Changes proposed to India’s telecom sector – an analysis

Sep 17, 2021

Through a press release issued on September 15, 2021, India’s Union Cabinet has announced structural and process reforms to India’s telecommunication sector.  These reforms are expected to infuse liquidity, encourage investment and reduce the regulatory burden on Telecommunication Service Providers (“TSP”), who have been bruised by declining tariffs, dues payable to the government and a rising debt burden.

100% foreign investment permitted

The Union Cabinet has approved 100% foreign direct investment through the automatic route in the telecommunication sector.  Until now, up to 49% investment was allowed through the automatic route, and any investment beyond 49% could be made only after obtaining government approval.  However, Press Note 3 (2020 Series), which mandates prior government approval for any investment by an entity incorporated in a country with whom India shares a land border or where the beneficial owner of an investment into India is situated in or is a citizen of any such country, shall continue to apply.  As such, investments by a Chinese telecommunication services company into India will require prior government approval regardless of the quantum of investment.

Rationalisation of the definition of Adjusted Gross Revenue and

deferment of payment of dues

Adjusted Gross Revenue (“AGR”) is a fee-sharing mechanism between the Indian government and TSPs, under which TSPs are required to pay a license fee and spectrum charges to the government in the form of revenue share.  AGR payments have been a long-drawn contentious legal issue.

The AGR dispute

In 2005, the Cellular Operators Association of India challenged the government’s definition of AGR and the manner in which it was calculated, which included revenue from both telecom and non-telecom services (such as deposit interest and income earned from asset sales).  TSPs wanted included only revenue from core telecom services under AGR.  In 2015, Telecom Dispute Settlement and Appellate Tribunal ruled in favour of TSPs, but the government appealed against this order to India’s Supreme Court (“SC”).

After protracted hearings, in 2019, the SC upheld the government’s definition of AGR, and in 2020, the SC directed TSPs to pay their AGR dues in annual instalments over the next ten (10) years. 

In July 2021, the SC dismissed applications filed by TSPs seeking a correction of the arithmetic errors in the calculation of AGR dues and held that the calculation of AGR dues could be the subject matter of any future litigation.

The effect of the SC’s judgement has resulted in TSPs like Vodafone Idea Limited and Bharti Airtel Limited being burdened with pending AGR dues of about INR 59,000 crores (US$8 billion, approximately) and INR 44,000 crores (US$5 billion. approximately), respectively.  Moreover, Vodafone Idea Limited is on the verge of bankruptcy.

Reliefs announced

  • The definition of AGR has been rationalized by excluding non-telecom revenue of TSPs, on a prospective basis.  
  • A moratorium or deferment has been given up to four (4) years commencing on October 1, 2021 in annual payments of dues under the SC’s judgement; provided, however, the Net Present Value (“NPV”) of the amounts due remaining the same.  
  • Payments for spectrum purchased in past auctions (excluding the auction of 2021) has also been allowed to be deferred for up to four (4) years with NPV protected at the interest rate stipulated in the respective auctions.

TSPs availing the moratorium will have to pay the Marginal Cost of Funds based Lending Rate + 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 provide an option to TSPs to pay the interest amount arising out of the deferment of payment by way of equity, and at the option of the government, to convert their entire dues into equity.  The guidelines on the equity conversion and the foregoing points are yet to be finalized by the Ministry of Finance.  

Other structural and procedural changes

Bank Guarantees: A reduction of 80% has been permitted in the bank guarantee (“BG”) amount for BGs to be provided to guarantee the licence fee and other similar payments.  One BG will suffice, and there is no requirement for multiple BGs in different Licenced Service Areas in the country.  Further, no BG will be needed for spectrum auctions.

Spectrum: In future auctions, the tenure of allotment of spectrum will thirty (30) years instead of twenty (20) years.  Spectrum sharing will be encouraged, and the additional spectrum usage charge of 0.5% for spectrum sharing has been removed.  TSPs will be now permitted to surrender unused spectrum after ten (10) years for spectrum acquired in future auctions.  This will help them offload any extra spectrum and do away the need for them to continue paying licence fees on spectrum not being used.  A spectrum auction calendar will be fixed, and auctions will be held in the last quarter of every fiscal year.

Miscellaneous changes to improve ease of doing business:

  • The license requirements for import of wireless equipment under customs notification of 1953 issued under Section 19 of the Sea Customs Act 1878 have been removed and have been replaced by self-declaration.
  • Know Your Customers (KYC) process based on apps has been permitted while the e-KYC rate has been revised to One Rupee (INR 1).  Shifting from prepaid to post-paid connections will not require fresh e-KYC process.
  • Paper customer acquisition forms will be replaced by digital storage of data. Consequently, warehouse audit of customer acquisition forms will not be needed.

Key Takeaways

The telecommunication sector reforms are being implemented to ease the cash flow for TSPs.  However, all the reforms are prospective in nature.  

While a moratorium of four (4) years might help TSPs in shoring up their business and use the liquid market conditions to raise funds to pay the government, the burden of payment has not been reduced in any manner.  Outstanding dues will ultimately have to be paid with interest, or equity will have to be issued to the government.  It remains unclear if these reforms will help distressed TSPs like Vodafone Idea Limited stay afloat or even help the government, if it has to buy equity in a more or less defunct business. Moreover, the spectrum usage charge waiver will be applied on spectrum bought in future auctions, and likewise, the bank guarantee relaxations will also kick in futuristically.  It remains to be seen if strategic and financial foreign investors look at India’s telecommunication sector favourably and invest additional funds in the incumbent operators.

Akil Hirani, Managing Partner - Tax, Corporate/M&A, Joint Venture, Private Equity

Akil Hirani is one of India’s leading corporate lawyers having more than 25 years of experience. Currently, he is the Managing Partner at Majmudar & Partners, a leading Indian law firm, and also heads its transactions practice. Mr. Hirani combines superlative Indian law acumen with an international skill set and has been ranked as one of the most in-demand lawyers in India by Chambers Asia.

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