live in this country and rather leave the country," the bench observed.

“Call the desk officer here! Do you want us to wind up the Supreme Court? We will draw up contempt of court against everyone!” LiveLaw quoted Justice Mishra as saying.

However, soon after, the DoT on 16 March moved the SC seeking an approval for a 20-year window for payment of AGR dues. The DoT said that immediate payment of the huge dues accumulated could result in possible bankruptcies and could potentially hurt crores of customers and, therefore, proposed a 20-year formula to enable staggered repayment, CNBC TV18 reported.

The SC reacted to this furiously, lashing out at the DoT and Indian telcos, saying that no revaluation regarding the AGR dues would be entertained. The apex court also made it clear that seeking this period to make the payment was unreasonable, and ordered the telcos to clear their respective dues as per the previous judgment, but agreed to hear requests for a revised timeline.

Meanwhile, telcos proposed different timelines for clearing of dues, with Vodafone Idea and Bharti Airtel seeking 15 years, while Tata Telecom asked for a window of at least seven to 10 years. However, the government continued to stand firm on its window of 20 years.

In a hearing in July, the apex court lashed out at the DoT once more, pulling them up for trying to recalculate the pending payments. The bench said that the government's correspondence showed that it was mulling over recalculating the dues, adding that this would amount to contempt of the court’s order, according to a BloombergQuint report.

"First you said self-assessment and now call it recalculation. You are the Solicitor General and you cannot do this," Justice Arun Mishra reportedly said. “Such big hands, that are going against our orders. We will cut them short,” he added, according to Live Law.

The verdict on this debate, finally delivered on 1 September, gives companies a 10-year window instead of the 20-year one suggested by the government, but still proffers something of a breather.

Hope for Airtel, Jio, Bleak Prospects for Vodafone

Moneycontrol reported that experts see the SC’s window of 10 years as positive news for Airtel and Jio even though it is lesser than the expected window of 15-20 years. However, the case might not be the same for Vodafone Idea, for whom it is a matter of survival. Vodafone Idea chairman Kumar Mangalam Birla had warned in December that the company was headed for insolvency, NDTV reported.

“The SC ruling is positive for Bharti Airtel as it already has provisions. However, it is negative for Vodafone Idea as they have to pay 10 percent upfront. We need to see whether the parent will fund Vodafone Idea. Otherwise, it will be a two-player game.”

Ajit Mishra, VP-Research, Religare Broking to Economic Times

Speaking to Economic Times, AK Prabhakar, Head of Research, IDBI Capital Markets also had something similar to say, warning that Vodafone Idea would struggle and that Idea may even go out of the game.

Speaking to The Quint, Sunil Jain, Managing Editor of Financial Express, said that the damage is already done and this might cause Vodafone-Idea to shut shop. Jain claimed that Vodafone is on its last legs.

On being asked if the Indian telecom sector would become a duopoly, Jain considered Jio and Airtel to be stronger players. “It will essentially be Jio and Bharti Airtel... Vodafone will be a weak player, if it survives,” Jain added.

However, Vodafone Idea counsel Mukul Rohatgi told Economic Times that the company would be able to survive 10 years, despite the situation.

And what effect would the SC ruling have on customers? According to a Moneycontrol report quoting industry experts, consumers will face imminent tariff hikes by a minimum of 10 percent, with Airtel and Vodafone Idea required to pay up 10 percent of the total dues by March 2021.