On September 15, 2021, the Union Cabinet approved major structural and procedural reforms in the telecommunications sector with the aim of protecting and generating employment opportunities, promoting healthy competition, protecting consumer interests , inject liquidity, encourage investment and reduce regulation. burden on telecommunications service providers (“FST“).1 This government decision, together with the recent Supreme Court ruling in the Union of India v Association of Unified Telecommunications Service Providers of India2 September 1, 2021, comes as a respite for India’s struggling telecommunications industry.
To understand the judgment, it is relevant to discuss the context of this case. The dispute arises from the adjusted gross sales (“AGR“) Contributions owed by TSPs to the government in relation to their revenue sharing obligations under license agreements with the government. The definition of AGR in these license agreements has been a controversial issue for over 15 years. In 2003, the Association of Unified Telecommunications Service Providers of India filed an application with the Telecommunications Dispute Settlement and Appeal Tribunal (“TDSAT“), alleging that the AGR should only relate to revenues derived directly from the TSP’s licensed telecommunications operations. However, the government argued that the contributions were payable out of the aggregate revenues of the TSPs. The TDSAT issued an order in in favor of TSPs and estimated that the AGR would only include revenues from licensing activities.3 This decision was appealed to the Supreme Court in 2011, where the court ruled that the TDSAT did not have the jurisdiction to decide the validity of the terms and conditions of the license, including the definition of the AGR and the TDSAT ordinance were set accordingly. next to.4
The TSPs subsequently appealed this Supreme Court decision. However, the court refused to change the definition of the AGR. The Supreme Court, in its judgment of October 24, 2019, upheld the definition of AGR as envisaged in the licensing agreements and stated that “The definition in the agreement is unambiguous, clear and beyond any doubt, and there is no confusion in the definition of gross income, which is the basis for the realization of the royalty. The licensees made a futile attempt to evade the definition by an indirect method, which was rejected directly in the 2011 decision between the parties and these same counts were found to be part of the gross income.5
While the Court maintained its position on the non-reassessment of the claims raised by the Department of Telecommunications (“Point“) as regards the AGR contributions, however, it granted relief to the TSPs with regard to the payment of these contributions on 1 September 2021. It was ruled that the TSPs would be authorized to make the payment of said contributions in 10 installments annual ending March 2031. The Apex Court has seen fit to provide a staggered payment schedule to TSPs given their financial stress as well as the banking industry’s involvement in it.
Following this Supreme Court ruling, the government announced substantial reforms as part of an aid plan for the telecommunications sector. The main measures are described below:
- Rationalization of the AGR: The very controversial question of the definition of IGA has finally been decided by the government in favor of TSP. Non-telecom revenues were prospectively excluded from the definition of the AGR. However, as its application is not retrospective, this reform will have no impact on the former AGR contributions of companies.
- Relaxation of bank guarantees to furnish: Bank guarantee requirements against license fees and other similar charges have been reduced. Now there are no more requirements to provide multiple bank guarantees in different authorized service areas in the country. A single bank guarantee would suffice for the purposes of royalties and other charges. In addition, no bank guarantee would be required to secure installment payments in spectrum auctions.
- Elimination of penalties and reduction of interest: As of October 1, 2021, any deferred payment of license fees or spectrum usage fees will result in reduced interest which is compounded annually instead of monthly. In addition, penalties and interest on penalties have been removed.
- 100% foreign direct investment in the telecommunications sector: Previously, government approval was required for foreign direct investment (“IDE“) in the telecom sector above the 49% limit. Now 100% FDI under the automatic route is allowed.
- 4-year moratorium: As a result of the recent Supreme Court ruling discussed above, a moratorium of up to four years on annual payments of AGR dues has been approved with protection of the net present value of the amount owed. TSPs that take advantage of this moratorium will be able to pay the amount of interest resulting from said deferred payment on an equity basis. The government will be able to convert these equity funds at the end of the moratorium period, the guidelines for which will be finalized by the Ministry of Finance.
- Encouragement of spectrum sharing: TSPs are required to pay spectrum usage fees for spectrum sharing in accordance with relevant DoT guidelines.6 However, these fees below would not apply to spectrum acquired in future spectrum auctions. In addition, the spectrum duration has been increased from 20 to 30 years and the spectrum transfer will be authorized 10 years after the spectrum is auctioned.
- Relaxation of compliance requirements: To promote ease of doing business in India, the onerous licensing requirement under Customs Notification (1953) for wireless equipment has been removed and replaced with self-declaration. In addition, other measures such as self-knowledge of your customers were allowed, paper customer acquisition forms (“FAC“) must be replaced by digital data storage and the CAF warehouse audit will not be required.
These measures7 will stimulate the telecommunications industry. The reforms were announced at a critical time for the industry and could be a game-changer for TSPs. Numerous amendments to license agreements, DoT and Telecommunications Regulatory Authority of India notifications, and DoT guidelines are expected to be made to implement these changes.