Supreme Court AGR ruling may have opened a Pandora’s Box
On 14 Feb, the Supreme Court came down heavily on telecom companies and the DOT. As they rush to adhere to the SC judgment, it could open a Pandora’s Box for the Indian economy.
What happened till now?
On October 24, 2019, the SC passed an order asking the telecom companies to pay up Rs.1.47 trillion to the DOT as AGR charges. This charge based on annual gross revenue (AGR) had been disputed by the telcos for nearly 15 years. However, SC ruled that the DOT stance was legally binding. Meanwhile, the telcos skipped the Jan 24 deadline and DOT went soft by asking its officials to go easy on telecom companies. SC on 14 Feb came down heavily on this.
Adhere to court orders
In its Feb 14 review order, the Supreme Court has unequivocally stated that the telecom companies were bound by the order. It also stated that DOT had no business to issue a circular asking its officials to go slow on the telcos. The order has further stated that telecom companies will have to pay part of the dues by the same week. The SC also added that the telcos and DOT would be guilty of contempt of court if it did not enforce the adherence to the order. In a swift reaction, DOT has withdrawn its circular while Bharti Airtel has agreed to pay up Rs.10,000 crore this week. The bigger challenge is for Vodafone Idea.
Vodafone idea in a Catch-22
A catch-22 situation is one wherein you are damned if you do and damned if you don’t. That is the situation that Vodafone Idea finds it in. It needs to pay up Rs.53,000 crore to the DOT in the next few weeks and there is no way it is going to raise so much money. The stock price has been in single digits for some time and the stock’s ability to leverage its stock currency is limited. Secondly, the situation can be salvaged if the promoters are willing to infuse capital into Vodafone Idea. However, Vodafone UK and the AV Birla group had already expressed inability to commit further funds. Without infusion, there is little hope for Vodafone Idea.
What about bank exposures?
That is the real billion dollar question. Banks have fund-based exposure of Rs.70,000 crore and non-fund based exposure of Rs.31,000 crore to the telecom sector. That takes the total exposure to above Rs.1 trillion. For banks like Yes Bank and IndusInd Bank, the exposure to the telecom sector is above 30% of net worth. Both these banks are already under tremendous stress and this could only worsen things for them. In most cases, the exposure to telecom is more than 2.5% of the bank book. A lot will now depend on how quickly the government, DOT and the telcos sit across the table and iron things out in an amicable manner.
Targeted Keyords – Supreme Court AGR ruling, telecom companies, SC judgment, annual gross revenue (AGR), commit further funds, tremendous stress