Telecom sector and AGR woes

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Vodafone -Idea and Tata Tele have both decided to pay the interest on its dues to the Government of India by issuing equity shares to the Government of India.  This move of the telecom companies is expected to bring a new lease of life to these companies and make the telecom sector competitive again. Let us try to understand what the issue is and what the terms like spectrum usage charges, AGR etc. means.

What is Spectrum and Spectrum Charges

The mobile telephone system requires signals to be sent from one end to another end, these signals are carried through airwaves which are sent on a designated frequency to avoid interference. These airwaves are called spectrum. These airwaves are owned by the Government of India and the government auctions this spectrum to telecom companies.

The telecom companies have to bid for this auction and the successful companies have to pay the amount to the government either in lump sum or in installment.

After winning the spectrum successfully, the Department of Telecommunications (DOT) gives licences to the successful companies.

Spectrum usage charge and License fees

The winning telecom companies have to pay annual license fees and spectrum usage charges to the Government of India. They have to pay 8% of their Adjusted Gross Revenue (AGR) as licence fees as well as 3-5 % of their AGR per annum to the Government as spectrum usage fees. The spectrum usage fee is a minimum 3% of the AGR and it varies according to the telecom circle and for the metro circle the fee is 5% of the AGR.

The license fee of 8% includes the Universal Service Obligation Fund (USOF) fee of 5%. 

What Is AGR 

The telecom operators in India, Reliance Jio, Vodafone-Idea  and Airtel have to pay a part of their revenue to the government as license fee and spectrum usage charge fee.

According to the DOT, the AGR of a telecom operator includes all the revenue earned by it from telecom as well as non-telecom sources like deposit interests and sale of assets.

Case in Supreme Court 

There was a difference between the DOT and the Telecom companies on the method to be used for calculating the AGR. The telecom companies calculated AGR to include the revenue they earn from providing basic telecom services like talktime, data usage etc. 

The Government of India used the DOT formula to calculate the dues of the telecom companies and started levying penalties on delayed payment by the telecom companies.

The telecom companies challenged the DOT method of calculating AGR and the government demand of annual license fees and spectrum usage fees based on AGR.  The Supreme Court  in its November, 2019 judgement upheld the DOT version and asked the Telecom companies to pay the dues amounting to around Rs. 92,261 crores including interest and penalty charges to the government of India.

Government Package for Telecom companies 

Of the three private sector telecom companies operating in India, Vodafone-Idea is financially the weakest. It was feared that Vodafone -Idea will not be able to pay its due to the government and will have to shut down its business in India leaving the field to two private companies Reliance Jio and Airtel. The duopoly of these two companies in the market was not a desirable situation for the consumer hence the government of India came out with a bailout package in september 2019, which was primarily meant to save Vodafone -Idea.

Highlights of the package

• The Government announced a four year moratorium period on AGR and Spectrum payments. It means that if the telecom companies wants then they will have to pay the dues to the government after four years.
• It redefined AGR and excluded revenue earned from non telecom operations in its definition.
• The license period was extended from earlier 20 years to 30 years.
• It gave the option to the telecom operators to convert the dues amount on license fees and its interest payment into equity shares. Equity shares will be issued to the Government on a preferential basis as the relevant date for pricing of equity shares was 14.08.2021.

Impact on Telecom Sector 

Reliance Jio and Airtel have already said that they will pay the due amount to the Government and will not issue any equity shares to the Government. However Vodafone-Idea and Tata Tele have announced that they will convert the government dues into equity shares.

Post issuance of equity, the Government of India will hold around 35.8% of the total outstanding shares of the Vodafone-Idea Company, while the promoters Vodafone and Aditya Birla Group would hold around 28.5% and around 17.8% stake in the company, respectively.

The details of Tata tele are awaited.

What is USOF (Universal Service Obligation Fund)

• To provide good quality telecom service in rural and inaccessible areas where the private sector wont go due to low profit or loss, the government of India came up with the Policy of Universal Service obligation.
• New Telecom Policy - 1999 (NTP '99) provided that the resources for meeting the Universal Service Obligation (USO) would be raised through a 'Universal Access Levy (UAL)', which would be a percentage of the AGR earned by the Private Telecom operators  under various telecom  licenses.
• The Universal Service Support Policy came into effect from 01.04.2002. 
• USOF comes under the Department of Telecommunication, Ministry of Communication, The Government of India.
• The infrastructure created under USOF comes under Government-owned Bharat Sanchar Nigam Limited (BSNL).