The Curious Case of AGR Dispute
Updated: Sep 8, 2020
There has been two decades old dispute between the Department of Telecommunications (DoT) and the telcos regarding the Adjusted Gross Revenue (AGR) dues.
There persists a sense of uncertainty on why the AGR dues are a matter of such significance and what is the gravity of the actual situation. To address that, lets first understand what is AGR.
In 1994, the National Telecom Policy was liberalised, introducing a system of fixed license fee and spectrum usage charges (SUC) in exchange of the license and spectrum to carry out telecommunication services in the country. Five years later in 1999, the Telcos and DoT consented on a revenue-sharing fee model, where instead of the fixed license fee payments, the operators agreed to pay 8% as license fee and 3-5% as SUC of their AGR.
According to the DoT, AGR includes rental receipts, dividend income and income from any other-activity arising out of the telecom license the company has. However, the Telecom Service Providers (TSPs) believe that the stated incomes should be excluded from the purview of AGR and only the revenue and receipts from the core activities should be considered in the computation of the dues.
The dispute arises on the mere definition of AGR.
2003 marked the year of court proceedings as a few members of Association of Unified Telecom Service Providers of India (AUSPI) and Cellular Operations Association of India (COAI) challenged the DoT’s definition of the AGR, in the Telecom Disputes Settlement Appellate Tribunal (TDSAT). Following which, in 2006 TDSAT favoured the telcos. In the consecutive year (2007), the DoT opposed the TDSAT’s verdict in the Supreme Court (SC), leading to dismissal by the SC. DoT was asked to take up the matter with TDSAT. TDSAT stayed its order and made it applicable to all the members of the AUSPI (post which AUSPI and COAI urged the tribunal to include all members of both the bodies), in the same year. DoT, again, moved the SC to review the TDSAT’s order. The top court took up the dispute in 2011. This time, setting aside TDSATs order, the SC permitted the licensees to challenge any demand before the TDSAT. The telcos challenged the basis of DoT's license fee demand. In 2015, TDSAT announced it verdict. Its previous order remained. It accepted all the petitions of both the bodies and asked the DoT to rework its license fee. DoT challenged TDSAT’s verdict in the SC, for the third time.
The proceedings took an interesting turn in October 2019. The top court upheld the definition of AGR as stipulated by the DoT as per the License Agreements which was agreed, accepted and signed by TSPs, the licensees, and further ordered them to make payment of all outstanding dues of license fees and SUC (including interest and penalties) to DoT within 3 months (January 23rd 2020). The DoT computes the dues for 16 entities over ₹1.56 lakh crore.
Out of all the entities, a notable amount is owed by 6 licensees. These 6 can be classified into solvent firms and firms under the Insolvency and Bankruptcy Code (IBC) procedure. Bharti Airtel, VodaIdea and Tata Teleservices fall under the solvent bracket, owing dues worth ₹1.19 lakh crore. Reliance Communications (R.Com), Aircel and Videocon Telecom are wound in the IBC procedures, owing amount upto ₹35,059 crore.
[Source: The Economic Times]
Review petitions were filled by the telcos, only to be dismissed on January 17th 2020.
The January 23rd deadline was missed.
Since the 2019 verdict of the SC, the solvent telcos have been pleading for relief in the payment timeline to which the SC agreed a staggered payment mechanism. Vodafone Idea and Bharti Airtel, requested for a 15-year window to clear dues while Tata Teleservices sought 7 to 10 years. The SC on the first day of September 2020, allowed 10 years for staggered payment of AGR dues. Every year by 7th February, payments have to be made, defiance of which contempt proceedings will be initiated.
[Source: Business Insider India]
As in the case of telcos under the IBC, another issue has cropped up as a serious matter of discussion. Spectrum is recognised as the biggest asset for these telcos, on the sale of which these firms can repay their debts. However, the top court states that the spectrum is a sovereign property and is just for the telcos to use, not sell. The top court declined to decide and asked NCLAT to decide whether the spectrum of insolvent telecom companies can be sold in insolvency proceedings.
The decision regarding the solvent service providers has been declared. However, in respect to the telcos under the IBC is still contingent in the hands of the NCLAT. Which brings us to the question, in whose favour could it be ruled and its plausible implications.
Assuming an affair where the NCLAT rules that spectrum cannot be sold under the insolvency proceedings. Consequentially, the creditors, predominantly banks, of these telcos refuse to extend any funds to the telcos if spectrum is disallowed to be recognised as their owned asset, translating to a fact that it cannot be used as a collateral against the debt issued. On the onset of the 5G roll out and the capital needed to establish the supporting infrastructure, such a statement from the banks will prove to be catastrophic for the entire sector. The bankrupt telcos have clearly claimed that without the sale of spectrum they will default in their payments, a situation disadvantaging all the bodies involved – DoT because it will be deprived of AGR dues payable, after the debt amount is serviced; banks and other creditors since the collateral against the debt will be void; the telcos themselves and the sector as a whole since the aftermath of such a rule would be signify harsher capital constrains in the already capital intensive sector.
Such a scenario might also lead to a shift of AGR liabilities to the firms who have a spectrum sharing model with the telcos under the IBC as in the case of Reliance Jio Infocom Ltd (RJIL), who has a spectrum sharing agreement with R.Com. Airtel had bought spectrum from Aircel and Videocon for operations in several telecom circles. However, this outcome can be ruled out after the SC's order dated 2nd September 2020.
Now, lets consider an instance where the tribunal favours the telcos. Meaning the spectrum will be allowed to be used as an entity owned asset and be sold in order to service the debt. The banks and creditors will restore their credibility in the telecom companies and would extend funds for operation and expansion. The DoT will be in a position to claim its AGR dues. However, the biggest glitch in such a verdict would mean that the spectrum, a sovereign property which is auctioned only by the government and used by the telcos, would now be sold by the banks and other creditors to restore its loan amount.
Is such a scenario viable? Will this situation maintain the unbiased auction procedure?
In either case, we will have to wait to find out.