The right call

It's now for the telcos to strengthen their finances

The Union Cabinet’s decisions on Wednesday are vital steps towards reviving the embattled telecommunications sector in India and preserving its competitive nature. Although the private sector-led telecom revolution has been instrumental in propelling the India growth story, several administrative and judicial decisions over the past decade have placed it under enormous pressure. Some of these are now being addressed through the Cabinet’s decisions, and the government’s intent and decisiveness should be applauded.

The Union minister for telecommunications, Ashwini Vaishnaw, has described the Cabinet has made “nine structural changes and five process reforms”. Of these, one major improvement — long sought by telecom companies — is the rationalisation of the definition of “adjusted gross revenue”, or AGR, which serves as the basis for companies’ dues to the government. AGR was previously interpreted as being based on all revenue, rather than just that associated with a company’s core telecom business. The government has accepted that this interpretation was problematic, which will reduce the future financial burden on companies. Since this is forward-looking, as required by recent judicial decisions, the companies continue to have a high debt burden. They will, however, be able to manage cash flows a little better, given that the Cabinet has permitted a four-year moratorium on its dues from the sector, as long as interest is also provided for this period at a prescribed rate. The Cabinet has also approved a plan to remove the penalty regime from spectrum and licence fees and rendered future telecom leases both longer-lasting and more flexible. Finally, the infusion of global capital into telecom companies has been made easier by raising the cap on automatic foreign direct investment to 100 per cent.
 

The stock market has responded positively to the news, as it is seen as providing a more hospitable environment to two out of the three remaining players in the sector. There is a clear sense that the government has done its part in propping up this crucial industry. Concern about outstanding loans by state-run banks to the sector must also have played a role in the decision. The next moves must be taken by the companies themselves. They still have that debt burden to deal with, and creating a sustainable business model while paying down debt must be the focus of their strategy. There is no way in which this can be done without raising average revenue per user. The firms need to generate more cash in order to finance investment and manage their debt. The regulator needs to encourage the industry to move to tariffs, including prepaid 4G tariffs, that are sustainable over time. Vodafone Idea in particular has additional work to do as it needs to handle a large pile of liabilities. Now that the policy environment has been clarified, it would be relatively easy to raise capital from long-term investors. It is to be hoped that the government’s efforts will pay off, and the sector will be prevented from becoming a duopoly. It is also vital that it begins to bring in the cash required to make the investment needed to prepare India for a digitised future.