In this week's wrapup, we finally unravel the AGR saga and answer all the questions you were too afraid to ask.


The AGR Saga continues

So we had another ruling on the AGR subject. But before we get to the heart of the story, some context on Adjusted Gross Revenue, the Supreme Court judgment, and other willy nilly matters.

Whenever telecom operators make money, the government wants its cut. Call it a licensing fee if you like. So in effect, a small part of a telco’s revenue will be ploughed back to the government as fees. But the government doesn’t take a cut from the entire revenue pie. Instead, it only takes a cut from what it calls — the Adjusted Gross Revenue (AGR).

Here’s what that means.

Telecom operators make money in many ways. For instance, Airtel charges you a small fee when you want to connect to a different operator, say Vodafone. They call this IUC — an Interconnect Usage Charge.

But Airtel doesn’t get to keep this money. They’ll have to plough it back to the operator you are trying to connect to i.e. Vodafone. So they’ll bill it on your account, take your money and promptly transfer the sum to the telecom operator in question.

In effect, while Airtel might recognise IUC as revenue, it’s really not.

Now imagine the government asks Airtel to pay a small cut from the IUC as well. I mean, they could, since it forms a part of Airtel’s revenue. But it would be a travesty if they did. So the ideal way to deal with this problem is to adjust the revenue downwards (and remove items like IUC) until you finally get the Adjusted Gross Revenue (AGR). The government then takes its cut from this final pot. Hence the name — AGR Issue.

But then there is another contention.

Telecom operators think that the government’s cut should include a percentage of the revenues from the telecom business and nothing else. If they make money off of selling an old tower or maybe interest income from bank deposits — The government shouldn’t be taking a cut from all this. That would be unfair… At least that’s the Telco’s side of the argument.

The government, on the other hand, wants everything included. Interest, profits from selling old buildings, other miscellaneous income nobody wants to talk about; they want a percentage of everything. Their contention is simple. There’s only one reason why you can make money off of bank deposits and selling old towers i.e. you have access to a telecom license. It’s this license that enables you to do business at all. It’s at the heart of most of your revenue streams. So pay up.

The Telecom operators refused. The government was incensed. Together, they approached the courts and the courts ruled in favour of the government. The Telcos were asked to pay their dues. And the dues. Well…

The dues were massive.

Now before we get to what happened to the Telecom operators, a small detour.

So, bolstered by this judgement the DoT (Department of Telecommunication) also made claims on a bunch of other government-owned companies. Think — Power Grid Corporation of India Ltd, GAIL India, GNFC, and Oil India. Now bear in mind, these companies aren’t exactly like your private telecom operators. But they did own some telecom assets and they did make some money leveraging said assets.

For instance, GAIL had obtained an Internet Service Provider license back in 2002. They never made any substantial money by leveraging this license since their main objective is to process and distribute natural gas. But the story goes that they did do some business in the telco space.

However, in almost ridiculous fashion, the DoT asked GAIL to pay up AGR dues totalling ~1.72 lakh crore. That's 4 times the company's market capitalization. An absurd amount by any stretch of the imagination.

Thankfully, the Supreme Court intervened and offered relief to the likes of GAIL a couple of days ago by stating in unequivocal terms that this was a misuse of its original judgment — which, by the way, was reserved explicitly for private telecom operators. So these PSUs are finally off the hook and their share price rallied a tiny bit.

But it was a different story for Airtel and Vodafone. They were desperately seeking some reprieve — hoping they would be allowed to pay their dues in a staggered manner over 20 years. Even the DoT empathized with their plight and asked the Supreme Court to consider their plea. At one point their lawyers claimed (and I am paraphrasing here) — “The companies are not asking recomputation of the payable dues. They are simply pointing out errors in the DoTs Math”


The Supreme Court shot back

“We won’t allow the telecom companies to assess their own dues. Not even in the wildest dreams. Won’t spare the telcos or the DoT. Will send all the MDs to jail.”

Double Ouch!!!

Anyway, after this heated exchange, the Supreme Court did relent a tad bit on Thursday. They rejected the 20-year time frame because who knows what’s in store for the world after 20 years. But they did ask Telcos to provide a detailed roadmap on how they plan to clear their dues including personal guarantees from the owners.

Now I am not sure if crippled telecom operators can put up these guarantees. But it is what it is. The Supreme Court has drawn a line. The Telcos have to comply. And the saga continues.


Real Estate

Real Estate blues

Also in other news, PE equity inflows into Indian realty is down 93% year-on-year. That’s 93%. Wow!!!

Now the Private Equity folks have been pumping money into the Indian Real Estate sector for a while now, primarily focusing on commercial real estate. You know — properties including office buildings, medical centres, hotels, malls, retail stores, etc.

However, COVID has taken a massive toll on the world economy. And investors are jittery about parking their funds in emerging markets like India right now since they see better risk/reward prospects elsewhere. Like — in the developed economies, I suppose.

Unfortunately, commercial real estate in this country is already reeling from an unprecedented crisis owing to the extended nationwide lockdown. Rental income has vanished. Cashflows have dried up. Banks are skittish about lending altogether. And the PE folks have decided to bid adieu. It isn’t a great look for the industry.

To make matters worse, it doesn’t look like the Residential space is getting a boost either. We did this elaborate story a couple of days explaining why RE developers are now in a quagmire and you should definitely read this piece if you want to own the next dinner table conversation on why the Real Estate sector is on the downside.

What else happened

  • G for Growth — Parle registered record sales in April & May and gained a whopping 5% market share during this period. After all, Parle G has been a staple for most people braving the lockdown and it’s not exactly surprising to see these figures.
  • Brace for impact — It’s getting extremely turbulent for Airlines now after Emirates, one of the biggest airlines in the world, continued it’s firing spree. after cutting around 600 pilots from its payroll. Not a very nice precedent.

See you next week ...