Telecom Reforms – Cloud Over Vodafone Idea Remains, Say Top Experts

On Wednesday, the union cabinet approved a number of relief measures for India’s telecommunications industry, including the calculation of adjusted gross revenues, future spectrum issuance and use, rules for foreign direct investment and a moratorium on dues to the government.

While leading experts on the sector welcomed the changes, they are skeptical about these moves ushering an immediate return to health for the weakest service provider in the market—Vodafone Idea Ltd.

‘Risk Of Duopoly Still Looms Large’

– Sanjay Kapoor - Former India CEO, Bharti Airtel

The government has announced structural and procedural changes for a sustainable telecom sector and the sector, in the past, has been demanding most of these in their manifesto and requests to the government. At an overall basis, it's good to see that the government is heeding that, and has taken these measures as reformist activities which should bring telecom back to track, going forward.

While I say that, for me in particular, there are a couple of initiatives that I probably fancy more. I definitely like the spectrum validity going up from 20 years to 30 years which will be good for the sector. I also like that the spectrum auction schedule will be there, which brings in complete transparency and therefore neither panic nor hoarding of spectrum is required. Everybody will know when the next spectrum will be available and how much will be available. I think that sort of transparency is very good for the sector.

As regards the AGR definition is concerned, I think most of the operators—after what happened on the AGR definition confusion—would have structurally corrected where the “non-telecom” or “non-core” revenues of the telecom firms lie. Maybe they have covered up their exposure already, so I don’t know how much of additional benefit will they get because of this. To have this as a stated clarity can only do good to the industry, it cannot do any harm to anybody.

Industry would have been happier to see reduction in revenue share and SUC as well!

Now to the more vital point where foreign direct investment is now 100% through the automatic route. The reality is that FDI gets traction when the industry is sustainable, profitable and is, per se, attractive. When we look at that, the government has made an attempt but with a caveat, to keep all structural and procedural changes to be NPV neutral for itself. However, while the government states that, in reality the threat or the risk of moving the industry from an oligopoly to a duopoly still looms large.

Even today, when you look at Vodafone Idea, their current Ebitda of about Rs 5,500 crore falls short to cover their capex, payables to the government and non-government. They also have to repay their non-convertible debentures and renew bank guarantees worth Rs 12,000 crore in the near future. When you consider all this along with the forthcoming 5G spectrum auctions, it looks unlikely that Vodafone Idea can stay contemporary with technology, be competitive and relevant to drive customer experience.

I think from a future perspective, these are great clarities for the industry but the Vodafone problem may need much more! The moratorium comes along with the interest, it isn't free. They might get a cash flow respite, but their P&L will get loaded with interest for future which has to be paid. Converting this into equity is an option but valuing the conversion will remain a challenge.

‘Unclear If This Facilitates New Investments For Vodafone Idea’

– R Chandrashekhar - Former Telecom Secretary

First and foremost, this is an excellent package that the government has come out with for the telecom sector. All the measures indicated in the structural reforms are very sensible and rational and were probably things that ought to have been done quite some time ago.

Similarly, the procedural reforms address areas that were crying out for attention for quite a while. These reforms address really important pain areas – uncertainty regarding when spectrum auctions would be held; complicated process for import of wireless equipment; very cumbersome manual KYC requirements which are an anachronism in a digital sector. The online clearance for telecom towers also is a very important procedural reform.

All the structural reforms – for example, removing non-telecom revenue [from AGR] is a very obviously desirable measure that was required for quite some time now. The earlier situation, where telecom companies typically had only-telecom revenues and non-telecom revenues were an insignificant portion no longer holds good. It has not been the case for a decade or more now. It made no sense to continue with that definition. Similarly, the bank guarantees requirements were needlessly onerous and heavy – this has been very substantially reduced without much loss in efficacy of the measure.

The spectrum tenure being increased to 30 years with an option to exit after 10 years provides both certainty as well as an escape route for telcos in case business does not pan out as planned. The abolition of spectrum usage charge for future auctions and making it easy to share spectrum are very welcome and rational steps.

The other category of reforms announced are for the purpose of removing some of the liquidity problems that players in the sector have been facing – in particular, Vodafone Idea, but to a lesser extent Bharti Airtel and to a very minor extent Reliance Jio. This problem has been sought to be addressed by the deferment of payment up to four years but protecting the NPV at the current value.

Giving the option to pay dues in the form of offering equity provides an escape route for a company from a cash outgo. That is in two parts, for which details will have to be awaited. One part is to pay the interest amount in the form of equity given to government. The second is the option to convert the due (principal) amount of the deferred payment into equity to the government at the end of the moratorium period. The [equity conversion of] interest appears to be at the option of the TSP, while that of the due amount at the option of the government (i.e., acceptance of an offer by the TSP). We will have to wait for the fine print to see what kind of equity – is it preference equity or at pari passu (equal footing) with original promoters, etc… all those questions will come up later. In a sense, this measure offers a mechanism to not force the extraction of liquidity from a company. Of course, it does mean diluting the ownership somewhat, again based on whatever is the fine print of the provision for conversion of dues or interest into equity.

Overall, for the sector, this [package] is a very good thing, there is no question about that. A well thought-out and well-reasoned, rational set of measures which offers the kind of oxygen that the sector was very badly in need of.

