The Haunting of AGR
“Storm is coming!” This beautiful yet terrifying one liner from Nolan’s Dark Knight series was well suited for 23rd October 2019 (prior to the supreme court’s ruling upholding the original definition of Adjusted Gross Revenue or AGR). Someone from the government should have tweeted this by tagging telecom companies for a dramatic and comical impact amidst the slowdown. The oft-referred “laggard judicial system” took a cracking decision putting an end to 14 year old judicial battle over the exact meaning of Adjusted Gross Revenue within the telecom sector.
It’s counter productive to pin the blame on one party in this dramatized adaptation of Liam Neeson’s cheap thriller. Let’s just say, it’s a combination of asymmetric greed from two parties to a contract, one that was never supposed to do any business (we call it the government) in the first place, save for sale of assets that rightfully belonged to entrepreneurs of the country and the other which felt the sector will see no downfall as the number of active subscribers could grow to a billion (a good enough reason to ignore the nuances of contracts?). Why is the case curious? I say this because at the time of accepting the AGR regime, the definition had a broad context including revenues accrued from non core businesses, sale of assets, rentals etc. As it is with Airline Industry across the world and telecom industry (in most of the countries), perennial and growing demand essentially doesn’t necessarily translate into a burgeoning sector. The 2G scam and the introduction of the term called “lakh crore” within the commoners for the first time, valued the industry and the income that could be realized, at astronomical levels. This became perhaps one of the top 5 sectors for successive governments to lay trap whenever they felt the need to cover deficits caused by promotion of moral hazard and digging holes to nowhere.
Ghosts of Telco’s past:
The ghosts of 1999, would haunt unsuspecting private telecom companies after almost 20 years of shifting to a variable license fee mechanism which is otherwise called revenue sharing regime or AGR. Alarm bells must have rung in 2003, when the migration from revenue sharing to that of a deferred license fee mechanism (which explicitly included AGR). The strongest of the legal brains hosted by these large companies never felt the need to delve into the definition of AGR stated in these contracts and chose to find skeletons in their respective closets. The question according to me is “why would they do that?” rather than “how did they let that happen?”. Was it laxity or the purest form of wisdom at any given point in time, that the issue will get stuck at the judiciary till the doomsday? Or was the industry convinced, there would be no non-core business to be done? Whatever may be the reason, the fact of the matter seems to be that these companies felt that they would eventually exit from telecom business before the skeletons came into full public exposition. Having said that, one has to also give merit to the fact that no one really expected that there’s going to be any substantial change in the FCFS (First come first serve) system. The 2G scam clubbed with CAG’s estimations, led the supreme court to order auctioning mechanism after 2011. By the time auctioning mechanism began (since 3G spectrum sales), the sector was getting hyper-competitive. The artificial supply glut introduced by the UPA government at that time didn’t help, but rather increased the overall telecom Debt to EBITDA of these companies. Added to that, none of the companies (Private and public) chose to make a reserve for these potential payments accrued over 15 years. We will never know what caused the laxity.
Current establishment’s quagmire:
The current government’s miscalculation made it feel that the definition attributed to AGR is supporting the cause of ramping up its revenues. This bonus awarded by the Supreme court on 24th October, is being seen as a dividend for the past government’s mistakes. Modi government itself is in a major conundrum trying to balance the deficit while facing a slump in tax revenues and increasing need for fiscal stimulus into the economy. It has important state elections approaching after 5 consecutive defeats and has to keep writing those welfare cheques. By now, the government has realized the mistake of almost letting a telecom company die and is clueless as to how it salvage the situation by complying to the Supreme court’s order and also letting all the 3 players co-exist without branding itself as a pro-capitalist regime. At best, it won’t invoke the bank guarantees of the two telecom companies (legal?).
Enter the millennial called Jio in 2016 with deep pockets and blessings. It was a bloodbath ever since. Fruits of capitalism were available to India where majority still support socialism. Mobility, data and information revolution has become a human right for the first time in India and the generation thrived on this new found freedom. Being a new entrant, Jio was enjoying the deployment of its deep pockets and fewer legacy bills to pay. They didn’t carry the burden of losing subscribers but were rather welcoming new one’s into the world of better customer service and super-fast internet.
On the other hand, Vodafone India and Bharti Airtel have been buying spectrum of dying companies or getting into forced amalgamations for the lack of a better choice. In the special case of Vodafone Idea, where the merger created more synergistic problems and leverage than benefits, the consolidated debt loomed to over ₹105,000 Cr or $14.5Bn as at the end of CY2019. The ARPU declined every quarter and today they stand on a total principle liability in the form of license and spectrum fee at ~$1Bn. Out of the total liability of ₹57,000Cr ($7.9Bn) as per the DoT, $6.9Bn is the result of compounded interest, penalty and interest on penalty. The company however claims the total figure at ₹27,000Cr (~$3.7Bn). This disparity in the number (which is likely Pakistan’s total forex reserve) is further going to complicate things. Vodafone India’s management time and again met the respective ministries and also gave doomsday scenarios for the company. Afterall, who would want to throw in capital into a sector mired in historical discrepancies and controversies. Added to that, the political slugfest over the perceived government’s favorite child with deep pockets is not making things any easier for the government.
What’s at stake?
Vodafone’s bankruptcy will not just kill the AGR liability in the first place (as there will be major debate about the seniority of AGR dues when the committee of creditors sit over a table with the Insolvency resolution professional), but also the massive bank debt which will go bad combined with job losses, criticism about ease of doing business and political unrest at this time of economic slump. The government will also lose its potential revenue stream from 5G auctions to bail it out of the impending fiscal slippage of FY21. Bharti Airtel is however expected to stay alive as the dying company’s consumers will get divided among the duo.
Also, the comic relief provided by the AGR’s paradoxical architecture around PGCIL, GAIL, OIL and the state owned BSNL, MTNL can’t be fathomed the beings of Darwin’s evolved earth.
What can the government do now?
Unless the government steps in, India is headed to a monopoly / duopoly soon. Apart from mulling or going through the painful process of not invoking bank guarantees and providing a further moratorium for non-AGR dues for all the troubled telcos, the government has one ironclad choice.
COME OUT OF THE CLOSET AND PASS AN EXECUTIVE ORDER TO CHANGE THE DEFINITION OF AGR FOR GOOD.
However difficult / impractical it may sound, there is little to no hope for a healthy competitive industry as even the Vodafone’s perspective of its actual liability cannot possibly be met by March 17th (deadline put forth by the SC). If this is unresolved, many including myself will have to swing into action and port out as soon as possible.