One Year Mark of Landmark Reforms in Telecom Sector

One Year Mark of Landmark Reforms in Telecom Sector - bold policy decisions by Hon’ble MOC Shri Ashwini Vaishnaw has had enormous economic impact on the sector.

The situation appeared dire! Banks stood to be impacted the worst if the industry were unable to stem the bleeding. The Indian Banks’ Association (IBA) wrote to the Government and conveyed that the adverse developments in the telecommunications sector could potentially lead to failures

Background: Financial situation in the telecom industry

The telecom sector has been under various kinds of stress over the last decade. The Industry revenue of Rs. 2.66 lakh crores in the year 2016-17 declined by 1.88% to Rs. 2.61 lakh crores in the year 2020-21 because of a combination of factors – including the pandemic, a declining ability to pay for new subscriptions and the financial burden on operators due to incompatible policies.

For example, the Adjusted Gross Revenue (AGR), which is derived from the Gross Revenue after making all permissible deductions (e.g., payments made to other operators for using their networks, income from interest and dividends, services not directly provided under the telecom license) also declined from Rs. 1.85 lakh crores in 2016-17 to Rs. 1.78 lakh crore in the year 2020-21, a decrease of 3.78%.

Further, the gross Average Revenue per User (ARPU) per month as per TRAI figures had declined from Rs. 122 in the year 2014-15 to approximately Rs. 104 in the year 2020-21 (for wireless subscribers). It is only after the new set of reforms that the ARPU has started to climb back up again – to the great relief of the industry and its viability.

The compounded AGR dues and interest on those dues had piled up to a gigantic number, and this was a blow to the financial position of nearly all telecom service providers (TSPs).

Given the older definition of AGR, before 2015, which did not allow for many of the deductions that TRAI recommended in its 2015 recommendations, the dues payable by the industry kept on compounding.

Finally, after the Hon’ble Supreme Court’s Judgement, which upheld the position of the Government in the definition of AGR, the entire industry was severely and adversely impacted. The compounded AGR dues and interest on those dues had piled up to a gigantic number, and this was a blow to the financial position of nearly all telecom service providers (TSPs).

The situation appeared dire! Banks stood to be impacted the worst if the industry were unable to stem the bleeding. The Indian Banks’ Association (IBA) wrote to the Government and conveyed that the adverse developments in the telecommunications sector could potentially lead to failures, resulting in vanishing competition, a duopoly framework that would be harmful to consumers, resulting in unsustainable operations, and severe losses for the banking system -- which has huge exposures in this sector.

The IBA made certain suggestions to the Government on easing the stress for this sector. It emphasized in its letter that if the existing stress in the sector continues for long, it would result in dramatic and negative outcomes due to failures which would have repercussions like:

a) Banking sector will be directly hit due to its large exposure.

b) There will be significant revenue loss to Government (AGR dues, Spectrum charges, GST, etc.).

c) Employees will be laid off, and there will be both direct and indirect job losses.

d) IT sector, banks and others who are dependent on telecom network for their services would be directly impacted.

e) Economic recovery, post Covid-19, may stall due to negative sentiments and declining contribution to GDP from the core telecom sector.

AGR amended

In March 2022, the telecom industry proposed to the government that revenue from payments banks, rental income, and e-commerce operations be excluded from calculations of adjusted gross revenue (AGR).

This is to reduce as many disputes as possible, and a negative and positive list was prepared, which will specify that components like revenue from payments bank, rental income and e-commerce platforms, will be excluded from AGR. This will reduce levies and liabilities for the telcos and open up newer fields for business.

The changes will be incorporated into the notification that amended the AGR definition from 1 October, 2021, eliminating the need for the government to issue a separate amendment to the unified license agreement, which binds telecom operators to a revenue sharing arrangement with the government.

Need for Reforms

At this stage, if any TSP had decided to go into proceedings under the Insolvency and Bankruptcy Code (IBC), this may have had a cascading and deleterious effect on banking sector, and the overall growth of economy. It also would not be conducive to realization of Government dues and revenue. To mitigate the financial stress, and ease the cash flow situation of TSPs reducing risk of default of bank loans. We also need to enhance capital investment capacities for growth of telecom infrastructure for 4G and 5G.

