AGR DUES: Why Vodafone Idea shutdown is unlikely

Vodafone Idea, one of the top telecom operators in India, is likely to deposit Rs 2,500 cr towards the demands raised by the Department of Telecom related to revenue share under India’s telecom license rules, according to industry sources. The company has been served with a total demand of over Rs 53,000 cr.

Meanwhile, Bharti Airtel is also reported to have deposited Rs 10,000 cr towards part-payment of the demands raised on the company. Airtel is facing demands of over Rs 35,000 cr.

However, companies who make full payment in a hurry may end up regretting the move.


In all, various companies are facing total demands of around Rs 3.5 lakh crore from Department of Telecom after a recent Supreme Court judgment held that any company that holds a telecom license must pay Department of Telecom a share on all its revenue, and not just its telecom revenue.

Companies in India have so far been paying a share of only their telecom revenue to the DoT as part of their telecom license agreement.

The judgment by the Supreme Court has come as a bolt from the blue for over a dozen companies that hold telecom licenses in India, including oil producers, pipeline operators and even fertilizer makers.

The biggest casualty of the move are likely to be pipeline operator GAIL India Ltd and petroleum producer Oil India Ltd.

GAIL India, which is valued at around Rs 54,000 cr, is facing a demand for a whopping Rs 1.7 lakh cr — more than three times its value.

This is because GAIL must now retrospectively pay DoT revenue share on all its revenue, and not just its telecom revenue.

GAIL officials have been protesting in private, pointing out that the telecom business contributes only around 3% of its revenue.

However, under the terms of India’s telecom license, companies that take such a license have to pay a share of their revenue as a levy. This share varies from around 6% to 14%.

The intention of the revenue share was to make sure that the government got a share of the money generated through telecom services.

However, eventually, telecom companies started getting into other businesses — such as content creation. Similarly, companies in other businesses, such as GAIL India, also started taking telecom licenses for providing connectivity solutions.

These companies started excluding their non-telecom revenue when calculating how much money to pay under the revenue share clause of the telecom license.

For example, in case of GAIL, the company generates only around 3% of its total revenue from telecom operations. It would pay 8% of this amount to the DoT, instead of 8% of its total revenue, most of which is from its core pipeline business.

The argument was that since 97% of its revenue was coming from its non-telecom business, there was no need to pay a share of that revenue to Department of Telecom.

Moreover, no company would take a telecom license if it meant that it had to deposit 13% of its total revenue with the DoT the next day. A company that generates only 10 rupees from its telecom business will not like to pay Rs 100 as the DoT’s share of the revenue.

However, this understanding was upturned by a ruling of a Supreme Court bench headed by Justice Arun Mishra in October.

The bench held that Department of Telecom can claim its share on the entire revenue of the company, even if the revenue was not coming from telecom activities.

In a way, it is like taking a shop on rent from a landlord in exchange for giving 15% of the total turnover to the landlord, only to later realize that the landlord wants 15% of the turnover of all your shops, including those belonging to other landlords.

Besides the above cases, companies such as Powergrid Corporation, Gujarat Narmada Valley Fertilizers and Chemicals and Delhi Metro Rail Corporation also hold telecom licenses, and have been slapped with demand notices from DoT seeking tens of thousands of crores of rupees.


These companies have, in turn, approached the government seeking a law to prevent them from being driven to bankruptcy because of the Supreme Court judgment.

It is believed that the government is in the process of framing a law that will allow companies to exclude non-telecom revenue when they calculate the share of revenue to be paid to Department of Telecom. This is likely to be done by amending the telecom license.

However, this is likely to take some time.

If Vodafone Idea and Bharti Airtel can wait till the law is passed, then they too can take advantage of the new law to exclude their non-telecom revenue and avoid paying the huge amounts.

However, if the companies pay the amounts demanded by DoT before such a law is passed, such money is unlikely to be returned upon the passing of the law.

Another reason why Vodafone Idea may not be in a position to pay the Rs 53,000 cr or so demanded has to do with the condition of the company and the telecom market.

The entry of Reliance Jio three years ago has decimated margins in the industry, and Vodafone Idea has since racked up tens of thousands of crores in accumulated losses.

It raised around Rs 25,000 cr — nearly all of it from its main shareholders — for rolling out 4G network and modernization early last year. However, most of this money too has already been spent or committed.

When raising this money, Vodafone plc, the biggest shareholder in Vodafone Idea, also pledged its entire 44% stake in the Indian company with various banks.

This means that the British company has no other Indian collateral to give as guarantee to raise more money.

The other major shareholder, Aditya Birla Group, too has declared that it is not in a mood to invest more money in a loss-making company and would rather let it shut down.

As such, Vodafone Idea will find it nearly impossible to get more money, either from its shareholders or banks.

Without raising money from these sources, the company will not be able to pay the amounts demanded by the DoT pursuant to the Supreme Court verdict; hence the Rs 2,500 cr amount.


It remains to be seen how the Department of Telecom goes forward once it becomes clear that Vodafone Idea, GAIL India and others are not able to pay the demanded amount before the due dates indicated in the demand notices.

Broadly, DoT has two options.

The first is to drag these companies to bankruptcy court, effectively putting them into bankruptcy proceedings.

However, doing so will result in even bigger losses for the government, as these companies pay tens of thousands of crores of rupees every year in the form of various taxes and levies.

In case of Vodafone Idea, the company also makes annual payments in lieu of spectrum.

Once these companies are put into bankruptcy proceedings, all these payments will be stopped, and all the loans and obligations that they have taken will be subject to renegotiation.

Moreover, it will be up to the bankruptcy court to decide what to do with these companies.

The usual procedure is to auction these companies to the highest bidder and get whatever amount it can, and then divide this amount among all the banks, business partners and others to whom the companies owe money. It is possible that the government may end up getting nothing out of the whole process, killing the goose that laid the golden egg.

Moreover, dragging functional companies to the bankruptcy court and potentially shutting them down and causing massive job losses is unlikely to be a risk that the government can take, especially in a slowing economy.

This leaves it with the more viable option of passing a law to overcome the judgment of the Supreme Court and clarifying that non-telecom revenues do not have to be shared with the DoT. What remains to be seen is if these companies can hold on till then.

However, there is a risk that if the government does not pass such a law before March 17 — when the Supreme Court will next hear the matter — this is a possibility that the court may direct the DoT to initiate bankruptcy proceedings and recover money from the companies that have not paid their dues. This could put all the companies that face such demands in jeopardy.

As such, the government is expected to make its move before March 17.