In a press release issued on September 15, 2021, the Cabinet of the Union of India announced structural and procedural reforms in India’s telecommunications sector. These reforms are expected to provide liquidity, encourage investment and reduce the regulatory burden on telecommunications service providers (“TSP“), who have been battered by lower tariffs, government dues and rising debt burdens.
100% foreign investment authorized
The Union Cabinet approved 100% of foreign direct investment through automatic channel in the telecommunications sector. Until now, up to 49% of investments were authorized automatically, and any investment above 49% could only be made after obtaining government approval. However, Press Note 3 (2020 series), which requires prior government approval for any investment by an incorporated entity in a country with which India shares a land border or where the beneficial owner of an investment in India is located or is a citizen of such country, continues to apply. As such, investments by a Chinese telecommunications service company in India will require prior government approval regardless of the amount of the investment.
Rationalization of the definition of Adjusted Gross Turnover and deferral of payment of contributions
Adjusted gross income (“AGR“) is a cost-sharing mechanism between the Indian government and TSPs, whereby TSPs are required to pay license fees and spectrum fees to the government in the form of revenue sharing. AGR payments have been a long-standing controversial legal issue.
The AGR dispute
In 2005, the Cellular Operators Association of India challenged the government’s definition of AGR and how it was calculated, which included telecom and non-telecom service revenues (such as deposit interest and income earned sale of assets). The TSPs sought only included revenues from basic telecommunications services under the AGR. In 2015, the Telecommunications Dispute Settlement and Appeals Tribunal ruled in favor of the TSPs, but the government appealed this order to the Supreme Court of India (“SC“).
After lengthy hearings, in 2019, the SC confirmed the government’s definition of AGR, and in 2020, the SC ordered TSPs to pay their AGR dues in annual installments over the next ten (10) years.
In July 2021, the SC rejected requests filed by TSPs asking for a correction of arithmetic errors in the calculation of AGR contributions and considered that the calculation of AGR contributions could be the subject of any future litigation.
The effect of the SC judgment has resulted in TSPs like Vodafone Idea Limited and Bharti Airtel Limited being assessed pending AGR dues of approximately INR 59,000 crore (approximately US $ 8 billion) and 44,000 crore. INR (around US $ 5 billion), respectively. In addition, Vodafone Idea Limited is on the verge of bankruptcy.
- The definition of AGR has been streamlined by excluding non-telecom TSP revenues, on a prospective basis.
- A moratorium or postponement has been granted up to four (4) years from October 1, 2021 in the annual payments of contributions according to the judgment of the SC; provided, however, that the net present value (“VAN“) amounts due remaining unchanged.
- Payments for spectrum purchased in past auctions (excluding the 2021 auction) have also been allowed to be deferred for up to four (4) years with the NPV protected at the interest rate stipulated in the respective auctions.
TSPs benefiting from the moratorium will have to pay the loan rate based on the marginal cost of funds + 2% interest (instead of 4%), and the interest will be compounded annually (instead of monthly). No penalty or interest on penalty will be payable. At the end of the moratorium period, the government will offer TSPs the option of paying the amount of interest arising from the deferred payment through equity and, at the option of the government, converting all of their contributions into equity. The equity conversion guidelines and the above points have yet to be finalized by the Ministry of Finance.
Other structural and procedural changes
Bank guarantees: An 80% reduction has been authorized in the bank guarantee (“BG“) amount for BGs to be provided to secure license fees and other similar payments. One BG will suffice, and there is no requirement for multiple BGs in different licensed service areas of the country. In addition, no BGs will be sufficient. will be required for spectrum auctions.
Spectrum: In future auctions, the spectrum allocation period will be thirty (30) years instead of twenty (20) years. Spectrum sharing will be encouraged and the additional 0.5% spectrum usage charge for spectrum sharing has been removed. TSPs will now be allowed to sell unused spectrum after ten (10) years for spectrum acquired in future auctions. This will help them offload any additional spectrum and prevent them from continuing to pay license fees on unused spectrum. A spectrum auction schedule will be set and auctions will take place in the last quarter of each fiscal year.
Various changes to improve the ease of doing business:
- The licensing requirements for importing wireless equipment under the 1953 Customs Notification issued under Section 19 of the 1878 Maritime Customs Act have been removed and replaced with self-declaration.
- The app-based Know Your Customers (KYC) process has been cleared while the e-KYC rate has been revised to One Rupee (INR 1). Switching from prepaid to postpaid connections will not require a new e-KYC process.
- Paper customer acquisition forms will be replaced by digital data storage. Therefore, the warehouse audit of customer acquisition forms will not be necessary.
Key points to remember
Telecommunications sector reforms are implemented to facilitate TSP cash flow. However, all reforms are prospective in nature.
While a four (4) year moratorium could help TSPs consolidate their business and use liquid market conditions to raise funds to pay the government, the burden of payment has not been reduced in any way. The unpaid dues will ultimately have to be paid with interest, or equity will have to be issued to the government. It is not yet clear whether these reforms will help struggling TSPs like Vodafone Idea Limited to stay afloat or even help the government, if it has to buy shares in a more or less defunct company.
Additionally, the spectrum fee waiver will be applied to spectrum purchased in future auctions, and similarly, bank guarantee relaxations will also come into effect in a futuristic fashion. It remains to be seen whether strategic and financial foreign investors view India’s telecommunications sector favorably and invest additional funds in incumbents.