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MOSL: TELECOM-SC dismisses AGR liability review petition

TELECOM: SC dismisses AGR liability review petition

** In a big blow to telecom sector, India's apex court has dismissed the review petition filed by telecom companies to grant a relief on AGR liabilities, which have to be paid before the deadline of 24th Jan'20. We note that telcos owe ~INR920b in AGR dues to the government, primarily Bharti (~INR343b) and VIL (~INR443b).

** The verdict may put a severe burden on telcos and have unconceivable repercussions, particularly against the backdrop of VIL facing a risk of shutdown (it may result in INR1.2t debt default, large-scale job losses and subscriber churn).

** We thus believe that the final outcome may not be linear and that there could be a payment extension or moratorium to say the least. Irrespective of the outcome, Bharti is well prepared and, along with RJio, appears poised for strong market share gains.

Legal options – curative petition
Both Bharti and VIL indicated that they are exploring filing a curative petition in the SC, wherein it has to be proved that the decision would have a humanitarian impact and also severe repercussions on GDP, given the importance of the sector toward digital infrastructure and the economy. That said, we note that historically such petitions have been rarely accepted by the SC. Also, other non-telecom PSU companies have liabilities of over INR3t – the payment for which is still questionable – and they may too file a review petition.

Will government step in?
It won’t be surprising if the government comes to the rescue of the telecom sector. This is particularly because it has to recover INR900b as deferred spectrum debt from VIL, which has stated it will shut operations if asked to pay the entire AGR liability. Also, VIL owes INR300b to banks (against this, Aditya Birla Group and Vodafone Plc’s stake in VIL stands at a mere INR70b and INR80b, respectively). Moreover, the implication on end-customer in the advent of VIL shutdown could be terrible. In such a scenario, we believe that the government may look to exercise other options, including:

** It may provide an AGR liability extension or moratorium on the same lines as spectrum payment liability to resolve near-term cash flow issues.

** The DoT could consider waiving off penalties and interest on penalties before 2011 (as first decision of the SC on AGR liability came in 2011). In that case, ~40% of AGR payments could go off. This, however, will be in contrast to its statement in the parliament that it will not provide any relief toward AGR liability.

** GST input credit of INR80b/INR90b for Bharti/VIL is also being explored, but it could be a long-drawn process given the need for the GST Council’s nod.