Telecom Sector Reforms Continue as Center Approves 100% Automatic FDI, Reduces BGs

In a continuation of the telecom sector reforms, the government has approved 100% automatic FDI in telecom services and infrastructure providers that fall under Category 1. At the same time, it has also decreased the bank guarantees needed for licensing agreements with DoT to 20%.

More Relief for Vi, Airtel

On September 15, the government had announced the two latest reforms as part of the wider telecom relief package. The Department of Industrial Policy and Promotion, in a press note, said, "all telecom services including Telecom Infrastructure Providers Category-I, viz. Basic, Cellular, United Access Services, Unified license (Access services), ….such other services as may be permitted by the department of telecommunications (DoT), are qualified for 100% FDI under the automatic route". The government only announced 49% FDI in the sector before announcing the telecom sector reforms.

Informing of the BGs reduction, the DoT said, "the Licensee shall submit a Financial Bank Guarantee valid for one year from any Scheduled Bank or Public Financial Institution, duly authorized to issue such Bank Guarantee...Initially, the financial bank guarantee shall be for an amount of Rs. 50/25/5 crore (for category A, B, C service areas, respectively), which shall be submitted before signing the License Agreement"

It added, "subsequently, the amount of FBG shall be equivalent to 20% of the estimated some payable (of license fee for two quarters and other dues, not otherwise scrutinised and any additional amount as deemed fit by the Licensor" said the notice. In case of financial BGs, the telcos will have to submit separately for each service area and service; the DoT could ask for a maximum Rs. 8.8 crore.

Previously, telcos had to submit a performance BG worth Rs. 220 crore, and a financial BG worth Rs. 44 crore.

Govt Wants New Players in the Telecom Market

One of the key reasons for telecom sector reforms has been to attract investment into the sector. However, so far, that hasn't changed Vi's fortunes; the telco has struggled to raise cash for over a year now. The apparent difficulty in raising cash has not stopped its rivals from raising cash from foreign investors.

Ashwini Vaishnaw, the telecom minister, had called upon stakeholders in the sector to join the private telco triumvirate in delivering connectivity. In short, the government will now seek new players in the telecom market, to make it a more competitive segment.

That has been the key motivator for the government to announce a slew of telecom sector reforms; there has been no precedent of government saving a private company before, and it did not bring the relief package to save Vi. The timing just happens to be rather fortunate for the beleaguered telco.

And according to the telecom minister, this is just the beginning.