CHENNAI: Of the many ills that have ailed India’s telecom sector in the recent past, perhaps none have been as immediately disastrous for the sector as the Supreme Court’s October 2019 verdict on AGR. The SC’s ruling that the definition of adjusted gross revenue (AGR) included non-telecom revenues had placed a massive Rs 1.52 lakh crore financial liability on incumbent telecom operators in the form of pending dues, interest, and penalties.
On Wednesday, however, the Union Cabinet approved two measures directly aimed at mitigating the burden this had placed on incumbent telcos. First, the definition of AGR has been rationalised to exclude non-telecom revenues. Second, telcos have been granted a four-year moratorium on the payment of both AGR and spectrum dues.
According to ICRA, the moratorium on AGR dues provides an annual cash flow breather of around Rs 14,000 crore for the industry, while the moratorium on spectrum dues gives another Rs 32,000 crore of annual cash flow relief for the industry as a whole. However, companies opting for the moratorium are to pay interest on the amount, according to the telecom ministry, and such companies will have the option to pay this interest by way of equity. Guidelines for this to be finalised by the Ministry of Finance.
Union telecom minister Ashwini Vaishnaw also announced other important boosters for the sector, like an increase in the foreign direct investment (FDI) cap to 100% from the current 49%; and a rationaisation of existing license fees and spectrum charges.
But the relief extended on the AGR and statutory dues will have a particularly significant impact on freeing up the industry’s cash flow.
This is because upcoming AGR due payments have placed serious financial constraints on two of the only three private players in the telecom services sector—Bharti Airtel and Vodafone Idea—at a time when large scale capital expenditure is required for network upgradation and expansion. Reliance Jio, the third private player, only had to pay a nominal Rs 190-odd crore as AGR dues by virtue of being a late entrant to the market.
The moratorium on spectrum dues also gives a breather to all players in the sector.
For Vodafone Idea, which has been in danger of slipping into bankruptcy territory for a few quarters now, Wednesday’s measures offer much-needed respite. Analysts estimate that the company would have had to shell out an annual Rs 9,000-odd crore towards AGR dues starting March 2022, alongside deferred spectrum liabilities due from April 2022 of Rs 8,200 crore.
“A moratorium of 4 years (for these dues) gives enough time for the industry to carry out fundamental improvements by way of increasing tariffs, which is critical from the industry perspective,” noted Sabyasachi Majumdar, Senior Vice President & Group Head - Corporate Ratings, ICRA.
Relief across the spectrum
Other measures decided by the Cabinet are not far behind in terms of impact.
Apart from the rationalisation of AGR, structural reforms announced include a major 80% reduction in bank guarantees (BG) against licence fees and other similar levies. There will now be no need to produce multiple bank guarantees for different service areas. “Instead, one BG will be enough,” the ministry said. Interest rates and penalties on delayed statutory payments have also been reduced, while the tenure of spectrum licences for future auctions has been increased from 20 years to 30 years.
Telcos who take up spectrum in future auctions will now be allowed to surrender it after a 10-year lock-in period. The government has also completely done away with Spectrum usage charges for future auctions and the 0.5% additional spectrum usage charge for spectrum sharing is being eliminated. Finally, the telecom sector will be allowed 100% foreign direct investment (FDI) in order to attract investment, “but with safeguards”, Vaishnaw said.
These measures have been welcomed by the industry. The Cellular Operators Association of India (COAI), which counts all three private telcos among its members, said that the decisions “would go a long way in relieving the financial stress the sector is facing, boosting investments, encouraging healthy competition and in offering choice to customers”. Reliance Jio also welcomed the move in a statement, calling it “a timely step towards strengthening the sector”.
According to Majumdar, the rationalisation of AGR prospectively will improve the industry’s earnings before interest, taxes, depreciation, and amortisation (EBITDA), while the “reduction in SUC on spectrum sharing eases the sharing and cash flows to some extent. Further, elongation of spectrum allotment for a period of 30 years and a calendar for spectrum auction is also a positive,” he said.
Reprieve for Voda Idea
As mentioned earlier, the rationalisation of the definition of AGR is a critical change to the telecom landscape, and particularly so for Vodafone Idea (VIL).
AGR was the basis on which all telcos paid statutory dues like Spectrum Usage Charges and Licence Fees to the government and the 2019 verdict resulted in a Rs 1.52 lakh crore liability for the sector, severely straining the already stressed balance sheets of incumbent telcos Bharti Airtel and Vodafone Idea. This remained true even after the SC relented and allowed telcos to pay their pending dues in annual installments over 10 years.
While Bharti Airtel, boasting far better financial metrics than VIL, was able to raise sufficient capital in 2020 to meet its AGR obligations, the magnitude of the payments pushed VIL into far more treacherous terrain. Its auditors have repeatedly warned after the 2019 judgment that there was material uncertainty in VIL’s ability to continue as a going concern.
According to the Department of Telecom (DoT), Bharti Airtel owes a total of over Rs 43,000 crore in AGR dues, of which it has already paid Rs 18,004 crore. The company, in 2020, also raised over $3 billion through both foreign bonds and an equity issue.
In contrast, VIL has a total AGR liability of over Rs 58,000 crore and has paid over Rs 7,800 crore so far. But it has struggled to find investors even though its Board of Directors approved a Rs 25,000 crore fundraise through both equity issues and non-convertible debentures as early as September last year.
With the industry’s average revenue per user (ARPU) metrics sliding after the removal of the interconnect usage charge (IUC) system from January 1, 2021, and a continuous hemorhaging of subscribers, VIL has posted loss after loss quarter after quarter, leaving it with little cash in hand to meet upcoming payments.
According to the auditor’s note attached with its financial results for the quarter ended June 30, 2021, VIL had a total gross debt of Rs 1.916 lakh crore at the end of the period. Of this, “the next installment of the AGR liability and debt amounting to Rs 16,853.4 crore is payable in next 12 months,” they note. Against this, the company had a cash balance and cash equivalents of just Rs 920 crore.
However, analysts say that the four-year moratorium postpones payment liabilities worth an annual Rs 9,000 crore (AGR dues) and Rs 8,200 crore (spectrum dues) for VIL.
“This will be significant for VIL, because it frees them up from payments coming due within months and gives time to improve cash flow and/or get investors. The measures on the investment side and structural changes to levies and bank guarantees also make it easier to attract investors,” said a senior private sector industry executive.
Bharti Airtel and Vodafone Idea have not commented on the government’s measures yet.