The Supreme Court recently upheld the Department of Telecommunications’ (DoT) definition of adjusted gross revenue (AGR), a contentious point among India’s telecom players and the source of a running battle between the government and industry for years. The ruling will have major ramifications for the telecom companies, especially the older service providers such as Airtel and Vodafone Idea.

AGR-Adjusted Gross Revenue

Telecom operators are required to pay license fee and spectrum charges in the form of ‘revenue share’ to the Centre. The revenue amount used to calculate this revenue share is termed as the AGR.

  • According to the DoT, the calculations should incorporate all revenues earned by a telecom company – including from non-telecom sources such as deposit interests and sale of assets.
  • The companies, however, have been of the view that AGR should comprise the revenues generated from telecom services only and non-telecom revenues should be kept out of it.

The definition of AGR has been such a contentious issue because it has huge financial implications for both Telecom service providers (TSP) and the government.

Timeline of the Issue

The dispute between DoT and the mobile operators was mainly on the definition of AGR.

  1. The issue between DoT and the telecom companies has been on since 2005, when the the Cellular Operators Association of India — the lobby group for players such as Airtel and Vodafone Idea — challenged the DoT’s definition for AGR
  2. In 2015, the TDSAT (Telecom Disputes Settlement and Appellate Tribunal) stayed the case in favour of telecom companies and held that AGR includes all receipts except capital receipts and revenue from non-core sources such as rent, profit on the sale of fixed assets, dividend, interest and miscellaneous income.
  3. The government, meanwhile, continued to raise the issue of under-reporting of revenues to duck charges.
  4. The Comptroller and Auditor General of India (CAG), in a recent report, blamed the telecom companies for “understating revenues” to the tune of Rs 61,064.5 crore.
  5. The Supreme Court upheld DoT’s definition on what constitutes AGR as provided in clause 19.1 of the Telecom License agreement between the service providers and the government.

SC verdict

  • The top court had upheld the government’s position on including revenue from non-telecommunication businesses in calculating the annual AGR of telecom companies, paving the way for the Centre to recover dues of over a whopping Rs 92,000 crore from telecom service providers (TSPs) in the form of adjusted gross revenue (AGR),
  • The SC also termed as the conduct of the TSPs highly unfair even after they benefited from the scheme of a fixed license fee under the National Telecom Policy of 1994 to revenue sharing under the revised telecom policy of 1999.
  • The judgment requires private telecom service providers to pay out higher sums towards license fee and spectrum usage fee, which are dependent on the value of AGR.

Possible Effects/Outcomes

  • This judgment is a huge blow to the industry. Most telcoms are likely to report one-off losses and lead to more debt or financial instability
  • The financial implications for telecom companies are serious at the current juncture, when profits for telcos are under pressure from severe competition and the falling ARPUs (average revenue per user).
  • This is a big worry for telecom users, as the failure of a few large players could lead to one or two players emerging near-monopolies,
  • The higher contribution to the exchequer, could help bridge gaps in the fiscal deficit and bolster government revenues to rescue an ailing economy.
  • If the financial viability of the companies is impacted it may lead to large scale job losses
  • This could lead to bigger bills which may affect affordability, considering it was the cutthroat competition in the sector that made mobile telephony and Internet almost universally affordable.
  • The AGR issue may cause problems in the banking industry, given that the telecom sector is highly leveraged. Vodafone Idea alone has a debt of Rs 2.2 lakh crore that it has used to expand infrastructure and fund spectrum payments over the years.
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