Amid falling revenue, rising debt, AGR compounds Vodafone and Airtel’s financial despair

28 November 2019
Airtel and Vodafone Idea, which have been struggling to compete with Reliance Jio’s dominating presence in the market, are on the ropes after the Supreme Court verdict upholding the department of telecommunication’s interpretation of adjusted gross revenue.
Prashanth Vishwanathan / Bloomberg / Getty Images
Airtel and Vodafone Idea, which have been struggling to compete with Reliance Jio’s dominating presence in the market, are on the ropes after the Supreme Court verdict upholding the department of telecommunication’s interpretation of adjusted gross revenue.
Prashanth Vishwanathan / Bloomberg / Getty Images

On 14 November, Vodafone Idea Limited submitted its financial filings for its quarter that ended in September this year, recording the company’s largest-ever loss of Rs 50,921 crore, a consequence of the provisioning carried out to comply with a recent Supreme Court judgment. The judgment, delivered on 24 October, triggered the Vodafone Group’s CEO, Nick Read, to comment that VIL’s future in India was in doubt due to “unsupportive regulation,” “excessive taxes” and a “negative Supreme Court decision.” After his comments made their way to India’s business newspapers, Read backtracked and blamed the media for quoting him out of context. Subsequent reports noted that Read wrote a letter to Prime Minister Narendra Modi and the telecom minister Ravi Shankar Prasad in which he reaffirmed the company’s commitment to “remain invested” in the Indian market.

Yet, Read’s concerns about his company are not exaggerated. According to aVIL media release of its filings, which broke down the results of the recent quarter, the liability accrued by the company due to the judgment amounted to Rs 27,610 crore for the license fees and Rs 16,540 crore under spectrum-usage charges, taking the total to a whopping Rs 44,150 crore. India’s second-biggest telecom player, Airtel, is in no better shape. It reportedly has to pay a sum of Rs 35,586 crore as a result of the judgment. The two major players of India’s telecom industry, both of which have suffered continuously falling revenues while struggling to compete with Reliance Jio’s dominating presence in the market, are on the ropes after the Supreme Court verdict.

The 153-page judgment, which rocked the fragile and heavily indebted telecom sector in India, concerned the interpretation of Adjusted Gross Revenue, or AGR, in the license agreement between the department of telecommunications (DoT) and telecom service providers (TSPs). The AGR represents the annual share of revenue that a TSP has to pay the central government as the usage and license fee for its operations in India. Telecom companies argued before the Supreme Court—and prior to that before the Telecom Disputes Settlement and Appellate Tribunal—that the DoT had included various sources of income within the ambit of AGR, which do not accrue from operations under the license. These include revenue sources such as income from dividend, interest income on short-term investment, discounts on calls, and revenues from other separately licensed activities. The Supreme Court shot down these arguments, upholding the DoT’s interpretation of the term, and compelling the TSPs to pay tens of thousands of crores in revenue.

Ironically, the Indian telecom industry’s heyday had kicked off with a shift to the revenue-sharing model, introduced in the National Telecom Policy of 1999. Prior to that, telecom operators were required to pay a fixed, annual license fee. But telecom operators complained that the fee was too steep, and during the prime ministerial stint of Atal Bihari Vajpayee, India switched to a revenue-sharing model.

When it was introduced, the AGR was pegged at 15 percent, which the DoT subsequently reduced to eight percent in 2013. It worked wonders for the industry, with telecom companies recording a strong upswing in revenue. From a measly gross revenue of Rs 4,855 crore in 2004, TSPs scaled up to 1.05 lakh crore by 2008. By the financial year 2014–15, this number had shot up to Rs 2.37 lakh crore. Meanwhile, a 16-year-long legal battle over the interpretation of AGR ensued. When the DoT sought the revenue share in accordance to its definition of the term, in 2003, the Association of Basic Telecom Operators and individual telcos challenged the claim before the TDSAT. The case bounced between the TDSAT and the Supreme Court before the latter finally upheld the government’s interpretation of AGR in its October ruling.

Kaushal Shroff is a staff writer at The Caravan.

Keywords: telecom Airtel Vodafone-Idea Supreme Court Reliance Jio
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