Reforms

Related to easing liquidity and enabling healthy cash flow situation to TSPs:

• Reforms:

• 4-year moratorium of annual spectrum instalments of past auctions excluding 2021 auction and annual AGR dues instalments. With an option to convert the interest component of instalments under moratorium into equity for GoI.

Reduction of SUC by removing incremental Spectrum Usage Charges or SUC would reduce the total financial burden on Operators significantly.

•Rationalizing definition of Gross Revenue /Adjusted Gross Revenue as per TRAI recommendation,

by majorly excluding non-telecom revenue from AGR.

• Rationalizing the FBG/PBG requirements by reducing it to 20% of the existing stipulated requirement.

• Rationalizing interest rate and penalty.

• Impact:

• The grant of four-year moratorium in respect of spectrum instalments will reduce the cash flow from TSPs to the tune of Rs. 1,02,113 crores during the moratorium period.

• The grant of the four-year moratorium in respect of AGR-related dues installments will reduce the cash flow from TSPs to the tune of Rs. 72,193 crores in the next four years.

• Due to financial stress, one major operator (VIL) is facing sustainability issues. The moratorium given now, ensures healthy competition, thus avoiding duopoly.

• Enabling healthy cash flow for TSPs, thus enabling them to invest in 5G and other technologies.

The government has relaxed the rates of interest in the case of delay in payment of license fees or any other dues payable under the license.

• Reducing the BGs requirement to 20%, can reduce the existing 10,000 Crore BGs to around 3,000 crores BGs (for 3 major private TSPs). Thus reducing the costs of maintaining these FBGs.

• Reducing the banks’ exposure to telecom companies, and also decrease in NPAs pertaining to telecom companies.

• Reducing the financial costs of operations for telecom service providers.

• Rationalizing the interest rate and penalty, reduces the interest burden on TSPs in case of delay in payments by the TSPs.

• Decision to return the FBGs pertaining to all auctions except 2021 auction, then approximately 27,000 Crore amount FBGs are returned to TSPs.

Related to Spectrum & its availability:

• Reforms:

• Conduct of spectrum auction on regular annual basis, preferably in last quarter of every year.

• Requirements to submit FBGs to securitize Deferred Annual Spectrum payment installments and Performance Bank Guarantee (PBG) for roll out obligations etc. in future spectrum auctions is dispensed with.

•  Zero % SUC on spectrum acquired through future auctions.

• No incremental 0.5% SUC on spectrum sharing.

• Impact:

• Operator flexibility to manage his spectrum holdings as per the business needs.

• Conduct of spectrum auction on regular basis on annual basis leads to certainty in the timing of spectrum availability accordingly would help operators to plan their spectrum needs better.

• Dispensing off with submission of FBGs and PBGs, decreases the cost of operations by reducing the cost of maintenance of FBGs/PBGs.

• No SUC on spectrum of future auctions, and no incremental costs of spectrum sharing, decreases the SUC charges, and at the same time encourages better utilization of spectrum through sharing. The exact impact of no SUC on the spectrum of future auctions would depend on the amount of spectrum the TSPs purchased in 2022 auction, and the amount of spectrum they would purchase in the future auctions. Reduction of SUC by removing incremental SUC charges on sharing would not only increase the spectrum utilizing by incentivising the spectrum sharing, but also would reduce total cost of spectrum for TSPs.

Structural Reforms

Adjusted Gross Revenue Reforms

As part of the structural reforms, the government has redefined AGR to exclude non-telecom. AGR clauses in the UL Agreement, UASL Agreement, and UL VNO Agreement were amended to exclude license fee payment obligations on the TSPs. Previously, the annual license fee was calculated as a percentage of AGR.

Bank Guarantee Reforms

Under this structural reform, the government has significantly reduced the amount of Financial Bank Guarantee (FBG) to be submitted by the TSPs as license fees. For UL licenses, the maximum amount to be submitted as FBG and Performance Bank Guarantee (PBG) for different services has been reduced from Rs. 44 crore to Rs. 8.8 crore and Rs. 220 crore to Rs. 44 crore respectively. License holders now also have the option to submit bank guarantees centrally at one place instead of at Licensed Service Area (LSA) wise. This avoids submission of multiple BGs.

Rationalization of Interest Rates

The government has relaxed the rates of interest in the case of delay in payment of license fees or any other dues payable under the license. Earlier, delays in the payment of dues that brought about interest of 4% above Marginal Cost of Lending Rate (MCLR) of State Bank of India (SBI) has now been reduced to 2% above MCLR of SBI. The monthly compounding has also been replaced with annual compounding.

