Telecom relief package: The government could and should do more

The government’s telecom relief package is a lot like cotton candy: there definitely is candy, but there appears to be a whole lot more of it than there actually is. The government could have done more and still should improve upon its effort.

Wednesday’s telecom relief package removes some anomalies in policy, offers some financial relief and improves the chances of India not joining the world’s laggards in adopting 5G telephony. But the biggest service the telecom package does is to signal that the government wants a three-player market (not counting the state-owned also-ran) and is prepared to take a stake in Vodafone-Idea (VI). This would make it a whole lot easier for VI to raise the funds it desperately needs to stay afloat.

The least the government could have done was to frontload the promised conversion of debt service dues (repayment of principal and payment of interest) for the next four years into equity: do that conversion upfront, right now, instead of dangling it as a carrot to be munched four years hence. It can still do this.

Also read: Sale and leaseback of spectrum may save the telcom sector

Telcos pay the government, in addition to taxes, two slices of their adjusted gross revenues (AGR), one as licence fees, the other as spectrum usage charge (SUC). Then they pay the government their instalments of deferred payments for the spectrum they bought in auctions. Then they pay the so-called AGR dues, arising from a dispute over whether non-telecom revenues should be included in the sharable AGR or not, which began in 2003 and concluded with an inane Supreme Court order in 2019 that not only made non-telecom revenues sharable but also imposed on telcos interest and penalty that together accounted for 70 per cent of the total dues arising from the AGR ruling. These dues are to be paid in 10 annual instalments.

The government has said that payments on account of AGR dues and 20-year spectrum payments can be deferred for the next four years, but interest will accrue. A telco can opt to pay interest on such deferred dues as equity. After the four-year moratorium on these payments, the government might — it is not assured — convert all of the deferred payment, and not just the interest portion, into equity.

Nine structural reforms and five procedural ones have been adopted.

Structural reforms

• Non-telecom revenue will be excluded on a prospective basis from the definition of AGR.
• Relief on bank guarantees for licence fees and other levies.
• Reduction of the rate of interest by 2 percentage points on the interest payable on delayed licence fee and SUC payments from October 1, penalty removed and interest to be compounded annually, rather than monthly.
• No bank guarantees for future spectrum auctions.
• Spectrum lease period would be extended, in future auctions, from 20 years at present to 30 years.
• Surrender of spectrum will be permitted after 10 years for spectrum acquired in the future auctions.
• No SUC for spectrum acquired in future spectrum auctions.
• Spectrum sharing encouraged – additional SUC of 0.5 per cent for spectrum sharing removed.
• To encourage investment, 100 per cent Foreign Direct Investment (FDI) under automatic route permitted in Telecom.

Procedural Reforms

Auction calendar fixed – Spectrum auctions to be normally held in the last quarter of every financial year.

Cumbersome requirement of licenses under 1953 Customs Notification for wireless equipment removed. Replaced with self-declaration.

Know-Your-Customer norms simplified. Self-KYC (App based) permitted. E-KYC rate revised to only ₹1. Shifting from prepaid to post-paid and vice-versa will not require fresh KYC.

Paper Customer Acquisition Forms (CAF) will be replaced by digital ones.

Standing Advisory Committee on Frequency Allocation of the Wireless Planning and Coordination wing of the Ministry of Communications is as bureaucratic as it sounds. Now the government will not insist on this body’s formal clearance for telecom towers, self-declaration on an assigned portal would do.

Also read: Big bang reforms and sops: Centre allows 100% FDI in telcom sector

Now, all the proposed reform are prospective. But why should some, at least, not have retrospective effect? Suppose you ban capital punishment today. You can’t bring those executed in the past back to life. But suppose you redefine a life sentence to mean a maximum of 12 years. Will it make sense to apply the reform only to those who receive a life sentence henceforth while veteran jailbirds continue to rot in prison even if they have spent 20 years behind bars?

AGR should exclude non-telecom revenues, accepts the government now. It is the government’s insistence since 2003, spanning the Vajpayee, Manmohan Singh and Narendra Modi regimes, that AGR should include non-telecom revenues that allowed disputed revenue shares to accumulate, and acquire crippling penalty and interest burdens.

Similarly, the case for levying a spectrum usage charge disappeared when the government started auctioning off spectrum, instead of allocating it, bundled with a licence and without any upfront payment for it. That was in 2010. Now that the government has accepted the irrationality of collecting a steep SUC on spectrum that companies bought in expensive auctions, why should that logic not apply retrospectively? The government need not refund anything, but deduct the amounts paid from the amounts outstanding on spectrum dues.

A more controversial element of revenue is the so-called commission on sale of pre-paid SIM cards and airtime. Should this so-called commission be included in a telco’s revenue? If you look at the practice of the Fast Moving Consumer Good (FMCG) industry, they do not include the margins of their distributors/stockists in their sales figures. If you add up the value of an FMCG company’s products at their maximum retail price, it would be far in excess of the sales figures the company reports. It books the money it gets from its wholesalers as its revenue. If the telcos follow this practice, telcos should exclude the income of their distributors from the telcos’ revenues.

The simple point is that once telcos started acquiring 20-year leases on spectrum in competitive auctions, the rationale for collecting licence fees and spectrum charges as a share of the revenue disappeared. Telcos should pay taxes on the profits they make, just like any other company. But the government has not accepted this logic in full. In countries where telcos obtain their spectrum through competitive auctions, they pay a sliver of their revenue to the regulator, to cover regulatory expenses, that is all.

India’s future competitiveness in the knowledge and data economy depends on a viable, profitable and competitive telecom industry. Telcos should plough their funds into networks and producing affordable smartphones in a country like India, not into state coffers.

With the level of relief provided, VI’s survival is still dicey. It has to raise funds from large investors. The possibility of raising funds by issuing bonds is curtailed by the absence of vibrant market for corporate debt in India. If there were a market for subprime debt, junk bonds in the jargon, VI could raise the money it needs, invest in networks and customer retention/acquisition and remain an active player.

Ideally, the government should offer more support; conversion of four years’ dues into equity upfront would be a good beginning.