Whereas, for some of the players – to a large extent Vodafone Idea, to a significant extent Bharti Airtel, and to a negligible extent Reliance Jio – the problem was also the past. That problem of the past can be split into two parts. One is the liquidity problem arising from the past with the AGR judgment and the dues, penalties, etc, which has been addressed through these reforms as it applies to the dues applicable after the AGR judgment. So, the problems of the past in terms of liquidity have also been addressed in this set of reforms. What has remained is the problem of the overall viability for operators for whom the past is a heavy overhang. I am obviously referring to a substantial extent to Vodafone Idea, and to a certain extent Bharti Airtel. Bharti Airtel, probably has sufficient ballast to overcome the problem, especially after the current set of reforms which free up a certain amount of cash flow in the future for servicing some of the past dues.

However, for Vodafone Idea it is a different situation. One has to wait and see what impact these steps will have. I am sure the number crunchers are already on the job to see how this impacts the balance sheet of the company. To the extent that this only addresses cash flow, it probably does not significantly impact for the better, and certainly not for the worse, the financial status of the company. Therefore, the critical issue is… apart from an assessment of the viability of continued operations… the feasibility of fresh investment in infrastructure such as fibre and new technologies like 5G.

It is far from clear whether this will, in fact, follow after this set of reforms. It certainly makes it a little easier, less unattractive than it was earlier, when the promoters – both Vodafone and Kumar Mangalam Birla – declined to invest any further. The ability to attract fresh investment is going to be the litmus test for Vodafone Idea. Will they be able to attract loans or debt financing with or without additional equity infusion? Those are the big questions for which answers will unfold over time.

In summary, while the reforms are excellent, well thought out and exactly what the sector needed, the ability to address the past issues as far as Vodafone Idea is concerned is still a question mark. That is my sense of where things stand. If the substantial improvement in the sector dynamics and viability does lead to a change in the investment climate, especially with 100% FDI being permitted [via automatic route], that would be a huge plus. But that story is in the next chapter.

‘Moratorium Is Not Long Enough’

– Mahesh Uppal - Director, Com First; Telecom Policy Analyst

I will try and address the changes in the order in which the government has announced them.

One thing is very clear that the industry will welcome all the structural reforms that have been announced, since most of these have been demands that the industry has made over many years. So, whether it is the issue of rationalisation of AGR, multiple bank guarantees, rules about interest rates and now the removal of penalties, etc., all these things would be very welcome. I think they would be significant, going forward, and will make compliance easier.

The other thing which is an improvement is the rules about spectrum… where the tenure of ownership is now going to be 30 years, sharing will be easier, and that the surrender of spectrum will be possible after 10 years. All these are things that will make the access to, and the use of, spectrum that much easier and also reduce the risk in owning and using it.

This made sense when spectrum was allocated administratively but once you are buying spectrum in an auction, having to then again pay a charge to use it didn’t make sense, and its removal is a good thing.

Similarly, the process reform is also quite welcome, where a company will no longer have to store paperwork for ever and ever and will be able to move to digital means of doing KYC; not have to repeat it when it is not necessary, for instance as the minister pointed out – moving from prepaid to post-paid should not really require you to do another KYC.

I think it is also a good idea to have a calendar for spectrum auctions. Time will tell whether this calendar can be adhered to, because that has been a big challenge in the past. We are used to multiple postponements of auction. So, while the calendar is a good idea, adhering to it is a separate issue.

Now coming to the crux of it, and the more urgent parts.

I have my doubts whether this will be sufficient for companies such as Vodafone Idea which are struggling to stay afloat, but time will tell hereon. Maybe this is just the additional comfort that the banks needed, we don’t know. I personally will be skeptical about whether the four-year length of the moratorium will be sufficient. And more so because the minister was at pains to tell us several times that the government has taken no hit on liability. Government has not reduced the liabilities of players, nor has it allowed it to impact its own revenues. This means that it is really something that is about cashflow. Yes, it will have some advantages, but I don’t think it is slam dunk, or something that we can now sit back and say, "well we have sorted out the Vodafone Idea problem". Of course, the company will be best placed to respond to this as I am not privy to the details of their balance sheet. But I would be skeptical about the duration of the moratorium.

The other thing about converting interest into equity is a good idea but that it is completely at the discretion of the government, so time will tell if and how that will get implemented on the ground.

‘Totally Legitimate Decision’

– Arvind Datar - Senior Advocate; Counsel for Tata Teleservices in the AGR case at the Supreme Court

The cabinet decision is legally valid and does not fall foul of the Supreme Court’s AGR judgment. The amount is due to the government. So, they can waive it, reduce it, it’s totally legitimate. The Supreme Court had rejected all applications post its AGR verdict since they were made by the telecom companies.

The government can say it’s taking this decision in the larger public interest. Suppose they implement the Supreme Court judgment, banks are going to lose lakhs of crores in dues from telecom companies, there will be job losses if some companies have to shut down, those who will survive don’t have the infrastructure to absorb customers of entities who have to close down due to AGR dues. General Motors shut down, Ford has left India and if Vodafone goes as well, it’ll be a huge damage to the country’s image and economy. There will be huge collateral damage.

The court has given a decree in favour of the government. So, the government can decide whether it wants to give a moratorium, accept less etc. It’s similar to when a high court tells a taxpayer to pay a certain amount and then the government agrees to accept less under the Vivaad Se Vishwas Scheme.

Whoever has to receive the money is entitled to accept a lesser amount.