AGR dues: OIL moves SC; Moody's says business conditions risky in India

OIL has received demand notices for the period from FY08 to FY19 amounting to over Rs 48,000 crore including licence fee, penalties and interest, the company said

Oil India (OIL) on Wednesday filed a clarificatory petition before the Supreme Court against a Rs 48,000-crore demand raised by the Department of Telecommunications (DoT). The DoT had slapped the demand notice on OIL, seeking  Rs 48,000 crore on account of AGR (adjusted gross revenue) dues.  

OIL received demand notices for the period financial year 2007-08 (FY08) to FY19, including licence fee, penalties and interest, the company said in a statement.

OIL had taken this matter up with DoT and the Ministry of Petroleum & Natural Gas along with other affected central public sector enterprises (CPSEs) and explained the non-applicability of AGR to non-telecom companies.

Moody’s Investors Service said DoT’s demand is a credit negative for OIL and highlights the risks associated with an unpredictable regulatory environment in India where a number of companies in the telecom as well as other sectors have been impacted by "demands for tax and dividends as the government tries to shore up its revenue".

The company does not have sufficient liquidity to pay the amount required through reserves and internal cash flow and would have to raise additional capital to fund the payment, it said. As on September 30, 2019, the company reported cash and cash equivalents (including bank balances) of Rs 3,800 crore and Moody’s expect cash flow from operations of about Rs 4,000 crore in FY20. The amount demanded by the DoT is about eight times the company's projected Ebitda (earnings before interest, tax, depreciation and amortisation) for FY20 and about three times its latest market capitalisation.

OIL had obtained a National Long Distance Service Licence (NLD Licence) to establish Supervisory Control and Data Acquisition System (SCADA System) for control, management and protection of OIL’s pipeline network used for transportation of crude oil, natural gas and petroleum products.

The NLD licence is predominantly used for SCADA system and only spare bandwidth capacity is leased-out to other telecom operators, the company said. 

According to the terms, licence fee is to be paid on gross total revenue from services provided under the NLD licence, said the company. Since the award of NLD licence, the cumulative revenue of Rs 1.47 crore was earned by OIL from leasing of spare bandwidth capacity on which all applicable licence fee and other statutory dues had been paid by OIL regularly in accordance with licence terms.

However, DoT issued demand notices to OIL based on the recent Supreme Court judgment where, it said the entire revenue of the licensee should be considered for determining AGR. DoT has sought payment of licence fee on total reported revenue, including revenue from sale of crude oil, natural gas, which neither relate to the NLD licence nor can be treated as supplementary/ value-added services related to the NLD licence.

Besides Oil India, Delhi Metro Rail Corporation (DMRC) is also in the process of filing application with the SC over AGR dues.

“We expect the government to miss its fiscal deficit target of 3.3 per cent for FY20. There is uncertainty as to the quantum and timing of any potential payment by OIL. However, until this dispute is resolved, there remains an overhang on the company’s ratings,” Moody’s Investor Service said. In a scenario where the company has to pay the dues, any payment would immediately pressure OIL's ratings and take its leverage to unprecedented levels. The company has not made any provisions for the payment.