India’s Supreme Court took the `middle path’ in a long standing dispute between telecom service providers and the government, sparking a fierce rally in Bharti Airtel Ltd and clearing a massive regulatory overhang in the troubled sector.
A 3-judge bench gave 10 years to mobile operators to pay off $20 billion of Adjusted Gross Revenue or AGR to the government in equal annual instalments. The judgement added bankrupt TSPs, under liquidation, but still owning spectrum needed to seek the guidance of National Company Law Tribunal to sell airwaves and pay off outstanding loans. And more importantly mobile operators sharing spectrum belonging to rivals were not obligated to pay the rivals’ AGR dues, the judges ruled. This clarity brought cheer to Reliance Industries Ltd., majority owner of Jio Platforms, India’s top mobile services company. RIL rose 0.3 percent to 2,087 rupees, a whisker short of an all-time high.
The verdict ``provides much needed clarity on the AGR issue. It is positive for the near term because of the cash flow respite afforded with payments staggered across 10 years,’’ Ratings agency CRISIL said in a note to clients.
The Court ruled on a decade-and-a-half long battle on what constitutes and defines AGR and how should it be calculated. On one side were private telecom giants such as Bharti Airtel and Vodafone Idea, controlling nearly 60 percent of India’s 110 crore-plus mobile users. And on the other side was a Covid-hit government starved of revenues and running short on resources to raise them. The Court had already ruled in favour of the government two months ago but loss-making TSPs said they were unable to pony up the cash owing to intense competition in the cash guzzling sector.
The judges said the telecom department’s interpretation of AGR will hold good.
The government collects license fee, calculated as a percentage of sales – or Adjusted Gross Revenue – from telecom companies. The higher the top line, the more money the exchequer makes. At the heart of the dispute was what constitutes AGR? And at stake was 1.47 lakh crore rupees that was owed to the government. It had received a paltry 30,051 crore rupees earlier from three players – Bharti, Vodafone and the Tata Group. The TSPs sought time to pay off the remainder.
Also at stake was the deteriorating health of the banking sector that has lent heavily to telecom operators.
The stock market rejoiced the judgement. Bharti Airtel – suffering from a huge sell-off related to index-rebalancing – surged 6.5 percent to 546.25 rupees, a 4-week high. It was the top traded counter on the National Stock Exchange on Tuesday with volumes of more than 4,000 crore rupees. On Monday the stock saw heavy selling of nearly 9,595 crore rupees as mainly foreign investors exited the counter owing to a sharp cut in its weightage in the MSCI-Global index.
VODAFONE SHORT ON IDEAS
The judgement was a shot in the arm for Vodafone Idea, which owes the exchequer more than 50,000 crore rupees. The loss-making company had expressed its inability two months ago to pay off the dues immediately and said its India balance sheet was riddled with losses. The government offered a staggered payment plan but that was objected to by an angry Supreme Court, which said it amounted to ``scuttling’’ its earlier order that gave the winning hand to the executive. A balance was, thus, sought to prevent a financial meltdown of the sector and reducing it to a duopoly. Analysts were sceptical
The judges ``have taken the middle path,’’ said Abhishek Manu Singhvi, a lawyer representing Bharti Airtel. Mobile operators had sought 20 years of staggered payment and got 10, he added.
The verdict ``is not as beneficial to Vodafone Idea as it is to Bharti Airtel, ‘’ said Rusmik Oza, Executive Vice President at Kotak Securities. ``Considering the high annual interest and depreciation cost the annual AGR dues could further put strain on Vodafone’s cash flows.’’
The judgement provides Vodafone Idea, partly owned by billionaire Kumar Mangalam Birla, with breathing space to bring in much needed cash to resuscitate its balance sheet and put up a fight against Bharti and Jio platform in a market that is seeing booming growth in the data usage as millions work from home.
"Annual AGR payments of Vodafone far exceed its annual operating profit,’’ said Hemang Jani, Head Equity Strategist at Motilal Oswal Securities. ``With no tariff hike built, Vodafone should find it difficult to manage AGR payments.’’
Singhvi, among India’s highest paid legal brains, said he saw the possibility of a review petition being filed by some disgruntled mobile operators. He himself added that such petitions had a 99.9 percent failure rate.
(Additional Reporting by Yatin Mota)
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