Impacts for Indian Telcos on the new Government policies

Telecom industry is an asset heavy industry under the direct influence and supervision of the Government and with high entry barriers. It needs to stay updated from time-to-time based on the current trends and technologies, be it 5G or IoT, for improving customer service for faster internet, broader coverage etc. The cost of implementing infrastructure requirements for providing these services is quite high. At the same time the spectrum charges and the license fees that the telcos must pay to the Government adds to the already grieving cost pressures for the companies. Indian telcos are facing the same, pulled down by the infrastructure, spectrum, and other associated costs in addition to the prevailing market competition. Government, recognizing it has come up with certain relaxations for the due payments, and let’s see how it impacts the Telecom industry in India.

Telecom companies bid for the spectrum wave for different regions and owes to pay the Government for the spectrum usage charges. In India, from 1999, the Government and the Telecom players shifted to a revenue-sharing fee model that asks the telcos to share a portion of their Adjusted Gross Revenues (AGR) on an annual basis to pay the Government as license and spectrum usage fees. AGR is defined in that sharing agreement between the telecom players and Department of Telecommunications (DoT).

Currently, the prominent Indian telcos like Airtel, Jio, and Vodafone Idea owes around ~1.5–2L crores INR to the Government as dues. The balance AGR dues for Airtel, Vodafone Idea, and RCom is around 25K, 50K, and 24K crores respectively. The companies would also have to pay the interests accrued for the amount which ended up being cumbersome for the firms, forcing them compromise on the investments for infrastructure development and customer experience. As a setback for the telcos, in September 2020, the Supreme Court granted 10 years’ time to clear of the AGR dues, which was modified in the later months of 2021. Let’s see what those are and how it provides a breather to the telcos.

Because of these debts, dues, license charges, and interest accumulation, the telcos were struggling with the liquidity in cashflows throughout the year which they would otherwise use for development purpose. Considering these issues that are plaguing the telecom industry the Union Cabinet made a few key relaxations and changes which includes,

· Four-year moratorium for the payment of the statutory dues, for both the AGR and spectrum usage charges that has to be paid.

· The center would do annual compounding of interests replacing the monthly compounding being done.

· Spectrum sharing within the telcos has been allowed without the additional fees.

· 100% FDI in the telecom industry has been allowed.

· Earlier, the percentage of AGR that has to be paid included the non-telecom revenues for the telcos, which is now changed to include only telecom revenues for the calculation of AGR.

· The Department of Telecommunications is working on a package to reduce the revenue license fee to 6% of AGR from the earlier 8% charge.

· Companies are not mandated to pay the past AGR dues of acquired companies and owe charges only for the period in which the spectrum was used

The consequences are quite beneficial for the Indian telcos. The moratorium period would help the telcos free-up liquidity in capital for the coming years. As per Airtel’s higher Management team, the move is expected to conserve a cash outgo of Rs.35K-40K crores and would help them to use that for network and capital expansion programs. Similarly, the move is expected to free cash of ~Rs.60K crore for cash-strapped Vodafone Idea. These cash flows which would otherwise be lost could be made to use for restructuring and revamping the operational aspects of the struggling telcos.

With the reduction in share percentage of AGR, annual compounding, and the move to not consider non-telecom revenues provides the much-needed relief for the telcos as currently major telcos are focusing to develop their non-telecom revenues through modes like DTH. This move would help telcos developing and bundling more non-telecom products like OTT, games and devices, as we know Airtel and Jio are in the forefront in providing these non-telecom offerings to its customers. The cash generated could also be used by the telcos for the upcoming 5G spectrum auctions and other infrastructure developments.

Another major relief for the Telcos like Airtel and Jio is that they need not pay the past AGR dues for the acquired and merged companies like RComm and Aircel. This provides huge boost for those telcos mandating them to pay only for the spectrum that they’ve been using post M&A, reducing them from the burden of carrying forward the dues of the previous companies due to their negligence. This allows the companies to take full ownership of the dues and other mandatory payments that would’ve to be done.

Overall, this move is a welcome move by the authorities to provide a breather for the telcos to stabilize and focus on their developments. The four-year moratorium, more importantly, post the 3-year 5G launch is also a sufficient period for the telcos to restructure, transform, and get through the current challenges that they’re facing. It’s high time that they use this breather to propel their 5G developments and growth and come back stronger to help bolstering the telecom industry for the future.

References:

1. Telecom Industry in India. [online] Ibef.org. Available at: https://www.ibef.org/industry/telecommunications.aspx

2. Business Insider. 2022. Airtel opts for AGR dues moratorium, becomes the second telco to do so. [online] Available at: <https://www.businessinsider.in/business/telecom/news/airtel-opts-for-agr-dues-moratorium-becomes-the-second-telco-to-do-so/articleshow/87254202.cms>

3. Relief for telecom sector, Cabinet approves 4-year moratorium on AGR dues — Times of India. [online] The Times of India. Available at: https://timesofindia.indiatimes.com/business/india-business/relief-for-telecom-sector-cabinet-approves-4-year-moratorium-on-agr-dues/articleshow/86226532.cms

4. ‘Moratorium on telecom dues allows time to transform; tariff wars unlikely’. [online] Business-standard.com. Available at: <https://www.business-standard.com/article/economy-policy/moratorium-on-telecom-dues-allows-time-to-transform-tariff-wars-unlikely-121091900317_1.html>