Three key SC decisions that could change telecom sweepstakes in the country

While the first two rulings on AGR dues could have a lasting impact on incumbent players, the third, on transfer of spectrum by banks could impact fund raising by the telecom sector as a whole

The Supreme court is set to deliver decisions on three key issues on Tuesday which could fundamentally change the country’s telecom sweepstakes.

One, the SC will decide on the tenure for staggered payment of AGR dues that telcos have to go for. Two, it will clarify whether or not Reliance Jio has to pay the hefty AGR dues bill of Rcom, and Bharti Airtel, that of Aircel and Videocon, because they are using their spectrum. And three, it will direct banks on whether they can, as creditors, transfer spectrum, which is a national asset, to a new buyer under IBC, without first taking cognizance of the dues of the government. 

The tenure of the AGR dues issue could well decide the future of Vodafone Idea Ltd (VIL) and whether the country will continue to have three private players or will it become a duopoly play of Reliance Jio and Bharti Airtel will. And that will be decided by the SC when it pronounces its verdict on what the tenure would be for paying the adjusted gross revenue (AGR) dues.

In the hearing, held in July, the court had ended some confusion by clearly saying that the AGR dues will be based on DoT calculations and not on the self-assessment of operators where the number was lower. That cleared one key issue.

VIL, on the other hand, after pushing for a 20-year payment schedule, changed its stance in the court and even agreed to a 15-year period.

It has managed to pay only Rs 7,900 crore of its Rs 58,200-crore AGR liability. But if the SC decides on a 10-year tenure the telco will have to fork out as much as Rs 30,000 crore a year which includes the AGR dues, deferred spectrum payments that it bought earlier, non-spectrum interest payouts and also its normal capital expenditure according to analyst estimates. Out of this, it has to shell out Rs 7,500 crore annually (at 8 per cent annual interest) for the AGR dues alone.

To pay this bill, VIL will require ARPUs to go up by over 87 per cent from the current level (Rs 124 in the June quarter) and its earnings before interest, tax, depreciation and amortisation (Ebitda) must increase by 4.9 times that of the June quarter. That is a tall order, even though it is looking at making cost savings of over Rs 4,000 crore in the next 18 months.

If it is 15 years, the burden wil be much more bearable. Its AGR bill will come down to Rs 5,900 crore and it will need ARPUs to go up to a more manageable 43 per cent, but Ebitda will still have to be 4.7 times that of the June quarter. But the question is, can a company that is losing subscribers push up tariffs so steeply? With limited leeway in monetisation (its sale of its equity in Indus Towers is stuck for a while) its only option would be for shareholders to make a fresh infusion of equity. 

The other crucial issue is, who pays the AGR dues of telos that have closed operations and are in the IBC? Should it be Reliance Jio, which has a trading and sharing agreement for spectrum with Rcom? And also Airtel which has a spectrum trading agreement with both Aircel and Videocon?

SC will clarify whether or not Reliance Jio has to pay the hefty AGR dues bill of Rcom.

If they are directed to do so, Jio, which has aready paid the nominal AGR dues imposed on the company, will have to fork out an additional and decidedly steep amount of over Rs 25,000 crore. And Airtel, another Rs 13,000 crore. Of course, the exact amount would depend on what percentage of the spectrum was it using. Surely the move, if directed, will make the government coffers fuller. But this one move will substantially increase Airtel’s current AGR dues by over Rs 13,375 crore. The company has already partly paid Rs 15,953 crore for its own AGR dues. But with the new impost, the total dues it still has to pay will hit Rs 40,000 crore, nearly neutralising what it has already paid. The only saving grace is that VIL, which has not got into spectrum arrangements, has no such imposition as its two rivals.

The third key issue that needs to be settled is the DoT stance that banks in the IBC cannot sell spectrum which they hold in trust as a national resource. And that they have been relegated to the position of operational creditors by IBC, with very little leeway for recovering the AGR dues. 

But banks that are creditors in these companies have argued that the government and DoT itself have allowed spectrum as a collateral to extend loans. And what is getting transferred to the successful bidder is the right to use spectrum, the asset that is still held by the government. Analysts point out that if the spectrum is not allowed to be part of a resolution plan, it would be hard to find a buyer and continue it as a going concern. And two banks will be very reluctant to give loans to this sector anymore.