Union Cabinet clears a relief package for the stressed telecom sector

The Union Cabinet approved a number of structural and process reforms in the Telecom sector. These are expected to protect and generate employment opportunities, promote healthy competition, protect interests of consumers, infuse liquidity, encourage investment and reduce regulatory burden on Telecom Service Providers (TSPs).

In the backdrop of the outstanding performance of the Telecom Sector in meeting COVID-19 challenges, with huge surge in data consumption, online education, work from home, interpersonal connect through social media, virtual meetings etc., the Reform measures will further boost the proliferation and penetration of broadband and telecom connectivity. The Cabinet decision reinforces the Prime Minister’s vision of a robust Telecom Sector. With competition and customer choice, antyodaya for inclusive development and bringing the marginalized areas into the mainstream and universal broadband access to connect the unconnected. The package is also expected to boost 4G proliferation, infuse liquidity and create an enabling environment for investment in 5G networks.

The relief package for the telecom sector includes a four-year moratorium on payment of statutory dues, including AGR, unpaid dues and spectrum dues by telecom companies; as well as allowing 100% foreign investment through the automatic route.

The definition of AGR, which had been a major reason for the stress in the sector, has been rationalised by excluding non-telecom revenue of telecom companies. AGR refers to revenues that are considered for payment of statutory dues.

Telecom Minister Ashwini Vaishnaw at a press briefing in New Delhi.
“The reforms are deep and broad. They are structural. These reforms will bring in change today, tomorrow and in the future. I do not like to put a number on the package as it is revenue-neutral for the government. The moratorium will not impact the government’s revenue.

PM Modi took a bold decision over AGR (adjusted gross revenue) today. A decision has been taken to rationalise the definition of AGR. All non-telecom revenue will be taken out of AGR. There was a regime of heavy interest, penalty & interest on penalty on payment of license fees, spectrum user charges and all kinds of charges. It has been rationalised today. Annual compounding (of interest) will be done instead of monthly compounding. A reasonable interest rate of MCLR + 2% interest rate has been offered and the penalty has been completely scrapped. This will pave way for large-scale investments in the telecom sector. Investment means employment – more the investment, more the employment.

For future auctions, duration of spectrum will be 30 years instead of 20 years. Also if someone takes spectrum & business conditions/technology changes then after a lock-in period of 10 years it can be surrendered by paying spectrum charge. Spectrum sharing is also being completely allowed, it has been made completely free.

The reforms are applicable from October 1 and none of them are with retrospective effect.

Competition is extremely important for telecom industry to offer choice to customers. This right has to be protected. The reforms are to ensure healthy competition and attract new players.

There will be further reforms when 5G spectrum is auctioned.”

The Centre has announced 100 per cent foreign direct investment (FDI) in the telecom sector through the automatic route as part of its comprehensive package for the telecom sector. “100 per cent FDI (Foreign Direct Investment) in telecom via the automatic route was approved by the cabinet. Till date, up to 49 per cent investment was allowed through the automatic route and any investment beyond 49 per cent had to be routed through the government.

The 100 per cent automatic route, however, will not be applicable to investors from countries such as China and Pakistan due to an existing policy in that regard. In April 2020, the government had imposed regulations on foreign direct investments originating from countries that share a land border with India to thwart any hostile takeover of domestic businesses.. The restrictions were also a part of the retaliatory measures unveiled by the government following the border skirmishes with China.

The relief package provided much-needed relaxation to telecom companies — Vodafone Idea, Reliance Jio and Bharti Airtel. “These are expected to protect and generate employment opportunities, promote healthy competition, protect interests of consumers, infuse liquidity, encourage investment and reduce regulatory burden on Telecom Service Providers (TSPs),” the Cabinet said.

Nine structural reforms and five procedural reforms plus relief measures for the Telecom Service Providers are approved.
Structural reforms

• Rationalization of Adjusted Gross Revenue. Non-telecom revenue will be excluded on prospective basis from the definition of AGR.
• Bank Guarantees (BGs) rationalized. 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.
• Interest rates rationalized/ penalties removed. From October 1, 2021, delayed payments of License Fee /Spectrum Usage Charge 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.
• 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 Spectrum Usage Charge (SUC) for spectrum acquired in future spectrum auctions.
• Spectrum sharing encouraged- Additional SUC of 0.5% for spectrum sharing removed.
• To encourage investment, 100% Foreign Direct Investment (FDI) under automatic route permitted in telecom sector. All safeguards will apply.

Procedural Reforms 

• 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 will be linked with DoT Portal.
  
  Addressing liquidity requirements the Cabinet approved 
• 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 finalized by the Ministry of Finance.

