The Union Cabinet has approved a relief package for the stressed telecom sector that will help extend some flexibility to telecom companies on payment of their outstanding dues. To this end, the government has allowed a four-year moratorium on outstanding dues related to adjusted gross revenue (AGR), as well as spectrum related payments.
The Cabinet has also allowed 100 per cent foreign direct investment (FDI) in the telecom sector, through the automatic route. So far, up to 49 per cent was permitted to flow through the automatic route and any investment thereafter had to necessarily go through the government route.
Structural and procedural reforms announced by the Cabinet are as below:
- Rationalisation of adjusted gross revenue: Non-telecom revenue will be excluded on prospective basis from the definition of AGR.
- Bank Guarantees (BGs) rationalised: Huge reduction in BG requirements (80%) against License Fee (LF) and other similar Levies. No requirements for multiple BGs in different licenced service areas (LSAs) regions in the country. Instead, one BG will be enough.
- Interest rates rationalised/ penalties removed: From October 1, 2021, delayed payments of license fee (LF)/spectrum usage charge (SUC) will attract interest rate of SBI’s MCLR plus 2% instead of MCLR plus 4%; interest compounded annually instead of monthly; penalty and interest on penalty removed.
- For auctions held henceforth, no BGs will be required to secure instalment payments. Industry has matured and the past practice of BG is no longer required.
- Spectrum tenure: In future Auctions, tenure of spectrum increased from 20 to 30 years.
- Surrender of spectrum will be permitted after 10 years for spectrum acquired in the future auctions.
- No SUC for spectrum acquired in future spectrum auctions.
- Spectrum sharing encouraged: Additional SUC of 0.5% for spectrum sharing removed.
- To encourage investment, 100% FDI under automatic route permitted in telecom sector. All safeguards will apply.
- Auction calendar fixed – Spectrum auctions to be normally held in the last quarter of every financial year.
- Ease of doing business promoted – cumbersome requirement of licenses under 1953 Customs Notification for wireless equipment removed. Replaced with self-declaration.
- Know Your Customers (KYC) reforms: Self-KYC (App based) permitted. E-KYC rate revised to only One Rupee. Shifting from prepaid to post-paid and vice-versa will not require fresh KYC.
- Paper Customer Acquisition Forms (CAF) will be replaced by digital storage of data. Nearly 300-400 crore paper CAFs lying in various warehouses of TSPs will not be required. Warehouse audit of CAF will not be required.
- SACFA clearance for telecom towers eased. DoT will accept data on a portal based on self-declaration basis. Portals of other Agencies (such as Civil Aviation) will be linked with DOT Portal.
Addressing liquidity requirements of TSPs
- Moratorium/deferment of upto four years in annual payments of dues arising out of the AGR judgement, with however, by protecting the Net Present Value (NPV) of the due amounts being protected.
- Moratorium/deferment on due payments of spectrum purchased in past auctions (excluding the auction of 2021) for upto four years with NPV protected at the interest rate stipulated in the respective auctions.
- Option to the TSPs to pay the interest amount arising due to the said deferment of payment by way of equity.
- At the option of the government, to convert the due amount pertaining to the said deferred payment by way of equity at the end of the moratorium/deferment period, guidelines for which will be finalised by the Ministry of Finance.
The package could help address the long-standing financial crunch being faced by telecom companies and their inability to pay dues worth billions of rupees in terms of spectrum fees, to the government.
In particular, the package grants some respite to the debt-laden Vodafone Idea Limited (Vi). Vi owes Rs 504 billion in statutory dues to the government and a moratorium will offer a breather to the cash-strapped operator to clear dues over a longer period of time.
Industry quotes and reactions on the Cabinet announcement
Lt General Dr S.P. Kochhar, Director General, COAI
“The decision is an indication of the government’s intent for the much-needed structural reforms in the telecommunications sector, in scripting the success of Digital India and in accelerating the journey to meet Digital India goals which will ultimately deliver ample benefit to the individual consumers. These steps would go a long way in relieving the financial stress the sector is facing, boosting investments, encouraging healthy competition and in offering choice to customers. The announcement is aligned with the telecom industry’s long-standing asks.”
Peeyush Vaish, Partner & Telecom Sector Leader, Deloitte India
“The savings in the cash flows will boost the telecom sector and pave the way for 5G auctions in India. The government is clearly committed to a speedy roll out of next generation services in India through 100% FDI and also through self-declaration route for tower’s roll out.”
Sabyasachi Majumdar, Senior Vice President & Group Head – Corporate Ratings, ICRA Limited
“This package by the government is likely to bring about a much needed relief for the stressed sector. As per ICRA’s assessment, the moratorium on AGR dues provides annual cash flow breather of around Rs. 14,000 crore for the industry while the moratorium on spectrum dues gives another Rs. 32,000 crore of annual cash flow relief for the industry as a whole. Further, a moratorium of 4 years gives enough time for industry to carry out fundamental improvements by way of increasing tariffs, which is critical from the industry perspective. Other measures like rationalising of the AGR definition prospectively is EBITDA accretive and a reduction in SUC on spectrum sharing eases the sharing and cash flows to some extent. Further, elongation of spectrum allotment for a period of 30 years and a calendar for spectrum auction is also a positive for the industry.”
Jaideep Ghosh, chief operating officer, Shardul Amarchand Mangaldas & Co.
“The telecom sector relief package announced is more of long-term structural reform that has the potential to alter the Indian telecom landscape and investor image while providing immediate relief to certain telecom operators.
Long standing wishlists of the industry, such as redefining AGR and enhancing moratorium for payment of dues, are adequately addressed. I particularly like the step that a spectrum roadmap will be announced by the government in advance, which will infuse the much-needed certainty for the operators.”
Akshat Jain, Partner, J Sagar Associates
“The package announced by the government aims to usher in structural reforms by infusing investor confidence and provide flexibility to telecom operators with respect to spectrum sharing, surrendering spectrum usage rights etc. One of the key announcements is allowing 100% FDI in the sector which was limited only to 49% from the automatic route. The other significant announcement is to have certainty for auctions in the sector which are slated to be conducted mostly in the last quarter of a financial year. These measures will certainly provide better planning by operators. However, the liability to pay AGR dues continues. The deferment for AGR dues cannot be construed as waiver since the package only envisages a moratorium of four years on such AGR dues from 1st October 2021 (appointed date) with the interest and penalties accruing for such deferral. On other issues such as spectrum payments, bank guarantees etc., the relief appears to be prospective in nature. While this will temporarily provide some relief, it does not essentially alleviate the already bleeding balance sheets of the telecom operators since the dues will ultimately have to be paid with interest. It will be interesting to see whether these measures promote competition in the sector and achieve the desired objectives.”