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CONCEPT – ADJUSTED GROSS REVENUES (AGR)
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- Leading telecom companies reported record losses for the quarter ended September 2019 after making provisions toward the Supreme Court’s ruling on the definition of adjusted gross revenue (AGR).
- The judgment required private telecom service providers to pay out higher sums towards license fee and spectrum usage fee, which are dependent on the value of AGR. The telecom operators’ liabilities towards the said charges, including interest and penalties, was a whopping Rs. 1.3 lakh crore. In Feb 2020, the Supreme Court came down heavily on the firms, asking for immediate compliance with its order.
- What is it : The telecom sector was liberalised under the National Telecom Policy, 1994 after which licenses were issued to companies in return for a fixed license fee. To provide relief from the steep fixed license fee, the government in 1999 gave an option to the licensees to migrate to the revenue sharing fee model.
- Under this, mobile telephone operators were required to share a percentage of their AGR with the government as annual license fee (LF) and spectrum usage charges (SUC). License agreements between the Department of Telecommunications (DoT) and the telecom companies define the gross revenues of the latter. AGR is then computed after allowing for certain deductions spelt out in these license agreements. The LF and SUC were set at 8 per cent and between 3-5 per cent of AGR respectively, based on the agreement.
- The dispute between DoT and the mobile operators was mainly on the definition of AGR. The DoT argued that AGR includes all revenues (before discounts) from both telecom and non-telecom services. The companies claimed that AGR should comprise just the revenue accrued from core services and not dividend, interest income or profit on sale of any investment or fixed assets.
- In 2005, Cellular Operators Association of India (COAI) challenged the government’s definition for AGR calculation.
- 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.
- However, setting aside TDSAT’s order, Supreme Court on October 24, 2019 upheld the definition of AGR as stipulated by the DoT.
- Why is it important : The definition of AGR has been such a contentious issue because it has huge financial implications for both telcos and the government. The revenue shared by telcos with the government goes into the consolidated fund of India. It was estimated, after the SC’s judgment, that the telecom operators owe the government about 92,000 crore in back charges, interest and penalties on license fee alone.
- While the government has been deprived of the extra revenue, the financial implications for telecom companies — who now have to cough up overdue amounts piled up for years — are serious too. Especially at the current juncture, when profits for telcos are under pressure from severe competition and the falling ARPUs (average revenue per user).
- Why should I care : If you are an investor in any telecom company, brace yourself, for this judgment is a huge blow to the industry. Given that most telcos haven’t provided for these dues in their accounts, they are likely to report one-off losses. In addition to a lower EPS (earnings per share), you may have to prepare for more debt or financial instability that could erode the telcos’ net worth too.
- A few companies have flagged risks to remaining going concerns if they don’t get relief from the dues. 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, with high pricing power.
- If you’re a taxpayer, you can cheer a bit about the higher contribution to the exchequer, which could help bridge gaps in the fiscal deficit and bolster government revenues to rescue an ailing economy.
- The bottomline : It may be time to bid goodbye to cheap data and free voice calls.
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