Economics

Blow to telcos as SC says they have to pay Centre Rs 92,000cr

In News

  • In a blow to telecom service providers, the Supreme Court has upheld the Department of Telecom’s move to recover adjusted gross revenue (AGR) of about Rs 92,000 crore from them. 
  • The Supreme Court also upheld the DoT’s definition of adjusted gross revenue (AGR), which has been a source of a running battle between the government and industry for years.
  • The ruling will have major ramifications for the telecom companies, especially the older service providers such as Airtel and Vodafone Idea.

About: AGR

  • Under the revenue-sharing model introduced in 1999, telecom operators are required to pay licence fee and spectrum charges in the form of ‘revenue share’ to the Centre.
  • The revenue amount used to calculate this revenue share is termed as the AGR.
  • Initially, 15% AGR was fixed as licence fee under revenue-sharing, which was reduced to 13% and then to 8% in 2013.
  • According to the DoT, the calculations should incorporate all revenues earned by a telecom company – including from non-telecom sources such as deposit interests and sale of assets.
  • The companies, however, have been of the view that AGR should comprise the revenues generated from telecom services only and non-telecom revenues should be kept out of it.

Background: The Evolution of the tussle

  • The slugfest between DoT and the telecom companies has been on since 2005, when the the Cellular Operators Association of India challenged the DoT’s definition for AGR calculation.
  • Subsequently, in 2015, the TDSAT ruled that the AGR included all receipts, except capital receipts and revenue from non-core sources such as rent, profit on the sale of fixed assets, dividend, interest and miscellaneous income, etc.
  • The government, meanwhile, continued to raise the issue of under-reporting of revenues to duck charges.
  • The Comptroller and Auditor General of India (CAG), in a recent report, blamed the telecom companies for “understating revenues” to the tune of Rs 61,064.5 crore.
  • The latest petition by the DoT was being heard in the Supreme Court, wherein the DoT sought interest, penalty and interest on penalty on the outstanding amount.
  • These amounted to Rs 92,641 crore (disputed actual demand is Rs 23,189 crore, levy of Interest of Rs 41,650 crore, penalty of Rs 10,923 crore and interest on penalty of Rs16,878 crore)

News Summary:

SC decision

  • Examining the matter upon its merits, the court said the conduct of telecom licencees was highly unfair and their motive was to somehow delay payment of the Centre’s dues pending since 2003.
  • The court said that the definition of gross revenue is clearly mentioned in the agreement. Once benefit has been drawn, the licensees cannot deny validity or binding effect of contract.
  • The Bench said the companies have to not only pay the licence fee but also interest and penalty for delaying payment.
  • The agreement fixes interest at the rate of 2% above the prime lending rate of SBI and penalty could go up to 50% of the short payment.

Current state of the industry

  • The telecom sector has the lowest tariffs in the world backed by the investment of over Rs 10 lakh crore in setting up mobile networks over the last 20 years but is going through one of its most disruptive phases.
  • The sector is already reeling under a daunting debt of about Rs 4 lakh crore and is in difficult financial situation as operators are making negative returns on their investments.
  • The telecom EBITDA continues to contract, while the interest expense of the Industry continues to increase.

Potential impact of the judgement:

  • This judgment could have significantly damaging implications for India’s telecom industry, which is already reeling under huge financial stress and is left with only four operators.
  • The move is expected to negatively affect the fund raising capacity of telcos, impacting broadband and network expansion in the country, along with the government’s flagship Digital India initiative.
  • There are fears that the impact will not be limited to operators but will have a domino effect on the larger digital value chain.
  • Any further deterioration in financial conditions of telecom companies could also adversely impact banks which have lent over Rs 1 lakh crore to the sector.

Way ahead

  • The Telecom companies have asked the government to review the impact of this decision and find ways to mitigate the financial burden on an already stressed sector.
  • They would also look to file a review application, after looking for some technical or procedural grounds to do so.

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