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AGR verdict and implications- Aurum Capital Notes

On 1 September 2020, the Supreme Court of India announced the verdict on AGR, allowing staggered payments over a 10-year period to telecom operators. This document provides a summary of the verdict for a layman. Aurum Capital views the resolution positively.

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AGR verdict and implications- Aurum Capital Notes

  1. 1. Page 1 www.aurumcapital.in What is AGR issue?  AGR stands for Adjusted Gross Revenue.  The Telecom Service Providers/ Operators pay some part of their Revenue (Income from sale of services) to the government as License Fee (8% of Revenue) and Spectrum Usage Charge (SUC which is between 3 to 5% of the Revenue).  The whole issue is about what all sources of income should be included in Revenue.  The Govt. says AGR should include all revenue earned by a service provider, including that emanating from non-core sources such as rent, profit on sale of fixed assets or sale of scrap, corporate deposits, real estate transactions, handset sales, dividend income and interest and miscellaneous income. But the telecom operators say AGR should include revenue arising out of only telecom services.  This issue has been under litigation since 2003. Recently, the Supreme Court has said that AGR should include all the revenues even from non-core sources.  It means the telecom operators will have to pay License Fee and SUC even on non- core sources of revenue which is coming to be a staggering amount plus penalty and interest accrued on that (total INR1.69Lakh crore). Recent AGR verdict notes  On 1 September 2020, the Supreme Court of India announced the verdict on AGR  The Supreme Court allowed telecom companies a period of 10 years to make staggered payment of the pending AGR dues.  Bharti Airtel and Vodafone Idea had sought 15 years for the pending AGR payment. The government has asked for 20 years  The telecom companies have to pay only 10 per cent of total pending dues upfront and can’t default on the annual payments. The court also fixed Mar 31 as the date for annual installment.  The DOT estimate of AGR obligation for Bharti Airtel was INR44k Crs and for Vodafone Idea INR58k Crs. While the Self-Assessment by the companies were INR13k Crs and INR21.5k Crs respectively for Bharti Airtel and Vodfaone Idea.  Bharti Airtel’s amount of INR44k Crs includes Telenor India dues too.  This INR44k Crs of Bharti Airtel does not include dues of Videocon Telecommunic Ations (INR1376Crs). There is a point of contention about ownership of liabilities. o DOT's stand is that the spectrum cannot be the subject matter of the IBC proceedings (against the company that has acquired a bankrupt telecom provider. Here Bharti Airtel). The dues under the licence towards the spectrum's use cannot be put in the category of operational dues. In contrast, the Department of Commerce holds the opinion that the dues under the licence are operational dues, and the provisions of the IBC are applicable (to benefit Bharti Airtel). o Now as per verdict. It is for the NCLT to decide whether the licence/spectrum can be transferred and be a part of the resolution process initiated under the provisions of the Code. Whether spectrum/licence can be subjected to
  2. 2. Page 2 www.aurumcapital.in resolution process as an asset belonging to the telecom service providers, and whether the AGR dues are operational dues and have to be dealt with under the provisions of the IBC by NCLT. o Even if NCLT decision goes against Bharti Airtel, the liability is limited to INR1376Crs of Videocon Telecommunic. This in our opinion is not very large amount.  As per our current understanding, o Bharti Airtel, has already paid INR18,004 crore or nearly 40 per cent of its total AGR obligation. They have no payment obligations for financial year 2021, 2022 and 2023. o Airtel can use some of its recently-raised funds to deleverage since it is not required to make lump-sum AGR payment to DOT. Airtel raised $3 billion in January ($2 billion through a QIP and $1 billion through FCCB). o Vodafone Idea has paid only INR3,500Crs. This is not covering 10% of the total dues of 58k Crs for FY21. Rating implications:  Moody's has upgraded Airtel's rating outlook to stable from negative  The Fitch hasn't changed the ratings outlook but expects Bharti Airtel and Jio to gain substantial market share at the cost of Vodafone Idea. Source:  Verdict: https://main.sci.gov.in/supremecourt/2020/9887/9887_2020_32_1501_23776_Judgem ent_01-Sep-2020.pdf  Fitch Ratings non-rating commentary Jio, Bharti to Gain Market Share on Supreme Court's Verdict: https://www.fitchratings.com/research/corporate-finance/jio-bharti-to-gain-market- share-on-supreme-court-verdict-07-09-2020  Moody's affirms Bharti's Ba1 CFR; revises outlook to stable: https://www.moodys.com/research/Moodys-affirms-Bhartis-Ba1-CFR-revises- outlook-to-stable--PR_432345  https://mnacritique.mergersindia.com/news/airtel-open-to-acquisition-talks-with- aircel-sunil-mittal/  https://indianexpress.com/article/business/bharti-airtel-vi-may-meet-dot-seek- clarifications-on-agr-payment-quantum-6598936/  https://en.wikipedia.org/wiki/Aircel
  3. 3. Page 3 www.aurumcapital.in Annexure: Amounts recoverable from major TSPs
  4. 4. Page 4 www.aurumcapital.in Regards, Investment Advisors Department, Aurum Capital SEBI Registration No: INA000011024
  5. 5. Page 5 www.aurumcapital.in Disclaimers The information herein is used as per the available sources of bseindia.com/nseindia.com, company’s annual reports and quarterly reports/presentations/con-calls, credit rating reports & other private and public database sources. Aurum Capital is not responsible for any discrepancy in the above-mentioned data. Investors should seek the advice of their independent financial advisor prior to taking any investment decision based on this report or for the necessary explanation of its contents. Future estimates mentioned herein are personal opinions & views of the analyst. Analyst Name – Niteen S Dharmawat. For queries/grievances – support@aurumcapital.in. SEBI Registration No: INA000011024 Readers are responsible for all outcomes arising of buying/selling particular scrip/ scrips mentioned herein. This report indicates the opinion of the author & is not a recommendation to buy or sell securities. Aurum Capital & its representatives have vested interest in above- mentioned securities at the time of this publication, and its partners/company have positions / financial interest in the securities mentioned above. Aurum Capital, or its associates are not paid or compensated at any point of time, in last 12 months by any way from the companies mentioned in the report. Aurum Capital, or its representatives do not have more than 1% of the company’s total shareholding. Analyst ownership of the stock: Yes (Bharti Airtel). Served as a director/employee of mentioned companies in the report: No. Any material conflict of interest at the time of publishing report: No The views expressed in this post accurately reflect the author’s personal views about any and all of the subject securities or issuers; and no part of the compensations, if any was, is or will be, directly indirectly, related to specific recommendation or views expressed in the report.

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On 1 September 2020, the Supreme Court of India announced the verdict on AGR, allowing staggered payments over a 10-year period to telecom operators. This document provides a summary of the verdict for a layman. Aurum Capital views the resolution positively.

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