The Telcom Story: Ringing in the Reforms

Abstract

The Government of India has recently announced a set of structural and procedural reforms to protect and generate employment opportunities, promote healthy competition, protect the interests of consumers, infuse liquidity, encourage investment and reduce the regulatory burden on telecom Service Providers. The reforms are in consonance with the Government’s vision of a robust telecom sector characterised with competition and customer choice, antyodaya for inclusive development, and bringing the marginalized areas into the mainstream and universal broadband access to connect the unconnected. The package is also expected to boost 4G proliferation, infuse liquidity and create an enabling environment for investment in 5G networks in India. In this article, the authors analyse the reforms announced by the Government and discuss the upcoming government reforms in the sector and the way forward.

Key-words: Telecom Sector, reforms, FDI, moratorium, AGR.

Introduction

India is currently the world’s second-largest telecommunications market, with 1.16 billion subscribers, and has expanded exponentially over the last decade. The subscribers in India have grown at rate of 33% annually during the period 2000-2010. This staggering growth can be attributed to the technological progress and an enabling policy regime introduced in the last decade of the 20th century. As a result of this progress, wireless technology operators, internet service providers and cell phone operators have expanded resulting into global financial transactions being made easier, improvement in international connectivity, and stimulation of economic progress. The Indian Government’s liberal and reformist policies, as well as strong consumer demand, have aided in the rapid growth of the Indian telecom sector.

The telecom sector today is the backbone of the Indian economy with 4G technology firmly in situ in all private networks. As the result of the COVID-19 pandemic, the importance of the telecommunications sector has further increased as the world has taken notice of the role of telecommunications in maintaining economy activity and has elevated the impact of the telecom sector towards the GDP.  The sector’s contribution in India’s GDP is said to have increased by 5-6 times during this time. Certain major telecommunication players are facing the threat of insolvency with debt levels expected to rise toRs 4.7 lakh crore by March 2022, according to estimates by ratings firm ICRA. The accumulation of AGR (Adjusted Gross Revenue) liabilities in debt, high cost of Spectrum, litigation, is the reason behind the hike in debt levels.

Reforms to address the liquidity requirements of TSPs

The Government of India has announced these reforms in the backdrop of the judgement pronounced by the Hon’ble Supreme Court in the case ofUnion of India v. Assn. of Unified Telecom Service Providers of India (“AGR Judgement”) wherein the Supreme Court dealt with the definition and scope of ‘gross revenue’ and directed the TSPs to make payment of the adjusted gross revenue (“AGR”) dues owed by them to the government in yearly instalments commencing from 01 April 2021 up to 31 March 2031 of every succeeding financial year. Amongst the reforms announced by the Government of India, the one that will provide the biggest relief to the telecom industry saddled in debt is the option of availing a moratorium or deferment of up to four years in annual payments of dues arising out of the AGR Judgement, however, by protecting the net present value (“NPV”) of the due amounts being protected.NPV refers to the current value of a future stream of payments discounted at the applicable interest rate. Further, the TSPs that avail this moratorium have been given theoption to pay by way of equity the interest amount arising out of such deferral. Although, such TSPs will be required to pay interest (MCLR plus 2 per-cent, which is currently9 per-cent),  on the amount availed under the benefit, this move is expected to a provide a short-term breather to the TSPs and allow them to solve liquidity issues and improve their cash flow positions.

While this deferral will certainly provide relief to the TSPs, it is important to note that these reforms are only applicable prospectively and there is no actual reduction in the liabilities of the telecom operators. Moreover, the interest rate to be paid on availing the moratorium is also considerably high and the TSPs will have to swiftly put in place arrangements to raise adequate funds.

Thepress release issue by the Government also states that the Government will have the option to convert the due amount pertaining to the said deferred payment by way of equity at the end of the Moratorium/Deferment period. The Ministry of Finance will issue guidelines that will have the modalities as to how the dues of the telecom operators will be converted into equity. It will be important to analyse the mechanism devised under the guidelines for this conversion as it will involve the subscription of equity securities of public limited companies and various SEBI regulations pertaining to private placement and takeover are likely to be triggered.

