Bharti and Vodafone would be better off not aggravating the issue
The controversy over Adjusted Gross Revenue (AGR) of telecom companies snowballed in the last few weeks. The Supreme Court had passed an order asking the telcos to pay up the pending Rs.92,000 crore as AGR charges. Both Vodafone Idea and Bharti Airtel are filing a review petition in the court but they would do better not to aggravate the issue further. Already, the damage to their balance sheets is done in Q2 and they should seek early resolution.
Where AGR stands now?
After the Supreme Court order, Bharti Airtel and Vodafone wrote off big losses in the second quarter. Bharti reported a net loss of Rs.27,600 crore while the losses of Vodafone were closer to Rs.51,000 crore. If you break up these losses, the actual loss is only Rs.11,000 crore for Vodafone Idea and Rs.6,500 crore for Bharti Airtel. This was the amount that was payable in 2003. Over the last 16 years, the total liability of Bharti Airtel has swelled to Rs.25,000 crore inclusive of interest and penalty. In the case of Vodafone Idea the AGR has grown to Rs.44,000 crore including penalty and interest. They could have actually saved the embarrassment by paying that money back in 2003, even if they had to pay it under protest. This would have prevented the amount from escalating. But taking the matter to the court only worsened matters as the telecom companies did not have a strong case in their favor.
What the government offers?
The government has offered the telcos moratorium on payment of spectrum usage charges (SUC) but is unwilling to concede on the AGR charges. The telcos had sought waiver of penalty and interest component and had even sought a moratorium on the AGR payment considering the pressure that weak ARPUs had exerted on their profits. However, the government has refused any concessions and asked the telcos to pay the AGR dues in 3 months flat. While the government may be stretched for resources, they also realize there is a systemic risk in pushing the telcos too far into a corner. They have loans to banks in excess of Rs.220,000 crore and that is big money. The government will most likely be open to a combination of postponement of some charges and waiver on some costs. After all, the government is likely to go out of its way to arrest a slowdown in growth.
Sort it out amicably
Neither Bharti nor Vodafone can afford to aggravate the issue beyond a point. They should sit across the table with the government and work out a middle path. The AGR is legitimately payable and the telcos also know it. It is just that they have used this ambiguity to binge on debt and improve valuations. That is unraveling now. The good news is that ARPUs are bottoming. It is time to amicably sort out the AGR issue.