Helping hand for Telecom

Sep 16 – Helping hand for Telecom – https://youtu.be/QQDo7LMUVMI 

ECONOMY/ GOVERNANCE

• GS-2: Government policies and interventions for development in various sectors and issues arising out of their design and implementation.
• GS-3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.
• GS-3: Infrastructure: Telecommunications etc.

Helping hand for Telecom

Context: Indian telecom industry has grown exponentially over the last two decades. It has also gone through consolidation. However, increasing competition, costly spectrum and decline in revenue has hurt the industry. The government has tried it’s best to bail it out. In its recent effort, the cabinet announced a number of decisions, which might help the industry to recover from its bad phase.

• 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. 

Decisions by Cabinet to provide Relief

• 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

Significance of the Decisions taken

• 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.

Measures such as streamlining of the auction calendar and removal of the spectrum usage charges (SUC) from auctions, too, are likely to bring down the dues outgo, while helping telcos plan their auction purchase. For the telcos to benefit from the reduced SUC, however, they will have to buy more spectrum in upcoming auctions.

How far can the measures be expected to help save Vodafone Idea’s market?

Although the government insists these measures would be for everyone, it is Vodafone Idea, with a net debt of close to Rs 1.9 lakh crore, that will benefit the most in the near future. The company, however, will need to raise adequate capital urgently, and go for a sizeable hike in 4G tariff for prepaid customers.

Vodafone Idea will also have to fend off increased competition from Reliance Jio Infocomm and Bharti Airtel, which have more breathing space and manageable debt situation. The option of moratorium is open for all. While Vodafone Idea focuses on revival, which is a possibility now, Reliance Jio and Bharti Airtel can go back to being more aggressive whether it is in terms of offering better network and services or extremely competitive tariffs and add-ons.

How do the reforms impact the government’s finances?

The government has insisted that since all the moratorium offerings are done with net present value protected, it will face some revenue loss in the next four financial years even if two of the three private players opt for it.

For the current financial year, the government had estimated receipts of Rs 53,987 crore from spectrum usage charges, licence fee levies and other levies. The bulk of this, however, will have to be forgone for four financial years once the telcos opt for the moratorium.

At the end of the moratorium period, the government will have to provide an option to the telecom player to pay the interest arising out of the deferment of payment by way of equity, and at the option of the government, to convert the due into equity. This will be a challenge for the government to offload the stake later if market conditions do not improve.

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

Can you answer the following question?

How did the financial condition of the telcos deteriorate? Examine the Supreme Court verdict.