Can freebies cure ills facing telecom sector?

The government has announced a lifeline for the telecom sector by removing the financial constraints to spectrum sharing, and, more importantly, a four-year moratorium on all spectrum and AGR dues.

Freebies are not new to us and are a sure way to put off a problem but these do not provide a concrete solution. The government has done well to step in by redefining the adjusted gross revenue (AGR), prospectively, not retrospectively and the enhancement of the life of spectrum by 10 years. But is it a panacea for the ills the telecom sector faces?

The government has announced a lifeline for the telecom sector by removing the financial constraints to spectrum sharing, and, more importantly, a four-year moratorium on all spectrum and AGR dues. However, the government has retained the option of converting remaining dues at the end of the moratorium period too, to equity.

Vodafone Idea and Bharti Airtel are the biggest beneficiaries of the new announcements.  Little doubt that Bharti Airtel chairman Sunil Bharti Mittal, Reliance Industries chairman Mukesh Ambani, Aditya Birla Group chairman Kumar Mangalam Birla and Vodafone Group chief executive officer Nick Read welcomed the move. Mittal described the policy steps as seminal reforms, while Jio called them timely steps towards strengthening the sector. Nick Read commended the government’s resolve to find a comprehensive solution “that would support a competitive and sustainable telecom sector in India.

The collapse of Vodafone Idea would have impacted India’s image in attracting foreign investment. These measures will help the company in the short term to continue its operations in India. 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. Welcoming the reforms, Airtel’s MD and CEO Gopal Vittal, said, “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, toward 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.”  India’s largest service provider, Reliance Jio, also welcomed the new reforms, “Telecom sector is one of the prime movers of the economy and the key enabler for making India a digital society. I welcome the Government of India’s announcement of reforms and relief measures that will enable the industry to achieve the goals of Digital India,” said Mukesh Ambani, chairman of Reliance Industries, the parent company of Reliance Jio.

While Vodafone owes the government around Rs 50,000 crore, Bharti Airtel owes the government around Rs 26,000 crore. In fact, the bailout will benefit both the loss-making Vodafone-Idea, and also two other big players, Bharti Airtel and Reliance Jio. Vodafone-Idea which was at the verge of a closure has a total of 1,849.6 MHz of spectrum across different frequency bands of which 1,714.8 MHz is liberalized and can be used towards the deployment of any technology (2G, 3G, 4G or 5G). A further 1,316.8 MHz of spectrum acquired through auctions between the years 2014 and 2016 is valid only until 2034 to

The steps are expected to benefit mainly Vodafone Idea and Bharti Airtel, saddled with large AGR dues. The relief is likely to ease their financial burden, help save jobs in the sector and ensure much-needed competition in the industry. It may be recalled that Vodafone Idea had in August approached the Supreme Court for a review of its 23 July order rejecting a plea from companies to allow the government to correct errors in the computation of AGR dues.

According to experts, the best policy to revive the telecom sector should have been to give free spectrum to a newcomer and apply license fee on average gross revenue as soon as the company captures a certain market share. India now allows 100  per cent foreign direct investment (FDI) in the sector through the automatic route. This signals the return to an investor friendly climate. At least this seems on paper. Currently, 100% FDI is allowed in the sector, but only 49% was on the automatic route, and any investment above that limit required government approval. The 100 per cent FDI, relief on computing dues relating to AGR, adjusted gross revenue, a four-year moratorium on dues, and the option for the government to convert dues into equity after the moratorium period expires are key elements of the relief package approved by the Union cabinet.

There is also a catch. To protect government revenues, companies availing of the moratorium will have to pay interest. This would be at the rate of marginal cost of funds based lending rate (MCLR) plus two per cent. This moratorium would resolve the cash flow problem, and the improved cash flow can be utilized to upgrade technology.  The other structural reform is about spectrum user charges and licence fees and other charges.

No doubt the package comprises a slew of measures of which the most important is a four-year moratorium on adjusted gross revenue (AGR) dues. Further, AGR has been rationalized, with non-telecom revenue to be excluded on prospective basis from the definition of AGR.

Though the range of reforms seems impressive but these need to be complemented with something more to bail out telecom sector.  The AGR, a fee-sharing mechanism between the government and telecom companies, has long been a contentious issue. The government claimed that AGR must include all revenues from both telecom and non-telecom services, While the companies maintained that AGR should pertain to only core services. This burdened Vodafone Idea with dues worth nearly Rs 59,000 crore and Bharti Airtel with about Rs 44,000 crore. Information gathered reveals that Vodafone Idea owes over Rs 23,000 crore to banks. It also has to pay Rs 94,000 crore to the government on spectrum charges. Then there are AGR dues. If the company folds, banks and the government would just get a fraction of sums due to them. The company was staring at bankruptcy because of massive debt, partly because of several charges and duties levied by the government. The collapse of Vodafone Idea would have reduced India to a duopoly.

Few months back, Kumar Mangalam Birla resigned from Vodafone Idea as non-executive director and non-executive chairman. Birla’s partner in the venture, Vodafone Group Plc, also refused to infuse any equity in its joint venture in India. As a consequence, the company faced insolvency.

Indeed, the moratorium gives a new lease of life to telecom sector but the Telecom companies availing of this profit have to pay interest for the period the payment is deferred. They will also have the option to convert the interest payment arising due to the deferment into equity, which will be handed over to the government.  The government has listed the “structural reforms”. These included, apart from the one on AGR, rationalization of bank guarantees (BGs). BG requirements have been hugely reduced against the license fee and other similar levies.

Earlier, multiple bank guarantees were required in different licenced service areas or LSAs. Now one BG will be enough.  Further, for delayed payments of license fee and spectrum usage charge, telcos will have to pay an interest rate 2 per cent lower than they pay now.

Penalty and interest on penalty have been 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.

Also, for future auctions, the tenure of spectrum has been increased from 20 to 30 years. “Surrender of spectrum will be permitted after 10 years for spectrum acquired in the future auctions.”  No spectrum usage charge will be levied on the spectrum acquired in future.