Government’s announcements of 9 structural and 5 process reforms to remove bottlenecks of the industry; while industry will gain, customers likely to be biggest beneficiaries.
Government’s much needed relief package for the telecom sector is being hailed as a major reform and is expected to revive the sector. It was long overdue especially at a time when India was staring at a duopoly with Reliance Jio Infocom and Bharti Airtel remaining at the helm. The entry of Reliance Jio in 2016 was the biggest disrupting event for the sector, unsettling most players and leading to their closure.
It also effected the merger of two biggest players Vodafone and Idea. With receding subscriber numbers, the company is now struggling to remain afloat. But the announcements have given a fresh lease of life to the company and a chance to fight for its survival.
The impact has been particularly severe on Vodafone Idea. The fate of the company looked like a writing on the wall. In July, former Chairman of the company Kumar Mangalam Birla wrote to Union Cabinet Secretary Rajiv Gauba, offering his stake in Vodafone Idea to the Centre or any firm approved by the government for free. He later resigned as the chairman of the cash-strapped company.
The government has announced nine structural reforms and five process reforms. These reforms are expected to unshackle the industry by creating opportunities for companies to maintain cashflows, encourage investment and reduce regulatory burdens on the Telecom Service Providers (TSPs).
The move is also expected to generate employment and serve to protect customer interests.
Announcements:
A four-year moratorium on Adjusted Gross Revenues (AGR) related dues has been announced which will give a major relief to Bharti Airtel and Vodafone Idea. AGR dues of Reliance Jio Infocom are significantly lower than its other two peers. While the companies who will be availing this window will still have to pay interest on the AGR dues that would accrue over the period of the four years.
In 2020, the top court ruled that Bharti Airtel and Vodafone Idea must pay their pending AGR dues to the Central Government. Bharti Airtel, Vodafone Idea and Reliance Communications owed nearly Rs 92,000 crore to the Centre as license fee and Rs 41,000 crore as spectrum usage fees, as per the figures spelt out by the telecom department.
The definition of AGR has also been changed which was the biggest contentious issue between government and the Telecom Service Providers (TSPs). Under the new definition, all non-telecom revenues have been excluded from ambit of AGR. This issue was intensely fought between the TSPs and the government in the Supreme Court of India and was eventually ruled in favour of the government by the apex court.
The other major relief has come in the form of rationalisation of spectrum usage charges or SUC. The monthly compounding of interest on spectrum usage charges will be replaced by annual compounding based on the formula MCLR + 2 per cent. MCLR or Marginal Cost of Funds based Lending Rate is the minimum lending rate below which a bank is not permitted to lend.
This is expected to ensure significant savings for the telecom companies which could be utlised towards capital expenditure to improve services by building capacities.
Another major step is regarding enabling an ecosystem for higher overseas investment. The Centre has permitted 100 per cent foreign direct investment (FDI) in the telecom sector through the automatic route. Earlier, FDI was allowed up to 49 per cent through the automatic route and anything above this had to go through the government route.
All these measures are expected to increase cash flow for the companies which has otherwise been a big challenge for telecom companies.
As the companies are planning a rollout of 5G spectrum, this immediate relief will infuse liquidity into the system and alsoboost 4G proliferation.
The Government has also increased the holding period for spectrum from 20 years to 30 years for all future spectrum auctions. A telecom company will also now be able to surrender spectrum after an initial lock-in period of 10 years after paying a surrender charge.
This is expected to lend flexibility to telecom companies who must pay huge sums towards unused spectrum. Spectrum sharing between telecom companies has also been completely allowed free of cost.
The government has also allowed digitisation of KYC from now on and done away with the requirement of fresh KYC for switching from postpaid to prepaid mobile connections or vice versa.
Course Correction
Union Minister for Communications, Electronics & Information Technology Ashwani Vaishnaw during a cabinet briefing also underlined how the current reforms would promote health competition among the telecom operators.
For competition to thrive, it would be incumbent upon the companies how they would go from here. Jio’s entry has resulted in fierce tariff wars among the operators but has benefitted the consumers immensely, till now. Its launch was a colossal success and ensured that the mobile telephony reached even deeper.
We could see tariffs go upwards, going forward. Industry insiders have been telling that the tariff increase is the way forward to make the sector more sustainable. While many have argued for a regulatory regime on the tariffs citing potential for predatory pricing practices, others have argued against it emphasising on letting market forces to dictate the trends. While there are no simple answers, setting a base price does not look like a panacea for all the issues.
The fight is now more between the top two players with a lion share of subscriber base between them which is only building month-on-month. The battle now is to achieve higher ARPUs (average revenue per user) by bundling services. The customers may not see tariffs go down. What they could see is better packages being thrown at them with a bouquet of services. That could make the proposition look different and more value for money for the customers.
While, Reliance Jio Infocomm is already coming with its smartphones, Bharti Airtel is also in the process of following suit. This could further increase competition for the handset industry.
In one of his media interactions, Sunil Bharti Mittal, Founder and Chairman of Bharti Enterprises has exhorted the industry to come together and work for building the domestic industry.
Meanwhile, the Government is likely to take a temporary hit in its non-tax revenues because of the four-year moratorium. A Business Standard report estimates this to the tune of Rs 46,000 cr. The recovery is a long road but, looks optimistic this time.