Explained: Unboxing the telecommunications reform package

On September 15, the Union’s Cabinet approved a set of nine structural and procedural reforms to address the short-term liquidity needs as well as the long-term problems of telecommunications companies. While companies have welcomed the move, analysts are skeptical that a three-player telecommunications market will survive unless tariffs rise substantially.

What will be the impact of the reforms on telecom operators?

Of all the measures, one of the most crucial and timely, which analysts say will provide short-term relief to indebted Vodafone Idea and Bharti Airtel is a four-year moratorium on the payment of contributions resulting from the judgment of the Supreme Court of September 1, 2020 on adjusted gross income (TGR). Another four-year moratorium on payment for spectrum purchased in previous auctions, with the exception of the 2021 auction, should also provide relief.

Although the government will charge interest if companies opt for the moratorium, analysts believe it could provide the telecommunications industry with a respite of around Rs 45,000 crore per year for the next four years.

Measures such as streamlining the auction schedule and removing spectrum usage charges (SUCs) from auctions are also expected to lower dues, while helping telecom operators plan their purchase at auction. However, for carriers to benefit from the reduced SUC, they will have to purchase more spectrum in the next auction, analysts said.

To what extent can the measures help save the market for Vodafone Idea?

Although the government insists that these measures would be for everyone, it is Vodafone Idea, with a net debt of nearly Rs 1.9 lakh crore, that will benefit the most in the near future, the officials said. experts. However, the company will urgently need to raise sufficient capital and opt for a significant increase in 4G tariffs for prepaid customers.

“The onus is now on the company to complete its long-delayed capital raising, accelerate network investments, stem subscriber losses and (eventually) increase ARPU (average revenue per customer). user), all of which come with their fair share of challenges. and the uncertainties, ”Citi Research said in a note.

Vodafone Idea will also face increased competition from Reliance Jio Infocomm and Bharti Airtel, which have more breathing space and a manageable debt situation. “The moratorium option is open to everyone. As Vodafone Idea focuses on relaunching, which is a possibility now, Reliance Jio and Bharti Airtel may become more aggressive again, whether in terms of offering better networks and services or extremely competitive rates and extensions ” , said an industry veteran. .

What is the impact of the reforms on government finances?

The government has insisted that since all moratorium offers are made with a protected net present value, it will experience a loss of revenue over the next four fiscal years, even if two of the three private players opt for it.

For the current fiscal year, the government estimated revenue at Rs 53,987 crore from spectrum fees, license fees and other charges. However, most of this sum will have to be waived for four years once the operators have opted for the moratorium.

At the end of the moratorium period, the State will have the possibility for the telecom player to pay the interest resulting from the suspension of payment in equity, and at the choice of the State, to convert the due date into equity. . This, according to experts, will be a challenge for the government to offload participation later if market conditions do not improve.

But how has the financial situation of telecommunications operators deteriorated?

It basically started with the different legal interpretation of the AGR. To understand this, we have to go back to 1999, when the government decided to move from a fixed model to a revenue-sharing model for the telecommunications sector. Telecommunications players would pay a certain percentage of their AGR, coming from telecom and non-telecom revenues, as license and spectrum fees.

The relaxation of this regulatory environment has led a number of players to join the fray. At its peak, India had more than 14 national and regional telecommunications service providers.

In 2003, the Department of Telecommunications (DoT) increased the demand for AGR payments. He said all income earned by telecom operators in the form of dividends from subsidiaries, interest on short-term investments, amounts deducted in the form of merchant rebates, call rebates and the like, which s added to telecommunications service revenues, would be included in the calculation of the AGR.

Telecommunications operators approached the Telecommunications Dispute Resolution Appeals Tribunal (TDSAT), which in July 2006 ruled that the case should be referred to the regulator TRAI for further consultation. TDSAT rejected the government’s claim and the Center took the matter to the Supreme Court. While the case was still pending, in 2012 the Supreme Court overturned 122 telecommunications licenses in the 2G scam case. This has resulted in an overhaul, with spectrum now awarded through auctions.

A rickshaw puller talks on his cell phone as he waits for customers in front of billboards belonging to telecommunications companies in Calcutta in 2014 (Reuters Photo: Rupak De Chowdhuri, File)

What was the Supreme Court’s verdict?

In 2019, the Supreme Court rendered the first verdict in the case, ruling that the definition of the DoT AGR was correct and that telecom operators had to pay the AGR, interest and penalties in the event of non-compliance. -payment.

The judgment turns when the telecommunications industry is under the stress of intense competition from Reliance Jio Infocomm, which entered in 2016. Jio Infocom ended up with dues of over Rs 58,000 crore, which have now climbed at Rs 62,000 crore, while Airtel had to pay over Rs 43,000 crore as AGR dues when judgment was handed down in 2019. Although both players paid part of this sum to DoT, they still owe raise funds to pay off the rest either now or four years later if they opt for the moratorium.

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