AGR Dues explained: A 17-year-old bleeding wound

For the last few months, there has been a certain hubbub around the AGR dues. A column has been dedicated to the issue in every pink paper almost every day. But Why? What is all the fuss about? What are AGR dues? What are their implications for the telecom sector?

These are some questions that come to our mind when we’re reading these pieces in the newspaper. Let’s walk through the issue in detail.

History of AGR Dues: The start

It all started back in 1994 when the Government of India (GoI) liberalised the telecom sector and issued licenses to private companies so that they could provide telecom services. These licenses were given in return for a fixed license fee, which some folks believe was high. So, in 1999, the Government came up with a revenue-sharing model in which the telecom operators were required to pay a certain percentage of their revenues as license fee. To be specific, License Fee (LF) of 8 percent and Spectrum Usage Charges (SUC) of 3-5 percent was levied on the Adjusted Gross Revenue (AGR).

So, the higher an operators’ AGR, the higher will be the fee it will have to pay and vice-versa. Sounds simple, right?

But here’s the problem: how does one define AGR? This sole question has been the reason behind the 17-year battle between the government and telecom operators that ended in June 2020.

The Government argued that the AGR should include all revenues from both telecom services and non-core sources (interest or dividend income, rent, profit on the sale of fixed assets or sale of scrap, corporate deposits, real estate transactions, handset sales). So, if a company were to earn revenue by selling burgers as well, even on that revenue the LF and SUC will be levied. No kidding.

Isn’t this kind of wrong though?

Naturally, the telecom operators dismissed the government’s definition of AGR and argued that it should include only the revenue earned by providing telecom services.

To understand it better, assume that a company earns ₹1000 crore in a particular year by providing telecom services and another ₹100 crores as interest and dividend on investments. Applying the government’s definition of AGR, the LF and SUC will be levied on the total revenue i.e. ₹1100 crore. Whereas, by applying the definition given by the telecom operations, the LF and SUC will be levied only on ₹ 1000 crore. Therefore, in the former case, the fee paid will be higher than in the latter case.

The obvious crack

Now you might say, what’s the big deal? The case was resolved in the favour of the government, so shouldn’t companies simply accept the definition of AGR and pay the fee regularly, henceforth?

Well not quite, here’s the catch.

While the case was lying with the court, the companies had been paying the license fee and spectrum usage charges on the AGR that they had defined i.e. on the ₹ 1000 crore, as discussed in the above example. But, now that the government’s definition has been accepted, the telecom operators are obliged to pay the additional LF and SUC on the ₹100 crores as well. And if we sum up the non-core revenue of all these years (1994 till today) during which the case was pending in the courts and, calculate the fees that are due, add interest and penalty on top of the fees for delay in payment, you arrive at a massive sum of ₹ 1.4 lakh crore.

These are the AGR dues of companies in the telecom sector. The companies are required to pay all their dues within 10 years alongside a first instalment amounting to 10% of total AGR dues, which is due on 31st March 2021.

Below is the graph of major telecom companies and their AGR dues.

AGR Dues of Vodafone, AGR dues of Vi

Out of these 5 companies, 3 have already shut down. The telecom sector presently has only 3 players. They are Vodafone-Idea (VI), Bharti Airtel, and Reliance Jio. Out of the three surviving companies, Vodafone-Idea has the highest AGR dues, followed by Airtel. Whereas, Jio had very small dues which it has paid off completely.

The repayment of these dues is a gargantuan challenge for Bharti Airtel and Vodafone-Idea, mainly because of their stressed financials. Upon the entry of Reliance Jio into the telecom sector in 2016, a bugle announcing a price war had been blown. Due to this, the net profit of the two companies has crept into the negative territory.

The table below shows some of the financial parameters for the companies.

FY2020Bharti AirtelVodafone-Idea (VI)
Revenue                            87,539                           44,958
EBITDA                            36,137                           14,410
Net Profit                          -32,183                         -73,878
Total Debt                         1,48,228                       1,14,996
ARPU (Average Revenue Per User)                                 157                                114

The average revenue per user (ARPU) for Vodafone-Idea is very low as compared to that of Bharti Airtel. It is estimated that the companies need to reach an ARPU of ₹200 for a sustainable business. And, at present seems very distant for Vodafone-Idea as more users keep switching to Jio. Upon taking a closer look at the firm’s earnings before interest, tax, depreciation, and amortization (EBITDA); it becomes clear that even if the company is able to repay the finance cost and principal amount of its debt, it will be short of money to pay the yearly AGR dues.

Related: Take a look at Financial ratio analysis to understand EBDITA and other terms

This puts the company’s ability to go on as a going concern at risk.

For the telecom sector, the AGR dues verdict is a major setback. Given the precarious financial position of Vodafone-Idea, the risk of a duopoly in the sector has shot up and amidst all this fiasco, it will be the customers that may have to bear the brunt of this.

The Author

The piece was written by Shivam Ghule, a co-author at Casereads. Now that you’re able to understand the AGR dues, how about you share this with your best friend on WhatsApp?

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