TURMOIL IN THE TELECOM INDUSTRY : THE CASE OF AGR
Updated: Sep 29, 2020
This article has been authored by Nirvani Bhavsar, a second year student at NALSAR, Hydrebad
India is one of the biggest telecom markets in the world. The telecom industry contributes to a huge chunk of the GDP and provides the foundation for future technologies such as artificial intelligence, smart cities, etc.
Lockdowns and travel-restrictions amid COVID-19 have further proved the importance of telecommunication as almost every interaction has turned virtual now. But, in the silver jubilee year of mobility services in India, the telecom operators are in a state of turmoil because of a decade long legal battle related to Adjusted Gross Revenue (AGR) .
Timeline Of The Dispute
● 1994 - the Department of Telecommunications liberalised the telecom sector through the National Telecom Policy, 1994 which aimed at bringing the telecommunication services of India at par with that of the world. Under this policy, companies were granted licences by payment of fixed licence fees.
● 1999 - to grant relief from the high licence fees, the New Telecom Policy, 1999 gave an option to the telecom operators to make the payment of licence fee on the basis of revenue sharing. Under this model they were required to share a part of their Adjusted Gross Revenue (AGR) with the government as annual license fee (LF) and spectrum usage charges (SUC). Currently, the annual license fee is 8% of AGR and the spectrum usage charges are pegged between 3-5% of AGR. Licence agreement between the Department of Telecommunications (DoT) and the telecom operators defines the gross revenues of the latter. Condition 19 of the Licence provided for the calculations to arrive at AGR.
The dispute arose between the DoT and telecom operators regarding the definition of AGR when the former started contending that the definition of AGR is too wide and expansive.
● 2003 - Association of Unified Telecom Service Providers of India (Auspi), Cellular Operators Association of India (COAI) and some individual telecommunication service providers approached the Telecom Disputes Settlement and Appellate Tribunal (TDSAT) assailing the validity of the definition of AGR in the licence agreement. They argued that according to Section 4 of the Indian Telegraph Act, 1885, AGR can only relate to the revenue directly arising out of telecom operations licensed but it was defined in the license in such a wide manner that the Government was to be given a share from business activities that were neither covered by nor had any connection with the licence granted under the Telegraph Act.
● 2006 - TDSAT held that “the Central Government can take percentage of the share of gross revenue of a licensee realised from activities of the licensee under the license and therefore revenue received by a licensee from activities beyond licensed activities would be outside the purview of Section 4 of the Telegraph Act under which the license was granted."
The court also asked the Central Government to seek recommendations from Telecom Regulatory Authority of India (TRAI) which mandated under Section 11 (1) (a) of the Telecom Regulatory Authority of India (TRAI) Act, 1997, to clarify about the fees payable by the licensee and remanded the case to TRAI for its consideration.
Following the order of the tribunal, TRAI in recommendations on components of Adjusted Gross Revenue (AGR) delineated the components to be included in calculation of AGR.
● 2007 - TDSAT accepted most of the recommendations given by TRAI. The Union of India moved to the apex court to challenge this decision.
● 2011 - The Supreme Court stated that “the licensee can challenge any demand made licensor and the Tribunal will have to go into the facts and material of the case to decide whether the demand was made in accordance with the license agreement, it can also interpret the terms and conditions of the license agreement.”
The Supreme Courtobserved that in the previous case the licensees had not challenged a particular demand by the licensors but had questioned the validity of the definition of AGR and the Tribunal instead of interpreting it, had decided on the validity of the definition of AGR. Hence the SC stayed the previous order of TDSAT.
All the licensees now moved the Tribunal to challenge the license fee demanded by DoT.
● 2015 - The Tribunal quashed DoT’s demands and held that the definition of AGR is an inclusive one and the items to be deduce from the gross income to arrive at AGR are defined. The court further went on to say that AGR includes 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.
DoT then moved to the Supreme Court against this order.
● 2019 - The Supreme Court held that “TRAI and the TDSAT had no jurisdiction to decide on the validity of the definition of AGR and to exclude items of revenue, which were included in the definition of gross revenue in the licence agreement, even if they are from non licensing activities.”
