Adjusted Gross Revenue Archives

Government Holds The Largest Stake in Vodafone Idea (Vi)

Quite a few telecom companies came under pressure after a Supreme Court verdict ordered them to pay ‘pending’ AGR dues to the Telecom Regulatory Authority of India (TRAI). These dues ran into thousands of crores—something which they could not afford after a disrupted telecom sector.

Moving on, the government had come up with financial relief packages for distressed telecom companies burdened by AGR dues. While these relief packages have managed to keep Vodafone Idea and Bharti Airtel afloat, they have done little to ensure faster recovery dues. Vodafone Idea owed the government ₹58,254 crore in AGR dues. It has paid back ₹7,854 crore or 13% of the total dues. The company faced stiff competition from its relatively better-off rivals Airtel and Jio. Both Vi and Airtel had the daunting task of clearing AGR dues along with expanding their business.

The government eventually proposed converting all the pending interest on the spectrum and AGR dues into an equity stake in telcos. Vodafone Idea accepted the deal.

It is a pretty common practice in the business world wherein a lender converts the pending debt into equity shareholding. The government now owns a 35.8% stake worth Rs 16,000 crore in Vodafone Idea. This deal has brought down the combined promoter holding of Vodafone Plc and Aditya Birla Group from ~72% to ~46%. “The shares may be held through the statutory undertaking of the Unit Trust of India (SUUTI) on behalf of the Government of India or by any trustee-type or other suitable arrangement,” said Vodafone Idea in an exchange filing.

Vodafone Idea NOT a Public Sector Undertaking (PSU)

The stock hit the lower circuit after the announcement. The first question that comes to the mind of an average shareholder is: Will Vodafone Idea become a PSU? The answer is, no.

The government holding a majority stake in Vi does not make the company a PSU. TRAI has confirmed that the government shall not pay to acquire any shares, nor does it intend to convert telcos into PSUs.

Vodafone Idea’s Managing Director Ravinder Takkar said in a statement that the government had no intention to manage the company’s business. He stated that the article of association was amended to allow voting rights to shareholders with taking over 13%, allowing promoters to make decisions even if their shareholding falls below 21%. Long story short, the promoters Vodafone Group and Aditya Birla Group will continue to manage the company.

Vodafone Idea’s shares rallied ~11% after the statement by MD Ravinder Takkar.

Despite reassurances from government officials and company management, one must not forget that the government is the largest shareholder in Vodafone Idea. It could decide to move back on its word and take over or influence Vi’s management if the need arises.

The Way Ahead

After the decision to convert pending dues into equity was announced, Vi’s shares nosedived ~20% in a single trading session. The company gained ~11% after MD Ravinder Takkar announced that the government had no intention to participate in management decisions.

After Vodafone Idea, Tata Teleservices said it is planning to convert its interest on AGR dues into government equity. Tata Teleservices has AGR dues of Rs 16,798 crore, of which it has paid Rs 4,197 crore. Following conversion, it is expected that the Government will hold nearly 9.5% of the company’s total outstanding shares. The company’s stock price (NSE: TTML) hit a lower circuit after the announcement.

There is also BSNL and a possible merger with the state-run telecom. Although the current stand is to not interfere in Vi’s operations, there is a possibility it could be changed.

Mukesh Ambani’s Jio had managed to capture a significant market share through its competitive pricing. According to a Competition Commission of India (CCI) report, there were 21 telecom companies in 2009. The figure died down to just 6 companies in 2021. Out of the six, two are financially distressed PSUs. One is defunct, and the remaining three are the only active private players in the country. The government is trying to keep afloat all three private players, i.e. Jio, Airtel, and Vodafone Idea. If one company shuts down, there would be a duopoly in the sector. A duopoly would give telecom companies greater bargaining power over their consumers, which would go against an average Indian citizen and thereby the government.

What is AGR- Adjusted Gross Revenue?

