What is the AGR issue – A Simple Explanation


News about the ongoing AGR case between the telecom companies and the Government of India is all over the media. But what exactly is AGR and how will it affect the telecom companies? Let’s get started.

What is AGR?

AGR stands for adjusted gross revenue. But before we understand what AGR is, we need to understand what is the current arrangement between the Government and the telcos.

Currently the telcos have to pay a part of their revenues (not profits) to the Government as License Fees (LF) and Spectrum Usage Charges (SUC). The point to note here is that this arrangement is based on the revenue and not on the profits. What is the difference you may ask?

Revenue vs Profit

Well, let’s assume that a business earns ₹1000 in a month. Out of that, it spends ₹600 towards the employee salaries, cost of goods, office rent, etc. At the end of the month they’re left with ₹400. In this case, the revenue is ₹1000, expense is ₹600 and profit is ₹400. Now in this case, it’s clear that if a certain fee (%) is charged on the revenue then it’s far greater than what it would be if it’s charged on the profit.

Now let’s take the example of telcos. Let’s assume that as per the current arrangement, the telcos are supposed to pay 20% of the revenue as fees to the Govt. If the company is earning let’s say ₹1000 crore as revenue, then they’ll have to pay ₹200 crore as fees (20%).

What the Telcos want?

As you might have guessed it by now, the telecom companies are obviously not happy about this current arrangement. Why? Because they feel it’s unfair on the Government’s part to charge the fees on the basis of the revenue.

In their justification, the telcos say that not all revenue that is generated from core telecom operations. A certain part of the revenue also comes from non-telecom operations. This may include interest income, sales of assets like towers, investment returns, etc. So what is the AGR issue about?

The telcos want the fees to be charged only on the revenue part that comes from core telecom operations. That’s what is called the “Adjusted” Gross Revenue (AGR).

Let’s assume the following figures:

  1. Gross Revenue (GR): ₹1000 crore
  2. From non-telecom operations: ₹200 crore
  3. From telecom operations: ₹800 crore

In this case, AGR would be ₹800 crore (1-2)

So now the charges would be:

  • As per Govt: ₹200 crore (20% of GR)
  • As per Telcos: ₹160 crore (20% of AGR)

What the Government wants?

The AGR case started way back in 2005. At that point of time, there were around 14 telecom companies in India. Now only two remain out of that batch – Vodafone Idea (merged) and Bharti Airtel. Reliance Jio came in late, around the second half of 2016.

The Govt has opposed this AGR demand of the telcos saying that the telecom companies have intentionally under reported their revenues in the past to save on paying the Govt fees.

Who is right – Govt or Telcos?

After hearing the case for 14 years, the Supreme Court finally gave the verdict in Oct’19 in the favor of the Govt. The court in its verdict declared that the Govt’s way of calculating the charges is the correct way.

The Supreme Court ordered the telcos to clear all the outstanding dues within 3 months i.e by Jan’20. The overdues were extremely high, as much as a total of ₹1.50 lakh crore. Out of this, Vodafone Idea and Airtel contributed to more than 65%.

How much the telcos owe:

  • Vodafone Idea: ₹53,000 crore
  • Bharti Airtel: ₹36,000 crore

The overdues are huge. The telcos could not afford to pay the dues in such a short period of time (3 months) as given by the Supreme Court.

The Review Petition

The telecom companies filed for a review petition with the Supreme Court. In their petition, the telcos asked the court for some relief towards the overdue amount and also an extension of the deadline.

The Supreme Court rejected the review petition and asked the telcos to clear the outstanding dues immediately. If they fail to do so, they’ll be held in the contempt of the court order.

The Self-Assessment

After the SC rejected their review petition, the telcos deposited some portion of the total outstanding dues with the Govt. Vodafone Idea deposited ₹4000 crore while Airtel deposited around ₹10,000 crore. These sums were calculated by means of “self-assessment” by the telcos.

In the meanwhile, Reliance Jio cleared all their dues as they were very less as compared to the other players. This was partly due to the fact that Jio was a new entrant and so the impact of the current arrangement was very less. Interestingly, Reliance Jio hinted at saying that the Govt is right and that the telcos should clear all their dues.

The 2nd Review Petition

After depositing the part sums of money with the Govt, the telcos again approached the Supreme Court and asked for a relief. This time, the telcos wanted the Supreme Court to allow them to negotiate and settle the dues directly with the Govt.

The Wrath of the Supreme Court

The Supreme Court rejected the 2nd review petition as well. This time, the judges were extremely disappointed by the behavior of the telcos. The court lashed out at the telcos and highly criticized their behavior.

The Court famously said, “Do the companies think they are more powerful than the court?”. It also went on to say that the Govt (DoT Secretary) will be summoned for allowing the telcos to pay just a portion of the due by a way of self-assessment thereby ignoring the Court’s orders. Going further, the Court said that if the telcos fail to pay all the dues immediately, the top executives at these companies, including the MD & CEO will be sent to jail.

The last hearing during which the Supreme Court gave a final warning to the telcos was on 18-Mar-20. The next hearing was scheduled for 2 weeks later. The hearing now stands deferred due to the nation-wide lockdown imposed on account of the COVID-19 pandemic.

The Impact

It’d be interesting to see what happens next as it’s a matter of survival for Vodafone Idea. Their parent company, Vodafone Group (UK) has taken this up as a serious issue. Their CEO, Mr. Nick Read recently visited India to meet the Finance Minister, Mrs. Nirmala Sitharaman on this issue. They are still evaluating all the options available at their disposal.

The telecom industry is already facing head winds after the entry of Jio in 2016 and the subsequent price wars for data and call charges. For Bharti Airtel, it’s a dual edged sword. If Vodafone Idea fails to pay and shuts down it’s operations it would mean that the telecom industry in India will be ruled by only two players – Airtel and Jio. This will prove beneficial to Airtel in the long term but in the short term they will have to cough up the overdues and take a hit on their balance sheet.

As for Jio, they’re sitting in a comfortable position and are immune to this AGR issue. They continue to expand their telecom empire in India by offering cheap data and locking the users into their digital ecosystem.

This case will also have an impact on how foreign investors look at India. This will send a signal to them in terms of the regulatory stiffness and the law of the land enforcement. Foreign investors and companies may refrain from investing in India in the short term which again, we as an emerging markets cannot afford. With the rupee getting devalued rapidly, we need foreign companies to invest in India but at the same time we cannot let them go haywire and conduct their business above our laws. A healthy balance has to be striken.

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Hello! Welcome to Stock Gyan. Here we write interesting articles about stock markets, value investing, trading, data analysis and economy. Our goal is to break down complex financial concepts and topics into simple, easy to understand articles.

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