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Telecom Reforms – A Liquidity Booster for the Sector

30 Sep 2021

To boost the distressed telecom sector, the Union Cabinet has introduced various reforms such as the exclusion of non-telecom revenue from the definition of AGR, a moratorium on payment of pending AGR dues, and 100% FDI under the automatic route.

Introduction

Telecom Services Providers (TSPs), under the licenses granting them the right to operate in India, are obligated to share a percentage of their annual gross revenue (AGR) with the government as a license fee. These licenses define AGR broadly to include revenue generated from telecom as well as non-telecom activities carried out by licensees. However, certain TSPs disagreed with the view that AGR includes revenue generated from non-telecom activities and chose to litigate the matter before the Telecom Disputes Settlement and Appellate Tribunal and the Supreme Court. During the pendency of this litigation, the dues of some entities were not paid on the extended definition of AGR (i.e. dues were not paid on the revenue component from non-telecom activities). However, the Supreme Court affirmed the view that revenue of TSPs from all sources should form part of the calculation of AGR. Consequently, the Court directed the telecom companies to pay their pending dues towards license fees, along with penalty and interest. As a result, at the end of 2019, the telecom industry was burdened with nearly INR 92,000 crore (approx. USD 12 billion) in arrears, penalty and interest payments. Notably, only 25% of this amount was the actual license fee due and the remaining 75% of liability was on account of penalty, interest and interest on the penalty.

In addition to the hardship imposed by this demand, the TSPs have also endured bloated operational costs and amassed vast debt. The telecom sector has seen a major consolidation and the market has contracted from about twelve telecom operators to three.

To provide relief in the backdrop of the outstanding performance of the telecom sector in meeting challenges faced during COVID-19, the Union Cabinet approved a crucial relief package for the telecom sector, in the form of major reforms, outlined in the Press Release of 15 September 2021 (Press Release). We discuss some of these reforms and their impact below.

The Reforms

  • Rationalisation of various fees and charges

    • AGRA telecom licensee in India is required to pay 8% of AGR as license fees to the Department of Telecommunications (DoT). AGR is broadly defined to include not just revenue from the core telecom activities provided by the operator but also supplementary services, revenue from permissible sharing of infrastructure and any other miscellaneous revenue, without any set-off for related items of expense. This would mean that the income arising out of non-telecom activities of the TSPs would be subject to the license fees, imposing additional liability on the TSPs. This also discourages such entities to foray into other sectors or, to an extent, exit from the telecom sector, as evidenced by the shuttering of various TSPs over the last decade.Several interventions and representations were made by stakeholders attempting to assist the industry in this regard, including recommendations from the Telecom Regulatory Authority of India (TRAI) dated 13 September 2006 and 6 January 2015, in addition to the policy objectives outlined in the National Digital Communications Policy 2018 (NDCP), which sought to review the license fee and the definition of AGR. Despite the same, the Supreme Court sealed the issue in 2019, determining that the revenue of TSPs from all sources should form part of AGR.

      Through the reforms, the Union Cabinet has rationalized the calculation of the AGR by excluding non-telecom revenue from its purview on a prospective basis. While this may serve as a fillip to new participation in the telecom sector, given that the rationalisation is prospective in nature, the levy imposed on TSPs, following the Supreme Court judgment, will remain payable.

    • Spectrum Usage Charges

      Earlier, the DoT levied a spectrum usage charge (SUC) of 3%-5% of the AGR (depending on the band of spectrum allotted and the type of authorisation) with an additional 0.5% of the AGR charge levied, if such band of spectrum is shared with another operator. With the current reforms, SUC has been removed altogether for spectrum to be allocated in future auctions. Further, spectrum sharing has been liberalised with the removal of the 0.5% charge as well. While the Press Release does not expressly state as such, this relief is also likely to apply prospectively. We expect to receive more clarity once the DoT notifies the relevant amendments to the license to give effect to these reforms.

      The removal of SUC eases a large burden on the TSPs, it being a significant percentage of the AGR. Further, the liberalisation of spectrum usage and spectrum sharing incentivises investment into the sector, due to the reduced operational cost, and promotes proliferation and penetration of more players by encouraging spectrum sharing. Spectrum sharing will also assist large telecom companies in addressing network congestion and encourage smaller players to enter the market.

      In combination, these reforms significantly reduce the burden on TSPs as their corresponding licensing fee would be reduced to a large extent and would provide TSPs with much required liquidity, allowing them to channel these financial resources into improving infrastructure and other operational improvements. These reforms also have potential second order impacts, such as in the market for value added services, where the cost of the AGR was often priced into the services, and in corporate restructuring efforts that involved non-telecom assets of telecom companies. Other potential beneficiaries of this are the public sector banks and other debt instrument holders of these telecom operators, who would now be able to realise their borrowings with ease.

  • Reforms to the Treatment of Spectrum

    • Spectrum Tenure and Surrender

      The tenure of spectrum obtained in auctions has been increased from 20 years to 30 years, and a TSP may choose to surrender spectrum 10 years after it has been acquired, however this is permitted in case of change in business condition or technology changes after 10 years of lock-in and after paying defined surrender charge. Both these changes are effective prospectively, i.e. for spectrum obtained in future auctions.

    • Fixing of Spectrum Auction Calendar

      Previously, there was no specific timeline within which spectrum auctions were to be conducted. However, the Union Cabinet has now stated that spectrum auctions will be held in the last quarter of every financial year.

      Spectrum is a significant asset for TSPs and these reforms will allow TSPs to utilise the spectrum over a longer period and provide TSPs with more clarity, thereby assisting them with business positioning from an operational and cash liquidity perspective in preparation of the spectrum auction.

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