Whenever a company makes money, they are liable to pay tax to the government. Telecom companies charge Interconnect Usage Charge (IUC) but it is not a part of the income which stays with them. They have to pass it to different operators. Thus, this charge only inflates their total revenue. It won’t be fair if the government taxes a telecom company on this inflated number. Hence, the total gross revenue is adjusted downwards which is known as Adjusted Gross Revenue.

Where it All Began

After 1994, telecom companies were allowed to operate in a fixed license system which was very expensive. From 1999, the government allowed the telcos to migrate from the expensive license-based model to the revenue-sharing model. This model helped the company to share a part of what they earned rather than paying out a high fixed amount. The payment under the new model was divided into two parts annual license fee (LF) and spectrum usage charges (SUC). The former would be 8% of AGR and the latter would be 3%-5% of AGR.

This AGR was the base of the argument which started in 2005 when the Cellular Operators Association of India (COAI) challenged the definition of AGR calculation that was followed by the government. This leads us to dive deep into the definition given by both the parties and the dispute which continued for a decade and a half.

The “AGR Definition” Dispute

The telecom companies believe that the government should be charging tax from the revenue generated only from the core business and not from other businesses. For example, a telecom company like Airtel will generate revenue not only by providing services in the telecom area but also by selling off its assets or by investing in equities or bonds.

Now, the DoT says that AGR includes the revenue generated by the company as a whole and not only from its core business. They believe that companies are earning revenue only because they are allowed to do business in the country. Hence, they are liable to pay taxes on their total AGR, no matter if it is coming from the company’s core business or the non-core business.

We bring you a timeline of things that have shaped this whole saga –

October 24, 2019

The judgment day. After 14 years of indecision and uncertainty, the Supreme Court of India announced their mammoth verdict. The SC decided to widen the definition of AGR and include revenues coming for non-core items for taxation. The bombshell was that the apex court has asked the companies to pay all their dues amassing Rs 1.19 lakh crore by 23rd January 2020.

January 23, 2020

Vodafone Idea, Bharti Airtel and others miss the deadline citing poor financial health of their companies. The government also asked DoT not to take any action against the defaulting on payments.

February 14, 2020

As expected, the red-hot SC blasted the Centre, DoT and the telecom companies for not respecting their orders. The apex court declared March 17 as the new deadline for the companies to clear all their AGR dues.

March 18, 2020

In the past few weeks, telecom companies started clearing their dues but only partially. Supreme Court was asked to give 20 years for companies to clear their AGR dues. The apex court fiercely rejected the idea and also declared that companies won’t be allowed to self-assess their dues.

June 18, 2020

Supreme Court cooled its stance a tad bit. They asked the companies to present a detailed plan of action as to how they intend to clear their dues. This plan of action should consist of the years that the companies would be asking for and the guarantees they will be giving in the meantime. No allowance for staggered payment would be issued if companies fail to provide adequate bank guarantees and a proper roadmap for payment in upcoming years.

July 20, 2020

The Supreme Court reserved its orders for the AGR payment timeline. They reiterated that the calculation done by DoT is final and binding. Vodafone accepted the dues levied on them but requested 15 years to pay back the dues. Their counsel stated that the company is in “deep waters”. They even asked the government to retain the Rs 8,000 crore worth of GST refunds for this year.

With all this, the Supreme Court voiced their concern on how they can “rely” on a company to pay their dues in future if they already are in shambles. The next hearing is scheduled on 10th August 2020.

AGR Dues for Vodafone Idea:

Dues Outstanding: Rs 58,254 crore

Dues Paid: Rs 7,854 crores

Balance Due: 50,400 crore

Vodafone’s counsel told the Supreme Court that the company is “barely afloat”. If the apex body forces the company for an upfront payment, they will be forced to shut down their operations in India which will directly impact over 1100 employees.

AGR Dues for Bharti Airtel:

Dues Outstanding: Rs 43,980 crore

Dues Paid: Rs 18,004 crore

Balance Due: Rs 25,976 crore

Airtel has paid 60% of the total dues paid by the telecom companies till now. Several analysts believe that Airtel is in a much better financial condition when compared to Vodafone and will be able to pay its dues soon. Doubts remain on the survival of Vodafone Idea.