Explained: Adjusted gross revenue (AGR)

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Recently, a three-Judge Bench of the Supreme Court of India held, while deciding the issue of the over-expanded definition of Adjusted Gross Revenue (AGR), that the telecom Companies are required to submit within 3-months, the AGR dues to the Department of Telecommunication (DoT) vide its order dated 24th October 2019. By this order, Vodafone-Idea were greatly aggrieved, because of the continuing trends of its increased losses in the Indian Telecom Industry.

Thereby, a review petition was preferred by the Major Telecom Industries for extending the deadline for depositing AGR dues to DoT. In line of the same, a DoT officer released an order in respect of taking “no coercive actions/steps” against the Telecom Industries who haven’t paid their AGR dues clearly refuting and violating the October Order of the Hon’ble Supreme Court of India.

When the bench heard of the development, they rejected the review petition. Further, they condemned the action of DoT Officer for issuing such office order for nullifying the operation & execution of the Apex Court’s Judgment, and thereby held that till Friday, i.e. 21st February 2020, a handsome amount is to be deposited so as to show bona fide intent of the Telecom Companies.

They also directed to initiate contempt proceedings against the officer who published such order and asked the DoT to withdraw the same at earliest opportunity. Before 17th March 2020, the entire amount of ₹50,000 Crore was ordered to be deposited by the Vodafone-Idea Telecom Company.

This immediate deposition of amount has raised great concern for this major company, whose survival is at stake, as it is already in huge debt, and deposition of AGR dues may bring the company down, to the extent of winding up or restoration.

Significance of this development

The development must be seen in light of the international instance of evasion of the payment of Spectrum and License Fees from the Major Telecom Companies which has accounted an AGR due of ₹1.47 lakh Crore, which these companies have to pay to the Government. The wake of the Hon’ble Supreme Court of India’s decision has probably come at a time when these companies themselves are struggling for their survival, and especially Vodafone-Idea.

The significance of this development, which has ordered the Telecom Companies to pay their respective AGR dues to the Government, which in the line of Statistics are as follows:

  1. Vodafone Idea- ₹53,038 Crore
  2. Bharti Airtel- ₹35,586 Crore
  3. Other State Owned BSNL & MTNL and other shut and Bankrupt Telecoms- ₹58,376 Crore.

The decision has come right on time, when the auctions for 5G Spectrum are being called on in April-May, this year, which not only account for the realisation of the debt amount, but will also focus on the effective restoration of debt-laden Telecom Industry in India.

Quoting the words of Smt. Nirmala Sitaraman, who goes on to state as follows,

I don’t think I am looking at it purely from what the government will collect. This particular development in the telecom sector is something which all of us has watched, going through the proceedings of the court… it would not be right for me to just comment and say we are looking at this number or that”, she also state that, “It is fairly complex issue. The industry and affected parties are also in touch with the government. we are engaging with them; the department is engaging with them. We will be addressing this in more comprehensive manner”.

Thus, this development will surely account for great upsurge in the Revenue of the Government. But, the main problem which is to be tackled is that the debt-laden Telecom industry should not be adversely affected, which might seem to be over burdening the people by virtue of increased tariffs and other additional charges.

The main aim now is to revive the Telecom Industry and to realise the due debts and AGRs, whose actual picture and framework will be clear in coming future, as assured by the Budget Speech of Smt. Nirmala Sitharaman, Minister of Finance, Government of India.

What is AGR?

Adjusted Gross Revenue (AGR) was a relief mechanism which was granted to the Telecom Companies in the year of 1999. It was when the Liberalisation of the Telecom Industry took place in 1994 by virtue of the formulation of National Telecom Policy, 1994 the Telecom Industry need to seek for license at stipulated fixed rates, so to provide some relief, a revenue sharing model was introduced by the Government in the name of Adjusted Gross Revenue, which relaxed the steep fixed rate of license.

Under the AGR mechanism, the mobile telephone operators were required to share a percentage of their AGR with the government as annual license fee (LF) and spectrum usage charges (SUC). License agreements between the Department of Telecommunications (DoT) and the telecom companies define the gross revenues of the latter. AGR is then computed after allowing for certain deductions spelt out in these license agreements. The LF and SUC were set at 8 per cent and between 3-5 per cent of AGR respectively, based on the agreement.

Accordingly, the AGR is defined to include according to Government as all the charges which are calculated based on all revenues earned by a telco, including non-telecom related sources also such as deposit interests and asset sales, which was disputed by various Telecom Companies so as to only include or comprise the revenues generated from telecom services. It is worthy to quote, that Supreme Court has upheld the former definition over the latter.

Reason for bringing AGR and why was it introduced?

