A 4-year moratorium on AGR contributions will relieve telecom operators for now, but may not stop the bleeding of the balance sheet

The telecom industry relief package, while offering the prospect of an annual cash flow breather of around Rs 45,000 crore to the fund-strapped industry, fails to address the large spots of red already on the balance sheets of the majority of players .

The measures, all forward-looking in nature, also risk missing out on promoting a more sustainable tariff regime which, according to sector players, could have been a boost for players in the capital-intensive sector and other stakeholders, such as like banks which have exposure exceeding Rs 1 lakh crore to telecom companies.

Among the measures, the announcement of a moratorium of up to four years on contributions resulting from the Supreme Court judgment on annual gross income (AGR) and on payments due from spectrum purchased in past auctions, is considered positive in stemming short-term bleeding.

However, those who choose to take advantage of the moratorium will have to pay MCLR + 2% interest, which will effectively protect government revenues.

The rating agency ICRA has assessed that the moratorium on AGR dues provides an annual cash flow respite of around Rs 14,000 crore for the industry, while the moratorium on spectrum royalties gives another Rs 32,000 crore. annual cash flow relief for the industry as a whole.

But this postponement can only provide temporary relief.

“The deferral of AGR contributions cannot be interpreted as a waiver since the package only envisages a four-year moratorium on these AGR contributions from October 1, 2021 (date set) with the interest and penalties accrued for a such postponement. On other issues such as spectrum payments, bank guarantees, etc., relief appears to be prospective in nature. While this will temporarily provide some relief, it does not essentially alleviate the already bleeding balance sheets of telecommunications operators as dues will eventually have to be paid with interest, ”said Akshat Jain, Partner, J Sagar Associates.

In addition, at the end of the moratorium period, the government will offer an option to the telecommunications actor to pay the amount of interest resulting from the deferred payment as equity, and at the option of the government, to convert the entire of the amount owed in equity. The guidelines in this regard will be finalized by the Ministry of Finance.

A banking source close to the development said the measures the government announced “will help the company save money and significantly improve the likelihood of repayment for at least the next 3-4 years.” Another source said the announcements are likely part of a three-way deal in which the government is effectively conveying that “I will provide you with a moratorium, you (the promoters) will bring money into the business, after which the government will be open to exposure to equities. in the company at a later date ”.

A senior executive in the telecommunications industry said this, along with providing 100% FDI automatically, could potentially pave the way for some of the shareholders to phase out from Vodafone Idea in due course. As of June 30, Vodafone Idea’s gross debt was Rs 1.9 lakh crore, including deferred spectrum payment obligations of Rs 1.06 lakh crore and AGR liabilities of Rs 62,180 crore.

In October 2019, the Supreme Court ordered telecom operators to pay Rs 1.19 lakh crore to the Telecommunications Ministry as pending AGR dues. Of this, Vodafone Idea’s dues were Rs 58,254 crore, while Bharti Airtel’s dues were Rs 43,980 crore. However, in September 2020, the Supreme Court granted 10 years companies to make deferred payments of AGR contributions, including penalties, interest and interest on penalties until March 31, 2031.

A major point of contention in the AGR litigation was the inclusion of non-telecom revenues in the definition of adjusted gross revenues, which significantly increased AGR-based levies such as spectrum usage fees and service charges. license (which represent a percentage of the AGR). In Wednesday’s announcement, the government said non-telecom revenues would be excluded from the AGR’s definition “on a prospective basis.”

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Notably, Wednesday’s back-up plan for the telecommunications sector closely followed bankers getting involved in seeking respite for the industry, especially Vodafone Idea. Press Agency Reuters reported earlier this week that a group of banks, led by the State Bank of India, wrote a letter to the government, asking Vodafone Idea for more time to pay its dues. Last month, the telecommunications department had a series of meetings with banking officials, including SBI and Bank of Baroda, to discuss financial issues plaguing the industry.

Sources in the banking industry said the telecom package is a relief for banks as it mitigates the looming possibility of vulnerable operators defaulting. This would help stabilize and reduce non-performing assets in the sector.

“The banking sector’s exposure to telecom players is significant at over Rs 1 lakh crore, including fund-based and non-fund-based books. The four-year moratorium on contributions payable to the government, as well as the easing of bank guarantees, gives telecommunications operators the flexibility to better manage their cash flow. While this gives them time to get their homes in order, the overall liability of telecom operators does not diminish and ultimately they will have to increase tariffs to generate sufficient cash flow, ”said a senior banker from a public sector bank. “As the rationalization in the definition of AGR is only prospective, telecom operators must generate resources, or raise capital, to eventually serve this as well as the payment of bank dues,” said the banker. Among private banks, Yes Bank and IDFC First Bank have significant exposure to Vodafone Idea.

For the year ending March 2021, Vodafone Idea reported a net loss of Rs 46,293.70 crore while Bharti Airtel reported a net loss of Rs 25,197.60 crore. For the quarter ending March 31, 2021, Jio Platforms, the telecommunications unit of Reliance Industries, reported net profit of Rs 3,508 crore, up 47.5% from a year ago.

A long-standing demand for government intervention in setting floor prices for telecommunications, as it has done in the civil aviation sector to protect competition, has failed to find its place in the plan. relief.

Gopal Vittal, MD & CEO (India & South Asia), Bharti Airtel, said: “These new reforms will further strengthen our efforts to invest in this exciting digital future and allow us to be one of the key players in the India’s digital economy. However, there is still a long way to go towards a sustainable tariff regime to ensure the industry gets a fair return. This in turn will allow it to continue to invest in new technologies and innovation to deliver world-class services to its clients. “

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