SC rejects telcos' definition of AGR: What does it mean for the incumbents?

The apex court in its verdict, has prescribed new definition of adjusted gross revenue and held that all revenue accruing from telcos constitute to AGR.

Shares ot telecom companies, Bharti Airtel and Vodafone-Idea, came under heavy pressure in the afternoon trade on Thursday after the Supreme Court (SC) rejected telcos' definition of adjusted gross revenue (AGR). The apex court, on the other hand, upheld the Department of Telecommunications (DoT)'s view that other than termination fee and roaming charges, all revenue accruing to telcos are to be included in AGR. 

In its verdict, the apex court has prescribed the new definition of AGR and held that all revenue accruing from telcos constitute to AGR.

Reacting to the verdict, the stocks of incumbent telcos plunged. Shares of Bharti Airtel slipped as much as 10.19 per cent to Rs 327 apiece on the NSE, while those of Vodafone-Idea nosedived over 23 per cent. They, however, recovered after the knee-jerk reaction. At close, shares of Bharti Airtel stood at Rs 372 on the BSE, up over 3 per cent. Vodafone Idea ended at Rs 4.33, down over 23 per cent. READ MORE

While the industry has already paid 85 per cent of the demand raised by the DoT, the remaining 15 per cent has remained in dispute for a very long time with the telcos getting favorable judgments in various legal forums, including Telecom Disputes Settlement and Appellate Tribunal (TDSAT), High Courts and even the Supreme Court.

The telecom companies have withheld these payments as per legal judgments till date that have clearly favoured the arguments made by the industry on the definition of AGR, industry sources said.

After today's judgment, the industry will need to pay these dues to the government. The total dues amount 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 Rs 16,878 crore). The industry feels that the demand is unjust given previous judgments, where the same was held in favour of the industry by TDSAT on two occasions (2007 and 2015). The Supreme Court in 2011 also remanded the matter back to the TDSAT for interpretation of the heads and computation thereof. CLICK TO READ FULL REPORT

The fourteen year old case had the mobile operators locked in a legal battle with the government over the definition of AGR. It is the basis on which the Department of Telecom calculates levies payable by operators. Telecom companies pay around 3-5 per cent and 8 per cent of the AGR as spectrum usage charges and licence fees, respectively, to DoT.

After the judgment, a statement released by Bharti Airtel said, "We are disappointed by the verdict of the Hon’ble Supreme Court. The definition of AGR has been a long standing dispute between the DoT and the Telecom Service Providers (TSPs) dating to 2005. The issue of inclusion of revenue from non-telecom activities and interpretation of the heads included in the definition of AGR under the license conditions has been through several rounds of litigation, which have been in favour of the TSPs till now."

The Cellular Operators Association of India had in 2005 filed the first case, challenging the government’s definition on calculation of AGR. It had contended that the components of AGR that the government was trying to include was contrary to the Telegraph Act and the recommendations made by the Telecom Regulatory Authority of India (TRAI).

WHAT DOES IT MEAN FOR THE INCUMBENT TELCOS?

"The SC verdict is the body blow to the telecom companies as they are already highly leveraged and their business models will be fatally impaired. Secondly, it is not only the telcos that will have to bear the brunt but also the lenders to the telcom sector. So, the fragility of the financial system, which is already under seige, will get further impacted by this move if their business models come under question," said Ajay Bodke, CEO & Chief Portfolio Manager (PMS) at Prabhudas Lilladher. 

Dr Ravi Singh, Vice President and Head of Research (HoR) at Karvy Stock Broking shares similar views. "The ruling on the AGR will have greater pressure on the already ailing telecom companies. Following the ruling by SC, the telecom companies may need to pay to the tune of Rs 92,000 crores which is likely to disrupt their balance sheets. The telecom companies are already having a loan book of close to Rs 7 lakh crores," Singh added. 

The current monetary outflow from the telecom companies may heavily impact on the valuations of the telcos and their listed associate and group companies. To this effect, the listed telecom companies may correct to the tune of 5 per cent to 8 per cent from the current prices in the short term ahead, Singh said.