No Bank Guarantees for Future Auctions

Henceforth for auctions held, bank guarantees are no longer needed. However, the DoT will separately address eligibility criteria to ensure all participants have the necessary financial capability.

Spectrum Reforms

Spectrum assigned in all future auctions will now be for a period of 30 years as against the 20-year tenure in past auctions. In the case of spectrum acquired by TSPs prior to the reforms, these shall continue to be assigned for 20 years. Spectrum Usage Charges (SUC) will not be levied for spectrum acquired in future auctions. Also, the additional 0.5% levy on SUC rate with regard to spectrum sharing has been scrapped. Additionally, to help ease the financial burden, TSPs can now surrender spectrum after a minimum period of ten years for a surrender fee, subject to an intimation one year prior to surrendering.

Foreign Direct Investment (FDI) Reforms:

Under the new Reforms, 100% FDI is now allowed under the automatic route in the telecom sector. Previously, though 100% FDI was permitted, only 49% was through the automatic route. The rest 51% was through the government route.

Reforms to Address TSPs Liquidity Requirements

Taking into consideration the financial challenges faced by telecom companies, the Reforms have brought various measures to ease liquidity and cash flow. The government has provided an option of a moratorium of up to four years in an annual payment of dues arising out of the AGR judgment with the Net Present Value (NPV) of the due amounts being protected.

Procedural Reforms

KYC Reforms

Know Your Customer (KYC) Reforms now have simplified and consumer-friendly KYC norms for obtaining new mobile connections and converting pre-paid connections to post-paid connections. The Reforms brought for more straightforward, quicker, less expensive, and consumer-friendly KYC norms for getting a new mobile connection and switching from pre-paid to post-paid connections.

The KYC procedure based on Aadhaar has been reinstituted. For a small fee of Rs. 1, the TSPs obtain the demographic information and client photo from the Aadhar database as part of a fully digital process. Additionally, testing and verification with the help of government agencies are no longer required, but TSPs must nonetheless verify security-related compliances during implementation and notify DoT and the Ministry of Home Affairs of any steps taken.

Impact

Additionally, the alternative process of self-KYC for granting new mobile connections has been allowed. Customers can now apply for a connection from their home or place of business and have the SIM delivered by doing so using an app or portal where their documents can be electronically authenticated using DigiLocker or UIDAI. Last but not least, the One Time Password (OTP) based conversion from pre-paid to post-paid and vice versa has also been supplied in the OM.

Spectrum auctions are to be held in the last quarter of every financial year.

CAF Reforms

Physical Customer Application Forms (CAF) will be replaced by digital storage of data. This cost-saving measure will free up warehouse spaces used by telecom service providers that previously were required to store 300-400 crore paper CAFs.

The cumbersome requirement of licenses under Customs Notification for wireless equipment has been removed, paving the way for ease of doing business. This is replaced with a self-declaration.

SACFA Reforms

The Standing Advisory Committee on Radio Frequency Allocation (SACFA) clearance for telecom towers is eased. DoT will accept data based on self-declaration and automated time-bound approval through its Saral Sanchar portal.

Spectrum Reform

Spectrum auctions will typically take place in the final quarter of every fiscal year (fixed calendar). Instead of the current 20 years, the future spectrum auctions will take place over a period of 30 years. After a 10-year lock-in period from the date of acquisition, telecom will be able to give up its spectrum.

The additional SUC (Spectrum Usage Charges) of 0.5% for spectrum sharing has been eliminated in order to promote it. The radio frequencies allotted to the mobile industry and other industries for wireless communication are referred to as a spectrum.

The importance of these reforms

• Bringing Back Competition A four-year moratorium would incentivize businesses to spend money on customer support and cutting-edge technologies.

• Encouragement of Business Ease: The government chose to eliminate a contentious retrospective tax soon before allowing 100% FDI in the sector (through the automatic route).

• Together, these imply a return to an environment that is favorable to investors.

• Promoting Digital India: The telecom industry is one of the main drivers of the economy, and the government’s plans would help it realise the objectives of Digital India.

• Additional Technological Advancement: Taken together, these policies would open the door to significant industry investments, including the deployment of 5G technology, and would result in the creation of more jobs.

Compiled by Aanchal Ghatak