March 8, 2018
The Cabinet has approved a relief package for the telecom sector that’s been going through turbulence over the past two years. The demands of telecom operators were many but the government has decided to give succour in two areas – relaxing the spectrum holding cap and increasing the tenure to make payments to the government for spectrum purchase.
The package, according to the Union Cabinet chaired by Prime Minister Narendra Modi, will improve the cash flow of telcos immediately, and facilitate consolidation in the sector. By increasing the number the yearly instalments to 16 – up from 10 instalments presently – the telcos will be more in control of their finances for the next few years as their current liabilities will be spread over a longer period of time.
The biggest pain point for the sector is unsustainable levels of debt. Ratings agency ICRA estimates sector debt at Rs 4.7 lakh crore as on March 2018. Some 70-80 per cent of this debt is the money that the telcos owe to the government for buying spectrum.
But extending the tenure of liabilities to reduce the short-term burden would result in telcos paying more to the government in the form of interest and other levies. Remember that increasing the tenure of a loan leads to higher outgo (in the form of interest component) on the loan amount. The government’s note also mentions this: “the total amount received will be higher by Rs 74,446.01 crore till 2034-35.”
The other part of the package is going to support the current consolidation in the sector. A series of M&As have been announced in the recent past, including the merger of Vodafone India and Idea Cellular, Reliance Jio acquiring Reliance Communications, and Bharti Airtel buying a host of smaller telcos like Tata Teleservices, Telenor, Videocon Telecom and Augere.
The current regulations mandate that no operator can have more than 25 per cent of the total spectrum allocated in a circle and 50 per cent in a given band. Under the new guidelines, the overall spectrum cap is revised from the current limit of 25 per cent to 35 per cent. The current intra-band cap is removed but there will be a cap of 50 per cent on the combined spectrum holding in the sub-1 gigahertz bands (700 megahertz, 800 MHz and 900 MHz bands).
It’s going to directly benefit Vodafone and Idea Cellular because the combined spectrum holding of the merged entity is over 25 per cent. In the absence of new guidelines, the combined entity would have required selling some spectrum to comply with the old norms. Following the Cabinet’s decision, Jio can also target RCom’s remaining unsold airwaves in the 850 MHz band as it will not cross the new spectrum holding limits.
Industry is however not satisfied with the package. It wanted more measures such as lowering of licence fees, spectrum usage charge (SUC) and GST rates, 100 per cent FDI through automatic route, and scrapping of Universal Services Obligation Fund (USOF) levy. At the moment, the telecom operators pay taxes and levies of about 29-32 per cent, including 18 per cent GST, 8 per cent licence fee and 3-6 per cent SUC charges.
Some operators had even suggested introducing a floor price mechanism on data to prevent predatory pricing. In fact, telcos had asked for a longer tenure of 20 years to pay for spectrum but the Cabinet settled for 16 years, based on suggestions from inter-ministerial group.
It seems that before giving any relief to the sector, the government has tried to safeguard its own interests first. The government’s revenues from the sector are expected to fall substantially in 2017/18 due to the absence of spectrum auction and lower collection of licence fee and spectrum usage charge (SUC) from operators who are reeling under the impact of hyper competition.
In a way, the more likely gainer from these measures is going to be the government than the intended beneficiaries. The higher spectrum holding cap will encourage participation in the future auctions, thereby increasing government’s revenues. The extended tenure for spectrum payment will earn it more interest income. The clamour for more relief packages is expected to get louder.