SC ruling on AGR puts an end to liability dispute

The Supreme Court on September 1 set to rest all doubts about the adjusted gross revenue (AGR) payment obligations of telecom companies as follows:

• The SC has allowed telecom companies time to pay AGR dues over 10 years commencing April 1, 2021, rejecting the 20-year formula suggested by the central government
• The court has disallowed any reassessment of the said AGR dues which stand at about Rs.1.6 lakh-crore
• The court has directed the first tranche of 10 percent of the AGR dues to be paid on or before 31 March 2021
• It has directed the Chairmen/Managing Directors of the telecom companies to give an undertaking to follow the SC judgment and any breach thereof is to attract contempt proceedings.

Earlier, the apex court had vide its decision dated October 24, 2019, set to rest all contentions and counter-contentions surrounding outstanding dues of the telecoms to the government. However, despite the 2019 ruling, these companies continued to dodge the AGR liability, on lines resonating the following observations made by court in the 2019 ruling:

‘Further, the conduct of the licensees has also to be considered in the backdrop of the fact that the regime of revenue sharing was extremely beneficial then the previous regime of the fixed license fee, and they have tremendously benefited by it as is apparent from the statistics of the revenue earned under the revenue sharing regime. When Government has parted with the privilege as to revenue on sharing basis under the license, and an agreement entered into, it ought to have been precisely followed’.

‘…The conduct of the licensees was highly unfair, and anyhow and somehow, they had attempted to delay the payment. It passes comprehension how they have contended that the demand has to be worked out after this Court renders its decision….As the objections are baseless and wholly untenable, it cannot be said that there was a bona fide dispute concerning various items. The disputes raised could not be termed to be bona fide at all.”

Following the 2019 ruling of the apex court, these companies were also found short on disclosures and compliance of the Indian Accounting Standards 37 Provisions which requires companies to recognise an obligation arising out of a past event and to make a provision in their books to cover fulfilment of such obligation in future. The test for identification of these obligations is that if there is more than 0.5 probability of such an obligation, a provision must be made for the same based on a reliable estimate of such an obligation.

The question is: Was the probability of AGR liability more the 0.5? If yes, was it possible to estimate the AGR liability obligations by these companies?

All the assumptions and external opinions based on which the telecom companies failed to make proper disclosures and provisions, or even failed to acknowledge the dues as un-provisioned contingent liabilities, all along, stands exposed and nullified by the 2019 ruling and the September 1 judgment by the apex court. With the issue of elusive AGR liability now firmly fixed by the apex court, these companies need to also fix the corporate governance lapses as well.

Manoj Kumar is the Founder & Managing Partner of Hammurabi & Solomon Partners. Views are personal.