The government has also reviewed the extant FDI policy with respect to the telecom sector and has amended paragraph 5.2.14 of the consolidated FDI Policy Circular of 2020 issued by the Department for Promotion of Industry and Internal Trade (“DPIIT”) (“FDI Policy”) viaPress Note 4 (2021 series) dated 6 October 2021 (“PN 4”) to allow 100% foreign direct investment under the automatic route against the previously allowed cap of 49% subject to the terms and conditions as specified by the Department of Telecommunications (“DoT”). PN 4 also clarifies that paragraph 5.2.14 of the FDI Policy will continue to remain subject to the provisions of paragraph 3.1.1 of the FDI Policy (as amended videPress Note 3 (2020 series) dated 17 April 2020) (“PN 3”) which states that an entity of a country that shares a land border with India, or where the beneficial owner of investment into India is situated in or is a citizen of any such country, can invest only through the Government route i.e. after obtaining prior approval from the Government of India. While PN 3 clearly prohibits foreign direct investment by an entity based in a country that shares a land border with India, there is a lack of clarity on how the terms ‘beneficial ownership’, ‘control’ and ‘indirectly’ used in PN 3 are to be interpreted. Given that the Government is pushing for attracting more foreign investment in the telecom sector, it will be beneficial if DPIT provides clarity on the interpretation of these terms which will allow potential investors to make a more informed decision.

Structural Reforms

In addition to these reliefs, the Government has also announced a set of structural reforms. Rationalization of AGR is also a welcome move. Non-telecom revenue will now be excluded from thedefinition of AGR. However, this reform will not have any bearing on the past dues of the TSPs and will be applicable only on a prospective basis.

Bank Guarantee (“BG”) requirements have been reduced against license fees and other levies of similar nature. From now on, multiple BGs will not be required in different Licenced Service Areas (LSAs) regions in the country and one BG will suffice. For Auctions held henceforth, no BGs will be required to secureinstalment payments.

Interest rates have been rationalized and penalties have been removed. From 1st October, 2021, Delayed payments of license fee/spectrum usage charge will attract interest rate of SBI’s MCLR plus 2% instead of MCLR plus 4%. Interest shall be compounded annually instead of monthly. Further, penalty and interest on penaltyhas been removed.

The spectrum tenure for future auctions has been revised from 20 years to 30 years. Surrender of spectrum will be permitted after 10 years for spectrum acquired in future auctions. The TSPs will not be required to pay spectrum usage charge (“SUC”) for any spectrum acquired in future auctions. In order to encourage spectrum sharing, an additional SUC of 0.5%has been removed.

 Spectrum can be categorised as one of the most critical inputs in mobile telecommunications. Owning a larger quantity of contiguous spectrum improves operational efficiency and provides a competitive edge to such TSPs. India is considered to have the highest spectrum costs in the world pegged at approximately 7.6% of the aggregate revenue. Following India are Thailand (7.3%) and Bangladesh (7%) respectively. As compared to the global average of 50 Mhz, spectrum holding by average operators in India is also considerablylimited at 31 Mhz.

Regulators of different countries have  reduced the cost of mobile broadband services by making more spectrum available and assigning it in ways other than auctions designed to maximise government revenue. This leads to increased coverage and reduced rates for consumers in a competitive market. When it comes to assigning spectrum to mobile operators,  the model adopted by Saudi Arabia has  been very successful. The Communications and Information Technology Commission of Saudi Arabia madeextra spectrum accessible to mobile operators at no cost in 2020, at the start of the pandemic . As a result, this enabled them to meet the rising demands for broadband services.

The transition to 5G technology is gaining traction across the world with some countries such as South Korea, the front runner in terms of5G deployment has already surpassed 12 million 5G subscribers and is on track to reach the 90% penetration mark (around 36 million subscribers) by 2026. The Competition Commission of India after conducting amarket study on the telecom sector in India stated in its key findings and observations stated that the 5G revolution is happening faster than the transition to any previous access technology.