As the Indian Economy was liberalised in the year 1994 and with the advent of high License Fees (LF) and Spectrum Usage Charges (SUC), it was difficult for the Indian Telecom Industry to survive in the open economy. To get a mid-way relief for Telecom Operators, the AGR mechanism was introduced, which accounted for sharing of the LF and SUC between the Mobile Telecom Companies, so that burden of such heavy fixed fees is shared and collective good can be achieved.

Another benefit which could be conventionally seen as the impact of AGR was the shift from Monopoly to Duopoly, so that competition is reduced and ultimate good of the whole is seen.

Critical analysis of AGR

The objective behind bringing the AGR mechanism was that of benefitting the Telecom Operators which immunes them from high rates of LF & SUC’s. But with time, irresponsible character and non-payment of AGR dues by the Mobile Telecom Operators have led to the SC’s latest decision for depositing the AGR due to the Government.

It is appropriate to quote here that the Telcos were riding the boom period and enjoying profits without foreseeing the possibility of losing out in the court battle on the AGR dispute; they presumed themselves as ‘too-big-to-fail’ companies. But it was not the case, as the Introduction of Reliance Jio with consecutive increase in debt and decrease in consumer ratio, has brought the Telecom Operator in the situation of recklessness and danger.

The debate dates back to the time of the 1999 telecom policy that witnessed a major shift from the policy of government charging a fixed license fee from the telecom service providers to a newly-agreed revenue sharing basis system that saw telcos enjoying less financial stress compared with the earlier regime.

The problems began when telcos disputed the structure and composition of the new AGR formula and began contesting it legally and started engaging with regulators. One must note that even when telcos stopped paying the share under the AGR and litigation began, the industry’s gross revenue was growing rapidly between 2004 and 2015 from Rs 4,855 crore in the financial year 2004 to Rs 2.3 lakh crore in the financial year 2015.

Telcos have been making huge profits through rapid expansion and even from non-core activities. Bharti Airtel and Vodafone India, the two prominent players, also witnessed a hike in their revenues and presence.

Thus, the concept of AGR was brought with good intent, but the mala fide intentions of the Telecom Operator brought them into huge danger.

Impact on Telecom Industry

The major impact of this decision shall be on the Vodafone Idea which is worst hit by the implementation of AGR, given that it only had ₹12,530 crore of cash and equivalent reserves as of December 2019, while bearing a gross debt of ₹1.2 trillion.

It is worthy to note that Reliance Jio, the latest entrant in the sector is the only profitable telco, facing licence fee and SUC dues of only Rs 41 crore, whereas Vodafone Idea is already struggling with falling revenue, a shrinking user base, combined quarterly losses of nearly Rs 5,000 crore, and a negative free cash flow along with debt of more than Rs 99,000 crore. Moreover, Free talktime, late fee waivers and rebates on pre-paid vouchers for telecom consumers be also waived off in the light of the said judgment by the Telecom Operators, whereby directly impacting the common people.

In the words of the industry expert, “It’s not just the telecom operators that have been hit by the Supreme Court’s ruling on Adjusted Gross Revenue, even consumers will bear the brunt of the decision. Operators will stop offering discounts and waivers because they do not want to be in a situation where they have to pay revenue share to the government on income that they did not receive.”

This situation can be understood with the help of an example, where with ₹10 voucher you would get 10 minutes of talktime and extra 2 minutes free, now the company’s need to pay the due on ₹12 and not ₹10, for the extra free benefit as well.

He also says that operators will be left with no flexibility. “Operators will have to pay revenue share on revenue they have not earned but are presumed to have earned because of the discounts,” said an executive at a top operator. “There will be a serious impact on operators’ overall cost of operations. This will force them to raise tariffs and consumers will again have to pay for erroneous regulations.”

Conclusion
To conclude, it is noteworthy to quote here the words of our Telecommunication Minister, Mr. Ravi Shankar Prasad, who states that,

“The judgment represents a significant event with respect to the company… we will evaluate our next steps. The judgment has financial implications, which we are reviewing,” Vodafone Idea said. It said Thursday that it may file a review petition in the apex court. Besides waiving off or lowering penalty and interest, the government is working out a broader relief package for the industry that could include reassessing moratorium on payment for spectrum installments, offsetting input tax credit worth Rs 36,000 crore against future payments, and reducing licence fee by two percentage points to 6% by decreasing the contribution to the Universal Service Obligation Fund (USOF) and also said the government was working on spectrum pricing reforms.”

With the advent of time, we will get to know the actual impact and burden on the ultimate consumer per the change of tariff plans and policy of Telecom Operators in the light of the said realisation of AGR dues on them.

Author: Harshit Sharma from Amity Law School, Amity University Madhya Pradesh (AUMP), Gwalior, Madhya Pradesh.

Editor: Anna Jose Kallivayalil from NLU, Delhi.

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