Sector Update |
Telecom | Update
18 March 2020
Our earlier telecom update
SC dismisses reassessment of AGR liability
Next hearing to decide on DoT’s staggered payment plea
After dismissing the review and modification pleas filed earlier by the telcos for a
relief on the large AGR liability, India’s apex court on 18 Mar’20 maintained its iron-
fist stance, warning the DoT/telcos of potential contempt charges and ruling out pleas
for reassessment or self-assessment of telecom dues.
Consequently, Bharti/VIL will now have to pay the entire AGR liability toward license
and SUC charges of ~INR440b/INR580b (instead of INR343b/INR442b provisioned in
2QFY20 and the recent self-assessment figures of INR130b/INR210b).
However, in a slight relief to telcos, the SC after two weeks will hear the DoT’s
proposal for a staggered payment of AGR dues by telcos over a period of 20 years at
an 8% MCLR rate. According to our workings, Bharti/VIL will have to make annual
payment of INR27b/INR53b.
As the next option, telcos can file a curative petition, while the DoT/TRAI could offer a
relief on regulatory payments (annual license/SUC fees) and floor price to reduce the
burden, although clarity on this is limited.
As discussed in our earlier report “SC
dismisses modification plea on AGR liability”,
ongoing developments point toward far-reaching consequences on not just the
telecom sector but also the banking sector and the economy as VIL faces a risk of
shutdown with large-scale debt default (INR1.2t), job losses and subscriber
In our view, Bharti should weather this storm through its recent fund raise. A duopoly
market will likely benefit it (along with RJio) with incremental EBITDA potential of
INR100b in FY22 even after building in network cost increase with blue-sky EBITDA of
~INR550b (on pre-Ind-AS 116). We thus remain positive on Bharti.
SC sticks to its guns on AGR liability
The Supreme Court (SC) has ruled out any reassessment or self-assessment of AGR
liabilities, stating that it would tantamount to fraud on the court and contempt of its
orders. Moreover, it maintained that operators will have to pay their full dues. It
also lashed out on the DoT officers and telecom managements for not complying
with the order and warned of contempt proceedings. The only relief is that the apex
court has agreed to consider in the next hearing after two weeks the government's
plea on allowing the affected telcos to stagger their payments over 20 years.
However, it is yet unclear whether or not it would accept 20 years as the reasonable
time for staggered payment.
DoT reverses stand
After raising demand notice for an immediate payment of complete AGR liability last
month, the DoT reversed its stand, (a) requesting that telcos be allowed to spread
payment of dues over 20 years and (b) accepting plea for self-assessment of AGR
dues. In our view, this highlights that the DoT has taken cognizance of the large-
scale consequences given the size of payment against the stretched balance sheets
of telcos. The DoT can potentially offer relief toward annual license and SUC of total
11% to ease the regulatory burden and also support a floor tariff (ongoing TRAI
consultation) to improve profitability. However, it is unclear if the government may
reduce its receipts to support the bleeding sector.
Research Analyst: Aliasgar Shakir
(Aliasgar.Shakir@motilaloswal.com); +91 22 6129 1565
(Suhel.Ahmad@MotilalOswal.com); +91 22 5036 2611;
(Anshul.Aggarwal@motilaloswal.com); +91 22 5036 2511
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