Spectrum allocation will be key to the rollout of 5G services in India. While acquisition of spectrum in India is considered to be more expensive as compared other similarly placed countries, the structural reforms announced by the Government will go a long way in reducing the costs incurred by the TSPs. For a successful rollout, the availability of technology will not be a concern as much as the need for a competitive and robust market as the communications technologies including 5G Standards are largely globally developed and coordinated. Given the current financial health of some of the TSPs, there is a concern that the more profitable players would be able to dominate the auctions resulting in an uneven speed of adoption of 5G by the TSPs in India. Ensuring market feasibility for the acquisition of spectrum at a reasonable cost balancing revenue realisation and allowing 100% foreign direct investment through the automatic route will help the telecom sector to remain competitive.

Procedural Reforms

A set of procedural reforms has also been announced to promote ease of doing business and increase efficiency. The auction calendar has been fixed and going forward, auctions from spectrum will normally be organized in the last quarter of every financial year. The requirement of licenses under 1953 Customs Notification for wireless equipment has been replaced withself-declaration.

Know Your Customer (“KYC”) reforms have also been announced. Self KYC (app-based) has been permitted. E-KYC rate has been revised to INR 1 only. Fresh KYC will no longer be required for shifting from post-paid to pre-paid andvice versa.

Paper Customer Acquisition Forms (“CAF”) will be replaced by digital storage of data. Nearly 300-400 crore paper CAFs lying in various warehouses of TSPs will not be required. Warehouse audit of CAF will also beno longer required.

The Standing Advisory Committee’s clearance on Radio Frequency Allocation for clearance for installation of mobile towers and allocation of radio frequency waves has been streamlined and the DoT will now accept data on a portal on self-declaration basis.[i] Portals of other agencies (such as Civil Aviation) will be linked with theDoT Portal.

Aid to the banking sector

The reforms announced to address liquidity requirements of the telecom players will also help the banks having exposure to these telecom players which is considered to beexceeding 1 lakh crores comprising fund-based and non-fund based books The moratorium of four years on the AGR dues payable to the Government will help in stemming the cash flow bleed and reduce the risks of these TSP defaulting on their repayment obligations with banks and being declared as non-performing assets.

Future reforms and way forward

Government officials have stated a new set of reforms will be announced shortly. These reforms will be aimed at creating a robust telecom market with strong TSPs who can expand overseas and at the same time reach the remotest corners of India. Spectrum pricing will be such that that it allows all players to compete and also have enough funds to undertake research and innovation and increase the standards of the products and services provided by them.

The Government is also said to be working on the modalities of auctions to be held in the future with a focus on the pricing of spectrum and terms of payment. The intent here is to reduce litigation in this sector and ensure that there is the stability of policy and license terms as currently the Government and the telecom plays have been involved in a large number oflitigations mostly arising from either the calculation of tax or the cause of tax is disputed.

There have also been news reports that the Government is considering withdrawing the case relating toone-time spectrum charges amounting to Rs 40,000 crore against the telecom operators.  It is believed that changes are also being proposed in the space communication policy which is expected to be released shortly.Wireless space communication is expected to assist in increasing the customer base as well as revenues by focusing on India’s rural sector.

It remains to be seen whether a long-standing demand of the TSPs asking the Government to set floor prices of tariffs for providing services will be accepted by the Government in the upcoming reforms.

With the reforms announced by the Government, the Indian telecom sector is at the cusp of entering into the next era, one that will be dominated by the digitals services provided by the TSPs. However, there are several obstacles standing in the way of achieving the objective of robust Indian telecom market with strong players who can compete with their global counterparts and at the time reach the remotest corners of India. The deferral payment of AGR dues is only temporary relief and the TSPs will have to organize sufficient funds to pay the dues in four years’ time along with interest. Bridging the digital divide, expanding the network and telecommunications services to the rural areas, a sustainable tariff regime and the successful and timely rollout of 5G services are some of the major challenges the telecom sector will face. The onus is also on the TSPs to arrange capital infusion to pay off the AGR dues, plan for network investments, stem subscriber losses and at the same time formulate a sustainable tariff policy.

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