At one time there were more than 10. But now the Indian telecom sector has just three major players with the Centre noting that the “churning and consolidation” it has undergone had led to “financial stress on few remaining players”. So much so, that promoters of telecom companies, or telcos, has spoken about the sector being under a “tremendous amount of stress”. But, now, to provide a shot in the arm of these companies and pave the way for the 5G future, the Centre has announced wide-ranging reforms. Here’s what you need to know.
What Relief And Reforms Has The Centre Introduced?
In sweeping relaxations offered to the telecom sector, the Centre said telcos are being given a four-year moratorium on payment of statutory dues. Adding that nine structural reforms have been approved for the sector, Union Telecom Minister Ashwini Vaishnav also said that the Centre has okayed 100 per cent foreign investment through the automatic route. So far, automatic investment was limited to 49 per cent with approval mandated for investment of beyond 49 per cent.
Significantly, the Centre also climbed down from its earlier stance on the definition of Adjusted Gross Revenue (AGR) and said that it shall now exclude non-telecom revenue on a prospective basis.
Among the other structural changes, it said it was allowing a “huge reduction in bank guarantee requirements (80 per cent) against licence fee (LF) and other similar levies” and that it was also doing away with the requirement for multiple bank guarantees for different zones in the country with one bank guarantee to now suffice. Further, no bank guarantees would be needed for spectrum auctions going forward.
There were changed on the spectrum front, too, with the Centre saying that telcos will be permitted to surrender unused spectrum “after 10 years for spectrum acquired in the future auctions”. This will help telcos offload the extra spectrum and remove the need for them to continue paying licence fees on it. It also said that no spectrum usage charge (SUC) would be levied on spectrum acquired in future auctions.
What Are The Other Changes That Have Been Brought In?
Along with the deferment of up to four years in annual payment of “dues arising out of the AGR judgement” (for this, the Net Present Value (NPV) of the due amounts would be protected), the Centre also allowed a four-year moratorium on due payments of spectrum purchased in past auctions (excluding the one coming up in 2021).
Also, it allowed its outstanding claims with the telcos to be converted into equity. The telcos can offer a stake to the government for paying the interest amount arising due to the deferment of payment.
The Centre also introduced procedural reforms pertaining to spectrum auctions, which it said will now be held in the last quarter of every financial year, and replaced the “cumbersome requirement of licences” for wireless equipment with self-declaration. It also permitted app-based self-KYC and said paper customer acquisition forms (CAF) will be replaced by digital storage of data.
In July this year, Bharti Airtel CEO Sunil Mittal had raised red flags about the health of the telecom industry, urging the Centre to take steps to save “India’s digital dream”.
“To say the telecom industry is in a bit of trouble is actually an understatement. It is in a tremendous amount of stress. I hope the government, the authorities, and the telecom department focus on this issue and ensure India’s digital dream remains intact through the provision of at least three operators,” Mittal had said.
Among the telcos, the hardest hit is Vodafone India (VI), with reports saying the company is facing an “existential crisis” over its total dues of about Rs 1.8 lakh crore in March 2021, of which over Rs 96,000 crore was related to its deferred spectrum obligations. Official data said that VI also had an AGR liability of Rs 58,254 crore out of which it had paid Rs 7,854.37 crore and Rs 50,399.63 crore was outstanding.
The reforms announced by the Centre come some six weeks after Kumar Mangalam Birla stepped down as chairman of VI on August 4. He had earlier in June written to the Cabinet Secretary offering his stake in the company to the Centre or any company approved by the Centre.
In the letter, Birla had said that investors were not willing to invest in the company in the absence of clarity on AGR liability, adequate moratorium on spectrum payments, etc. “It is with a sense of duty towards the 27 crore Indians connected by VIL, I am more than willing to hand over my stake in the company to any entity — public sector/government/domestic financial entity or any other that the government may consider worthy of keeping the company as a going concern,” Birla had said.
How Will It Help?
The telecom sector annoucements was cheered by the stock markets and both the Sensex and Nifty jumped to fresh lifetime peaks. Telecom shares were in demand with Bharti Airtel’ share value seeing a 4.53 per cent rise while VI rose 2.76 per cent.
Talking about the benefits that would arise from the move, VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, told PTI that while it would bring big relief “to the cash-strapped sector”, it was a “positive for banks, too, since banks’ exposure too will decline significantly”.
The reforms also hold implications for the next generation of communication technologies with 5G knocking on the doors. The Telecom Equipment Manufacturers Association of India Chairman Emeritus NK Goyal said it paves the way for “Indian designed, developed and manufactured 4G and 5G… in private and PSU (public sector undertaking) telecom operators networks”.
In a statement announcing the reforms, the Union Cabinet said they are “also expected to boost 4G proliferation, infuse liquidity and create an enabling environment for investment in 5G networks”.
What Caused Stress For The Telecom Sector?
The core issue regarding outstanding payments owed by the telcos to the Centre was related to the definition of Adjusted Gross Revenue (AGR). It was on the question of components to be included as part of AGR that the telcos have repeatedly gone to court, but to no avail.
In July this year, the Supreme Court (SC) had turned down a plea by Vodafone Idea, Bharti Airtel and Tata Teleservices for re-computation of their AGR-related dues after having upheld in 2019 the definition of AGR as laid out by the Department of Telecommunications. It was a judgment that meant that private telcos would have to make bigger payments to clear their licence fee and spectrum usage fee as both were calculated on the basis of AGR. At the time of the 2019 judgment, reports had said that the telcos’ combined liabilities, including interest and penalties, was around Rs 1.3 lakh crore, the bulk of it owed by Vodafone Idea and Airtel.
What Is The AGR Issue?
After the telecom sector was liberalised in 1994 and companies were allowed to obtain licences to commence operations, the Centre came up with a revenue-sharing model to provide relief vis-a-vis the payment of the steep licensing fees. Under the model introduced in 1999, telcos were given an option to pay a percentage of their AGR towards their annual licence fee (LF) and spectrum usage charges (SUC).
An issue arose, however, over the definition of AGR. While the Centre said that AGR comprises all revenues from both telecom and non-telecom services, the telcos argued that it should just be limited to the revenue they earned from core services and not include dividend, interests earned from deposits or profit on sale of any investment or fixed assets.
The Cellular Operators Association of India (COAI) challenged the Centre’s definition of AGR in 2005 and, in 2015, the Telecom Disputes Settlement Appellate Tribunal (TDSAT) came up with a verdict that applied certain exceptions to what could be regarded as a component of AGR. However, the Centre went to SC against the decision and in 2019 won a favourable verdict with the top court upholding its definition of AGR.