Government reforms telecom sector; Airtel, Vodafone Idea to benefit the most

The Union Cabinet announced a series of measures which came as a relief for the debt strapped telecom companies in India.

The structural and procedural reforms will improve the situation for Bharti Airtel and Vodafone, the two telecos affected by non-payment of adjusted gross revenue (AGR) dues and host of other issues.

The government expects these major reforms will boost expansion of 4G connectivity to every corner of the country, infuse liquidity and enable the companies to make investment in the next generation technologies.

The telecom industry honchos like Sunil Mittal, chairman of Airtel and KM Birla, promoter of Vodafone Idea welcomed the government’s move as they were confident that this will create a level playing field, improve competitiveness and healthy growth of the industry.

More than any other company , Vodafone Idea will be the biggest beneficiary of these reforms. Vodafone Idea is struggling under a huge debt of 1.8 lakh crore, out of which deferred spectrum dues stood at Rs 96,270 crore, AGR dues stood at Rs 58,400 crore, and it had a bank debt of Rs 23,080 crore.

Among the various reforms, the four year moratorium that will be applicable from October 1, 2021, to pay the dues is the most important one. The companies can decide and avail the scheme, if necessary. It will have to pay an interest rate of 2% above the marginal cost of funds-based lending rate of SBI on moratorium period. Interest will be compounded annually instead of monthly and penalty and interest on penalty will be removed .

The companies will make the necessary payments after the moratorium period ends. Otherwise, the government can exercise the option to convert the amount pertaining to the deferred payment into equity, which will be finalised by the Ministry of Finance.

The government has changed the definition of adjusted gross revenue (AGR). It has excluded non-telecom revenues like dividend, interest income, etc. from AGR calculation. Only revenues from core telecom activities will be considered for calculation of AGR.

It has also reduced the bank guarantee (BG) requirements by 80% against License Fee (LF) and other similar levies. Further, only one BG will be needed for different licensed service areas.

The government has also allowed 100% foreign direct investment (FDI) under the automatic route with all safeguards to encourage investment.

There were also measures introduced with respect to spectrum usage. In future auctions, tenure of spectrum increased from 20 to 30 years. and no Spectrum Usage Charge (SUC) for spectrum acquired. Spectrum sharing will be encouraged and additional SUC of 0.5% for spectrum sharing removed.

All these measures are likely to improve investor sentiments and telcos can raise capital in the international market to fund its capex plans. However, analyst were of the opinion that the companies have to spend money to improve the business and raise tariffs for its survival and to thrive. Vodafone when it was merged with Idea to form Vodafone Idea, it had a subscriber base of about 45 crore and the biggest telecom operator. Since then, it has been rapidly losing its customers to Relaince Jio and Airtel and the base stands at about 25 crore. We have to wait and watch if these reforms will help Vodafone Idea to stay in the game.