Explained | Can the telecom industry get out of the rut?
How will the government’s relief package impact the sector? Is there clarity on spectrum licence fees and dues?
The story so far: The Union Cabinet on Wednesday approved a set of financial relief measures to help major telecom companies in trouble. Companies such as Vodafone Idea and Bharti Airtel have seen their business hit hard by financial demands made by the government and cut-throat competition. In 2019, the Supreme Court had ordered telecom companies to pay dues worth over ₹1.4 lakh crore to the government, which they are yet to complete.
Why are telecom companies in trouble?
Telecom companies traditionally paid a fixed fee to purchase spectrum under lease from the government. Since 1999, however, apart from the spectrum licence fees, they have also had to share a certain proportion of their adjusted gross revenue (AGR) with the government. The government and the telecom companies have disagreed on what counts as AGR. Companies have argued that the government cannot classify their non-telecom revenues as AGR and demand a share of it. The dispute landed in court and eventually ended in favour of the government with the Supreme Court ordering companies to pay all their accumulated AGR dues. The order put immense stress on the balance sheets of the companies which were already in trouble owing to an intense price war.
Editorial | Delaying the inevitable: On relief to telcos
What are the concessions offered by the government?
The Centre has offered the companies a four-year moratorium on spectrum and AGR dues to relieve them of their financial stress. They can now opt to pay these dues and the interest accumulated on them at the end of the moratorium period. If a company is unable to pay the accumulated dues by the end of the moratorium it can negotiate with the government to give it an equity stake in lieu of the accumulated dues. Moreover, the government has eased its policy stance in order to decrease the future liabilities of the companies. It has declared that they do not have to share with the government revenues that they receive from non-telecom sources. Further, to make investment in telecom companies easier, the Centre has allowed 100% foreign direct investment without the need for government clearance. It has also eased bank guarantee requirements against licence fee and done away with penalties imposed on late payment of fees.
Will the measures help telecom companies?
The relief measures announced by the government are expected to free up cash from the balance sheets of the companies. The hope is that they will use this cash to invest in expanding and strengthening their business, thus becoming more capable of paying back their dues. It should be noted that the government has not agreed to waive off dues that companies already owe the government or the dues that will arise over the next four years. Analysts, however, see the government’s decision to waive off charges on future non-telecom revenues as significant because it puts to rest the two-decades long controversy in the telecom sector over what counts as AGR. Sceptics of the plan believe that it will not relieve the pain of the companies like Vodafone Idea, which has a total debt of nearly ₹2 lakh crore. In fact, according to analysts, the government’s offer to convert the spectrum and AGR dues of the companies into equity may cause Vodafone Idea to come under government control. This risk could deter investors from infusing fresh capital into the company.
Are telecom tariffs set to rise?
A major reason for the crisis in the telecom sector has been the intense competition. This has led to the overwhelming supply of telecom services, in turn leading to lower prices that have made India a country with one of the lowest telecom tariffs in the world. So, some believe the government should let troubled telecom companies like Vodafone Idea to fail and exit the market, just as other telecom companies have done in the past. This will cause supply to drop and prices to rise. The last major increase in tariffs came in December 2019. A further rise in tariffs is expected as the companies try to boost their average revenue per user to match the rising costs.
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