VIL has an adjusted gross revenue (AGR) outstanding liability of Rs 50,399.63 crore. Its gross debt, excluding lease liabilities, stood at Rs 1,80,310 crore as of March 31, 2021. The amount included deferred spectrum payment obligations of Rs 96,270 crore and debt from banks and financial institutions of Rs 23,080 crore apart from the AGR liability.

Bharti Airtel’s net debt at the end of the June 2021 quarter stood at over Rs 1.59 lakh crore.

INDUSTRY LAUDS DECISION
Sunil Bharti Mittal, Chairman, Bharti Enterprises
“We welcome the Government’s seminal reforms that herald a new dawn for the telecom industry which is at the core of Digital India.
We congratulate and thank the Government, who under the decisive leadership of the Hon’ble Prime Minister Shri Narendra Modi, has undertaken these seminal reforms to lift an industry that’s at the core of his 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 respond to the call by the Hon’ble Prime Minister to invest in and accelerate India’s growth. What lies ahead is a once in a lifetime opportunity to build the digital infrastructure that is a catalyst for the digital aspirations of over one billion Indians.”

Kumar Mangalam Birla, Chairman,  Aditya Birla Group
“The reform measures are path-breaking, that 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. The measures also reflect the decisiveness of the government to address long-standing issues”.

Nick Read, CEO,  Vodafone Group
“Although the sector has struggled for many years, we expect that the government’s constructive initiative announced today will be the beginning of a new era for India’s digital ambitions.”

Mukesh Ambani, Chairman, Reliance Industries
“Telecom sector is one 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. I thank Hon. Prime Minister for this bold initiative.” 

Lt. Gen. Dr. S.P. Kochhar, Director-General, COAI.
“We welcome the Government’s bold and forward-looking decision on the much-needed reforms for the telecom sector. We thank the Hon’ble Prime Minister for recognizing the telecom industry as a critical infrastructure, which has played a vital role for the growth of the economy during this pandemic. The decision announced by the Hon’ble Minister of Communications 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.

Sameer Chugh, Partner, Cyril Amarchand Mangaldas.
“The relief package announced by the Government is a welcome step towards strengthening the industry and ensuring survival of players to maintain healthy competition for the benefit of the customers. The removal of non-telecom revenues from the definition of AGR and the removal of penalty is a much needed change that has been brought in. This extra burden has hurt the telecom industry in the past and will now pave the way for telecom players to make higher capital investments.”

T R Dua, Director General, Digital Infrastructure Providers Association
“This initiative shall not only boost the proliferation and penetration of broadband and telecom connectivity but also boost the creation of robust digital infrastructure in the country.”

Sandeep Aggarwal, Chairman,  TEPC
“We need support from the government and private players to use ‘Made In India’ products. Unless the domestic sector uses Indian technology and products.”

General Chandrajit Banerjee, Director, CII
“The reforms will go a long way in restoring the sector’s financial stability and ensuring healthy competition and strong players.”

NK Goyal, Chairman Emeritus, Telecom Equipment Manufacturers Association
“Compliments to the PM and Minister Ashwini Vaishnaw for removal of non-telecom revenues for AGR, self-declaration for telecom towers,  four year moratorium, 100% FDI in automatic route, spectrum sharing, removing 1953 Customs Order and promoting Atmanirbhar Telecom.”

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.”

Deutsche Bank
“The acceptance of this principal could generate a lot of confidence for VIL long term future -although shareholder dilution will likely keep the investing case somewhat questionable.”

Goldman Sachs
“VIL will require about USD 9.5 billion of capital in the next four years to arrest its market erosion. And it will need as much as USD 12.8 billion if it also wants to be in the 5G game. With spectrum auctions to be held early next year, VIL has to participate or lose out.

Thanks to the moratorium, the company will not have to pay over Rs 16,200 crore annually as AGR and spectrum payments for four years, thereby improving its cash flow significantly. But it may still have to go for a tariff hike, increase its revenues and stop the tide of losing customers to improve its EBIDTA. It will also need an investor to pump in about Rs 25,000 crore, as its ability to absorb more debt is limited.

With the government increasing the licence period from 20 to 30 years for 5G and also providing a window to convert the additional interest to be paid during the moratorium into equity, it ought to be easier for VIL to get a partner.”

Akshat Jain, Partner,  J Sagar Associates
“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 October 1, 2021, with the interest and penalties accruing for such deferral.”

Sonam Chandwani,  Managing Partner, KS Legal & Associates
“This will give troubled telecom carriers like Vodafone Idea much-needed breathing room as they pay crores of rupees in unprovisioned previous statutory dues. However, liability is only postponed, not erased. The banks might heave a sigh of relief as their fear of default is postponed. But it is unclear how VIL will pay its obligations and the additional interest in the moratorium period.”
CT Bureau