The telecom sector in India is on the brink of collapse. If the telecom operators fail to repay their debt, this crisis could spill on to the banking system. It could add on to the Non-performing assets (NPAs) of the banks. This article explains everything about the distress in the telecom sector.
Why is the crisis in the telecom sector suddenly in the news?
It is because of the Supreme Court verdict on 24th October 2019. It upheld the definition of ‘Adjusted gross revenue'(AGR) as interpreted by the Government.
(As per the telecom industry, the AGR should include the revenue from core telecom operations only. As per the Government, the AGR should include the revenue from both core and non-core operations.)
The definition of AGR is important as it is the basis for calculating the two charges levied on the Telecom operators by the Government- license fee and spectrum usage charges. (License fees is 8 % of AGR and Spectrum usage charges is 3-5 % of AGR)
The Supreme Court upheld the definition of the AGR by the Government on 24th October 2019, so the telecom operators have to pay Rs.1.4 lakh crores to the Government within 3 months, that is by 23rd January 2020. It places a lot of burden on the already distressed telecom sector.
The definition of AGR has been under litigation for 14 years. So, a relatively smaller amount of Rs.23189 crores has turned into a massive sum of Rs.1.4 lakh crores. This amount includes the basic license fees and spectrum usage charges due, interest on the basic dues not paid, penalties on delayed payment and interest on penalties not paid. (License fees due- Rs.92640 crores; SUC due- Rs.46000 crores. Total- Rs.1.4 lakh crores)
This total amount of Rs.1.4 lakh crores is owed by 15 operators, but Telecom has consolidated over the years. Only 4 players are currently operational- Bharti Airtel, Vodafone Idea, Reliance Jio and BSNL/ MTNL.
A significant proportion of the amount is owed by Airtel and Vodafone, as Jio is a new entrant.
This decision is a blow to the debt-laden industry.
Update: The companies missed the January deadline for payment of dues. On 18th March 2020, the Supreme Court ruled that the dues cannot be assessed by the Telecom companies as argued by them, but it considered staggered payment (installments over a long period of time). But, on 11th June 2020, the court ruled that Telcos will not be allowed to pay the dues in 20 years time-frame, but asked them to provide a detailed roadmap on how they plan to clear their dues.
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Why is the Telecom sector saddled with debt?
There are two major reasons specific to the Telecom sector-
- Cancellation of 2G licenses– We know that in the year 2007, the Indian Government awarded 122 telecom licenses (with bundled 2G spectrum), without conducting auctions. The licenses were awarded on ‘first-come, first-serve’ basis with prices discovered in 2001. This was the genesis of the 2G scam, with the Government favouring some players. In the year 2012, the Supreme Court arbitrarily cancelled all the licenses and ordered fresh auctions. About 10 mobile operators had to shut down operations overnight after investing billions of dollars. The Supreme Court should have gone after the people involved in the scam, rather than arbitrarily cancelling all licenses.
- The entry of Jio– The entry of Jio led to intense price-wars in the industry. There has been rapid consolidation in the market, and only 4 out of 14 players have survived the competition.
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So, what next?
It seems that Vodafone Idea is on the verge of bankruptcy. The 5G auctions that have been planned this year, will push the operators further into liquidation. The Government will have to take immediate steps to support the industry. Otherwise, we are looking at lost jobs and troubled banks. We also risk turning the telecom industry into a duopoly with only 2 major players.
Considering the above, the Government recently announced setting up of Committee of Secretaries (CoS), to recommend measures to mitigate financial stress in the Telecom sector. The CoS will comprise representatives from the ministries of finance, law, and telecom. It will consider issues such as deferment of spectrum auction for two years, reduction in spectrum usage charges, waiver of penalties, etc
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