The demand for payment of statutory dues to the Department of Telecommunications (DoT) is a credit negative for Oil India Ltd, according to Moody’s Investors Service.
On 22 November 2019 and 3 December 2020, Oil India Limited (OIL) received demand notices from the Department of Telecommunication (DoT) for payment of ₹480 billion in statutory dues (with interest and penalties) by 23 January 2020 for leasing out surplus optical fiber network which were primarily for its internal communications under NLD (National Long Distance Service) licenses.
The demand notices by DoT follow the Supreme Court's Judgement on 24 October 2019 that broadened the definition of Adjusted Gross Revenue (AGR) for telecommunications companies to include non-core operations. AGR is used as a basis for the calculation of license fees and spectrum usage charges owed to the government. Oil India Ltd was not a party to this litigation.
"The demand for payment by DoT is a credit negative for the company 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," said Moody’s Investors Service in a note.
Moody's added that in a scenario where Oil India has to pay the dues, any payment would immediately pressure OIL's ratings and take its leverage to unprecedented levels as 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.
"As of 30 September 2019, the company reported cash & cash equivalents (including bank balances) of ₹38 billion and we expect cash flow from operations of about INR40 billion in fiscal 2020. The amount demanded by the DoT is about 8x the company's projected EBITDA for fiscal 2020 and about 3x its latest market capitalization. The company has not made any provisions for the payment," added Moody's.