What will be the impact of the government’s emergency plan on the sector? Is there clarity on spectrum license fees and dues?
The story so far: The Union cabinet on Wednesday approved a package of financial aid measures to help large struggling telecommunications companies. Companies such as Vodafone Idea and Bharti Airtel have seen their businesses hit hard by government financial demands and fierce competition. In 2019, the Supreme Court ordered telecommunications companies to pay the government dues worth more than 1.4 lakh crore, which they have yet to complete.
Why are telecommunications companies in trouble?
Telecommunications companies have traditionally paid a fixed fee to purchase spectrum on lease from the government. Since 1999, however, in addition to spectrum license fees, they must also share a certain proportion of their adjusted gross revenues (AGR) with the government. The government and the telecommunications companies disagree on what counts as AGR. The companies argued that the government cannot classify their non-telecom revenue as AGR and demand a share of it. The dispute landed in the courts and ultimately ended in favor of the government, with the Supreme Court ordering the companies to pay all of their accumulated AGR dues. The order put enormous pressure on the balance sheets of companies that were already struggling due to an intense price war.
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What concessions are offered by the government?
The Center has offered companies a four-year moratorium on spectrum and AGR dues to relieve them of their financial stress. They can now opt for the payment of these contributions and the interest accrued on them at the end of the moratorium period. If a company is unable to pay the accumulated contributions at the end of the moratorium, it can negotiate with the government to give it a stake in the capital instead of the accumulated contributions. In addition, the government has relaxed its policy in order to reduce future commitments by companies. He said they do not have to share with the government the income they receive from sources other than telecommunications. In addition, to facilitate investment in telecommunications companies, the Center allowed 100% foreign direct investment without the need for government authorization. It also relaxed bank guarantee requirements against license fees and removed penalties for late payment of fees.
Will the measures help telecommunications companies?
The relief measures announced by the government are expected to free liquidity from companies’ balance sheets. The hope is that they will use this money to invest in expanding and strengthening their business, thus becoming more able to repay their dues. It should be noted that the government has not agreed to waive the contributions that businesses already owe the government or the contributions that will occur over the next four years. Analysts, however, consider the government’s decision to waive charges on future non-telecom revenues important because it ends the two-decade controversy in the telecoms industry over what matters like AGR. Skeptics of the plan believe it won’t ease the pain of companies like Vodafone Idea, which has a total debt of nearly 2 lakh crore. In fact, analysts say, the government’s offer to convert companies’ spectrum and AGR dues into equity could bring Vodafone Idea into government control. This risk could deter investors from injecting new capital into the business.
Are telecom tariffs going to increase?
One of the main reasons for the crisis in the telecommunications sector has been intense competition. This has led to an overwhelming supply of telecom services, in turn resulting in lower prices which has made India a country with one of the lowest telecom tariffs in the world. So, some believe the government should let struggling telecom companies like Vodafone Idea go bankrupt and exit the market, just like other telecom companies have done in the past. This will lead to lower supply and higher prices. The last major rate hike was in December 2019. A further rate hike is expected as businesses attempt to increase their average revenue per user to match rising costs.