The telecom operators can not be given any relief in the licensing fee and have to pay the license fee, interest, penalty and interest on penalty on the outstanding amount.
● 2020 - In January, Supreme Court quashed the review petition filed by Bharti Airtel and Vodafone Idea challenging the previous judgement.
In February, the SC came down hard on the telecom operators such as Vodafone Idea and Bharti Airtel for not paying their dues by the January 23 deadline and ordered initiation of contempt of court proceeding against them.
In May, the DoT used the 2019 judgement of the Supreme Court to demand the payment of Rs 4 lakh crore AGR dues from the non telecom Public Sector Units (PSUs) such as GAIL India, explorer Oil India, etc. This move was struck down by the Supreme Court and termed “totally impermissible”.
In July, the Supreme Court while rejecting the 20 year window suggested by DoT for the due payment, allowed the telecom operators to make a minimum payment to show bonafides, provide a plan for further payment if allowed to make stagger payments and provide books of accounts for the last decade for assessment.
The Outstanding Dues
Since the beginning of the legal tussle, the telecom operators had stopped paying revenue share on the disputed part of AGR because of which a lot of interest has been accumulated on it.It is interesting to note that the actual license fee is just about 25% of the total amount to be paid, the remaining amount s a blowback of the case being dragged for a decade and a half.
DoT sought interest, penalty and interest on penalty on this outstanding amount. This amount sums up to Rs 92,641 crore (Balance license fee is Rs 23,189 crore, interest on license fee is Rs 41,650 crore, penalty is Rs 10,923 crore, and interest on penalty of Rs 16,878 crore). For the outstanding spectrum usage charges the amount to be paid is Rs 55,054 crore, summing up the whole debt to a mammoth amount of Rs 1.47 lakh crore.
Out of 16 telecom operators who were asked to pay the dues, 11 went insolvent, 2 are struggling PSUs (BSNL and MTNL) likely to be bailed-out by the government and 2 are debt-laden private operators (Airtel and Vodafone Idea). Reliance Jio being a new member had little debt to pay.
Why Does It Matter?
For the telecom industry -The arrival of Reliance Jio in the telecom industry had already forced the other operators to reduce their prices drastically which led to the earning very less or no profit and slowly shrinking their revenue and increasing their debts.
The biggest blow of this judgment will be suffered by Airtel and Vodafone Idea which were already in a bad shape and paying the dues will leave them with no capacity to deal with Reliance Jio.
The major concern will be of Vodafone Idea as it is the weakest in the 3 player market and has already been facing shrinking revenue, high debts and losses, for the last quarter. This might lead to the market turning into a duopoly as BSNL and MTNL are in no position to compete with the private operators which is not healthy for the economy.
For the government - Although the government at one hand will win the payouts by the telecom companies which will be helpful in filling the gaps of fiscal deficit for the current financial year but on the other hand the government might lose the revenue it was supposed to gain from the auction of the 5G spectrum which was supposed to be held this year. If Vodafone Idea decides to pull out it will lead to the loss of numerous direct and indirect jobs which will not go well with the already COVID hit economy.
Also, the government will be under pressure to ensure that the market doesn’t turn into a duopoly.
For the people - If the market does turn into a monopoly/duopoly, the cut-throat competition which was the reason for cheaper and affordable mobile and internet services will be compromised. This will be a bad news for consumers as it will lead to bigger bills.
The telecom sector was already in dire financial straits with loads of debts hovering over and the SC judgement proved to be the last straw. The Apex Court has already made clear its inflexible stance on the issue and has warned that no requests of recalculation will be entertained. Now, the only option left with the telecom operators is to ask the government to alleviate the pressure by relaxing the taxes on the industry which are currently as high as 30-32%. The telecom industry is in an adverse state and it needs revamping which can only be done through the help of the government. The effects of this case will be felt at all levels of the economy which makes it more important for the government to do something to help the telecom sector. The economy is already going through a rough patch and the tumble of the telecom industry can aggravate the damage further.