The federal cabinet offered the telecom industry a four-year moratorium on Wednesday on payment of adjusted gross revenue and spectrum dues starting on October 1, throwing a reprieve to debt-laden entities, particularly Vodafone Idea Limited, and give them a chance to better manage cash flows in the interim.
To encourage investment, 100% Foreign Direct Investment (FDI) under the automatic route was permitted in the telecom sector by the cabinet, the government said in an announcement welcomed by the top two industry players as a boost to the Digital India initiative.
The government made it clear that the moratorium will carry an interest burden of the marginal cost of funds based lending rate, or MCLR, + 2 percent, making it revenue- neutral for the exchequer. All relief measures are prospective in nature.
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The announcement of a raft of structural changes is particularly welcome for Vodafone India, whose annual AGR dues are estimated at Rs. 8,000 crore and annual spectrum dues at 16,000 crore by analysts.
With the additional interest burden, estimates suggest that around Rs 2000 crore of finance charges will be added to Vodafone Idea’s annual interest payments because of the relief offered by the government.
AGR is the spectrum usage and licensing fee that telecom operators are charged by the Department of Telecommunications, or DoT. (MCLR) is the minimum lending rate below which a bank is not allowed to lend money to its customers.
If business prospects improve and tariffs increase, the relief may prove to be a game changer for Vodafone Idea, said analyst Naveen Kulkarni of Axis Securities Limited.
Nitin Soni, an analyst at Fitch Ratings, made light of the relief. “It’s a minor relief and not a life-saving measure for Vodafone Idea,” said Soni.
Vodafone Idea under stress:
Soni noted that Vodafone Idea was losing subscribers and may lose still more, which will make the interest burden difficult to service for the company. It will also not be able to commit any capital expenditure to spur growth, he said.
Many industry experts say the relief measure have been designed by the government to avoid a potential duopoly in the telecom sector.
Vodafone Idea has been struggling to survive in a difficult business environment and cope with the added burden of AGR dues worth Rs 58,254 crore assessed by DoT.
Vodafone Idea’s debt stands at Rs 1.8 lakh crore, which includes spectrum obligations amounting to Rs 94,200 crore.
Focus on spectrum auctions:
The cabinet also announced some path-breaking measures for the spectrum auctions. The government has come up with a spectrum auction calendar, offering telecom companies certainty of the timing of sales and a chance to plan in advance. Spectrum auction will be held in the last quarter of the financial year.
In future auctions, the tenure of spectrum was increased from 20 to 30 years. A surrender of the airwaves will be permitted after 10 years of being acquired in future auctions.
No spectrum usage charge (SUC) will be levied for airwaves acquired in future spectrum auctions. Spectrum sharing was encouraged with the removal of an additional SUC of 0.5% for such sharing.
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The National Democratic Alliance government is banking on the upcoming 5G spectrum auctions to raise money. Relief for the telecom companies ties will boost their ability to participate in the auctions.
Moneycontrol had earlier reported that top banks had written to the government for a reconsideration of the AGR dues, especially Vodafone Idea’s, to provide comfort to the lenders to fund telecom companies to participate in the auctions.
Banks have not been comfortable with their exposure to the telecom sector at a time when one of the three private entities was struggling to manage its cash flows.
More telecom reforms:
Out of the nine structural changes announced by the government, five are procedural for ease of doing business.
The cabinet also cleared the new AGR definition, which has been changed to exclude non-telecom revenues. Telcos will not be charged interest on interest and penalty on dues. Interest will be charged on an annual basis compared to monthly earlier.
In other measures, the cabinet approved simplification and digitisation of processes in telecom tower set-ups, and gave its assent for equipment purchases and customer acquisitions.
Under the Make in India initiative, 4G and 5G technology to be designed and developed in India will receive additional focus. The technologies can even be exported in the future.
VI's response:
“The pathbreaking reforms announced by the government today will go a long way in unshackling the telecom sector. These reforms demonstrate the government’s firm commitment to ensuring healthy growth of the industry. The measures also reflect the decisiveness of the Prime Minister, the Telecom Minister, and the government to address long-standing issues. These reforms will bring alive the digital aspirations of 1.3 billion people and accelerate India’s journey to be a digitally powered economy as envisaged by our Honorable Prime Minister,” Aditya Birla Group's Chairman Kumar Mangalam Birla said in a statement.
“We commend the resolve shown by the Government of India, under PM Modi’s leadership, to find a comprehensive solution that would support a competitive and sustainable telecom sector in India," Vodafone Group's CEO Nick Read said.
"Although the sector has struggled for many years, we expect that the government’s constructive initiative announced today - along with the continued strong support of the Telecom Minister and Finance Minister - will be the beginning of a new era for India’s digital ambitions and for VI’s continued contribution to creating an inclusive and sustainable digital society to the benefit of all citizens," added Nick Read.
What Lies Ahead?
Tariff hikes are, of course, critical but whether or not the relief package reassures equity investors to fund Vodafone Idea will be the real measure of its efficacy.
Reliance Industries Limited chairman Mukesh D. Ambani said in a statement: “Telecom sector is one of the prime movers of the economy and the key enabler for making India a Digital Society, I welcome the Government of India’s announcement of reforms and relief measures that will enable the industry to achieve the goals of Digital India. I thank Hon. Prime Minister for this bold initiative.”
Sunil Bharti Mittal, Chairman, Bharti Airtel Limited, said: “We congratulate and thank the Government, which under the decisive leadership of the Hon’ble Prime Minister Shri Narendra Modi, has undertaken these seminal reforms to lift an industry that’s at the core of his Digital India vision. The latest reforms ensure that the industry is able to invest fearlessly and support India’s digital ambitions. We also compliment the Hon’ble Minister of Communications and the Hon’ble Finance Minister for their leadership and support.”
“Bharti Airtel is fully committed to respond to the call by the Hon’ble Prime Minister to invest in and accelerate India’s growth. What lies ahead is a once in a lifetime opportunity to build the digital infrastructure that is a catalyst for the digital aspirations of over one billion Indians.” added Sunil Bharti Mittal.
Disclosure: MoneyControl is a part of the Network18 group. Network18 is controlled by Independent Media Trust, of which Reliance Industries is the sole beneficiary.
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