The union cabinet has recently approved a relief package for the stressed telecom sector that will help extend some flexibility to telecom companies on the payment of their outstanding dues, as well as address some of the long-standing issues faced by telcos. In particular, the package grants some respite to the debt-laden Vodafone Idea Limited, which owes Rs 504 billion in statutory dues to the government. This moratorium on payments will offer a breather to the cash-strapped operator, allowing it to clear dues over a longer period of time. The various structural and procedural reforms announced by the cabinet are:
Reforms related to payments and dues
Non-telecom revenues have been excluded from the definition of adjusted gross revenues (AGR), on a prospective basis. Bank guarantees (BGs) have been rationalised by slashing the requirements by almost 80 per cent against licence fees and other similar levies. A telco is no longer required to submit multiple BGs for different licensed service areas; a single BG will be enough. Further, from October 1, 2021, delayed payments of licence fees/spectrum usage charges (SUC) will attract interest at a rate equal to SBI’s marginal cost of funds-based lending rate (MCLR) plus 2 per cent (as against the existing MCLR plus 4 per cent). Interest on delayed payments will be compounded annually instead of monthly. Further, penalty and interest on penalty has been removed. Meanwhile, to encourage investment, 100 per cent foreign direct investment (FDI) under the automatic route is now permitted in the telecom sector.
For spectrum auctions held henceforth, no BGs will be required to secure instalment payments. The government believes that the industry has matured and the past practice of BGs is no longer required. Further, for spectrum allocated through future auctions, the validity has been increased from 20 to 30 years. Moreover, surrender of such spectrum will be permitted after 10 years. No SUC will be applicable for spectrum acquired in future spectrum auctions. In a bid to encourage spectrum sharing, the government has decided to remove the additional SUC of 0.5 per cent. The government has also fixed the auction calendar, and has decided to conduct spectrum auctions in the last quarter of a given financial year.
Reforms for addressing liquidity requirements of TSPs
The government has allowed a moratorium/deferment of up to four years on the annual payment of dues arising out of the AGR judgement, with, however, the net present value (NPV) of the due amounts being protected. A moratorium/deferment on due payments of spectrum purchased in past auctions (excluding the auction of 2021) of up to four years has also been allowed, with NPV protected at the interest rate stipulated in the respective auctions. Telecom operators have been given the option to pay the interest amount arising due to this deferment of payment by way of equity. By choosing this option, the telcos will be allowed to convert the due amount pertaining to the 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.
To promote ease of doing business, the cumbersome requirement of licences under the 1953 customs notification for wireless equipment has been removed and replaced with self-declaration. Further, app-based self-KYC (know your customer) has been permitted. The electronic KYC charge has also been revised to only Re 1. The government has further announced that shifting from prepaid to post-paid and vice-versa will not require fresh KYC. Paper customer acquisition forms (CAFs) will be replaced by digital storage of data. Nearly 3-4 billion paper CAFs, lying in various telco warehouses, will no longer be required. Warehouse audits of CAFs will also not be required. The process of getting Standing Advisory Committee for Frequency Allocation clearance for telecom towers has been eased. The Department of Telecommunications (DoT) will accept data through a portal on a self-declaration basis. Portals of other agencies (such as civil aviation) will be linked with the DoT portal. The following are some industry reactions to the recently announced reforms…
The government has undertaken these seminal reforms to lift an industry that is at the core of the Digital India vision. The latest reforms ensure that the industry is able to invest fearlessly and support India’s digital ambitions. Bharti Airtel is fully committed to responding to the call by the government to invest in and accelerate India’s growth. What lies ahead is a once-in-a-lifetime opportunity to build the digital infrastructure that will be a catalyst for the digital aspirations of over 1 billion Indians.
The telecom sector is one of the prime movers of the economy and the key enabler for making India a digital society. The government’s announcement of reforms and relief measures will enable the industry to achieve the goals of Digital India. Jio’s mission is to bring the fruits of the digital revolution to 1.35 billion Indians. Telecom sector reforms will encourage us to bring greater benefits to our customers.
The path-breaking reforms announced by the government will go a long way in unshackling the telecom sector. These reforms demonstrate the government’s firm commitment to ensuring healthy growth of the industry. These reforms will bring alive the digital aspiration of 1.3 billion people and accelerate India’s journey to become a digitally empowered economy.
For over two and a half decades, Bharti Airtel has pioneered India’s telecom revolution. These fresh reforms will further boost our efforts to invest in this exciting digital future and enable us to be one of the leading players in India’s digital economy. More needs to be done, however, towards a sustainable tariff regime to ensure the industry gets a fair return. This will, in turn, allow it to continue investing in new technologies and innovation, to bring world-class services to customers.
These steps will go a long way in relieving the sector’s financial stress boosting investments, encouraging healthy competition, and offering more choices to customers. The announcement is aligned with the industry’s long-standing asks. It will bring in a new era for the Indian telecommunications industry, which has been a catalyst in the growth of the Indian economy over the past many decades. The industry stood united and played a critical role in ensuring that India’s telecom infrastructure remained robust and provided much-needed connectivity during the pandemic. The measures announced will lead to a much more robust and healthier telecom sector, which, in turn, will spur innovation and investments in allied industries such as network equipment, smartphones and data centres.
The relief package for the telecom sector is more of a 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. The long-standing wishes of the industry, such as redefining AGR and extending the moratorium on the payment of dues, have been adequately addressed. The step of announcing a spectrum roadmap in advance will provide much-needed certainty to operators.
The package is likely to bring much-needed relief to the stressed sector. As per ICRA’s assessment, the moratorium on AGR dues provides an annual cash flow breather of around Rs 140 billion to the industry while the moratorium on spectrum dues gives another Rs 320 billion of annual cash flow relief to the industry as a whole. Further, a moratorium of four years gives enough time to the industry to carry out fundamental improvements by way of increasing tariffs, which is critical from the industry’s perspective. Other measures such as rationalising the AGR definition prospectively is EBITDA accretive, and a reduction in SUC on spectrum sharing eases the sharing and cash flows to some extent. Elongation of spectrum allotment for a period of 30 years and the spectrum auction calendar are also positives for the industry.
The package aims to usher in structural reforms by enhancing investor confidence and provide flexibility to telecom operators with respect to spectrum sharing, surrendering spectrum usage rights, etc. One of the key announcements is the provision of certainty of auctions in the sector, which are slated to be conducted mostly in the last quarter of a financial year. These measures will certainly enable better planning by operators. However, the liability to pay AGR dues continues. The deferment of AGR dues cannot be construed as a waiver, since the package only envisages a moratorium of four years on such dues, with interest and penalties accruing for such deferral. On other issues such as spectrum payments and BGs, 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.
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 per cent FDI as well as through the self-declaration route for tower roll-out.
The removal of the 49 per cent limit on automatic approval of FDI in the telecom sector will incentivise domestic telcos/connectivity tech companies to build advanced open radio access network/5G solutions for both the Indian and global markets. The clarity provided on AGR, a contentious issue, is laudable for its decisiveness and long-term view. With these announcements, the telecom industry in particular and the overall digital infrastructure industry in general are poised for exponential growth that will bridge India’s digital divide and exponentially create jobs across the semi-skilled and skilled workforce.