Telecom Relief Package: 4-year moratorium on AGR dues

ECONOMY/ GOVERNANCE

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Telecom Relief Package: 4-year moratorium on AGR dues

Context: Recently, the Union Cabinet approved relief measures for telecom sector which include the following:

• Four-year moratorium on payment of statutory dues by telecom companies, both AGR and spectrum charges 
• Simplified Definition of AGR: The definition of AGR has been rationalised by excluding non-telecom revenue of telecom companies on a prospective basis (from now onwards)
  • Telecom operators are required to pay licence fees and spectrum charges in the form of ‘revenue share’ to the government
  • The revenue amount used to calculate this revenue share is termed as Adjusted Gross Revenue or AGR
• Relaxation in FDI: 100 per cent FDI in telecom via the automatic route has been approved (earlier 49%)
• Charges Rationalised: The regime of heavy interest, penalty and interest on penalty on payment of licence fees, spectrum charges and all kinds of charges has been rationalised. 
• Reduced Interest: The Centre will do annual compounding of interest instead of the monthly compounding. The interest would be charged at a ‘reasonable’ rate of MCLR plus 2%.
  • MCLR refers to the lowest lending rate banks are permitted to offer — the marginal cost of funds-based lending rate.
• Long periods of spectrum usage: Spectrum auctions will be held in the last quarter of every financial year. Spectrum auction will be done for 30 years, instead of 20 years. After completing 10-years lock-in period, the buyer will have the option to surrender by paying surrender charges. 
• Ease of doing business: Spectrum sharing has been completely allowed and made free. Also, shifting between prepaid, post-paid to not require fresh KYC

What is the background of these reforms?

• In October 2019, the Supreme Court had ordered telecom operators to pay Rs 1.47 lakh crore to the Department of Telecommunications as pending AGR-dues
• However, in September 2020, the Supreme Court had granted 10 years to the telecom companies to clear their AGR dues of around Rs 1.47 lakh crore to the Centre.
• These AGR dues (along with disruption caused Jio’s entry) had impacted the cash flow of various telecos that had wider impact on the Telecom sector itself. There were fears about a duopoly emerging with just two major telecom players — Bharti Airtel and Reliance Jio.
• However, the government was keen on ensuring that there were more players in the sector and customer retaining choices. Competition in the sector will always lead to better prices and better technology. 

Significance

• Relief to multiple Telecos: The package provides relief for debt-ridden Vodafone Idea which still owes roughly Rs 50,000 crore to the government as AGR dues. It also provides relief to Tata group (dues of Rs. 12,601 crores) and Aircel (Rs. 12,389 crores). 
• Relief for the cash-strapped telecom sector.: Moratorium on AGR dues provides an annual cash flow relief of around ₹14,000 crore for the industry while the moratorium on spectrum dues gives another ₹32,000 crore of annual cash flow relief as a whole.
• The reform package, therefore, provides telcos the flexibility to manage their cash flows better and boosts growth in the telecoms industry
• Safeguards Banking Health: Banking sector’s exposure to the telecom players is significant at over Rs 1 lakh crore. The telecom package comes as a relief to the banks as it prevents the possibility of default by vulnerable telecos (Vodafone). This would help in stabilising and reducing the non-performing assets in the sector. 
• Boost to Digital future: These fresh reforms will further boost telecos efforts to invest in future digital technologies and preparing the infrastructure for India’s digital economy.

Concerns

• Past Dues remain: The change in definition of AGR that will reduce the burden on telcos, applies only prospectively, so those past dues remain payable.
• Temporary Measure: While it provides time to put their house in order, the telcos’ overall liability does not come down and ultimately they will have to raise tariffs to generate sufficient cash flows. AGR dues will have to be paid with interest. 
• Unfulfilled Demands: A long-standing demand for the government’s intervention in setting telecom floor tariffs, as it has done in the civil aviation sector to protect competition, did not find a place in the relief package

Connecting the dots:

• AGR Crisis
• PLI Scheme for Telecom