Telecom majors Bharti Airtel and Vodafone Idea breathed a sigh of relief as the Centre announced its relief package for the beleaguered sector.

Vodafone Idea, in particular, was staring at defaulting on its payments and even bankruptcy before the relief package was announced by Minister of Telecom Ashwini Vaishnaw.

What does the package offer?

Vodafone Idea owes Rs 58,254 crore while Bharti Airtel’s dues to the Department of Telecommunications (DoT) are Rs 43,980 crore. The adjusted gross revenue (AGR) dues, which are essentially a form of revenue sharing for the government, are a contentious and litigated issue between the telcos and the government. The companies, especially Vodafone Idea, are seeking a recalculation of the AGR dues through a review and curative petition in the Supreme Court.

The package offers a four-year moratorium on the AGR and spectrum dues from the telecom companies. Which means both these companies will now be able to free up substantial cash flows in order to reinvest capital and pay their other dues.

ICRA estimates that Rs 46,000 crore of annual cash flow respite will be achieved for the telecom industry due to the deferments on AGR and spectrum dues.

Vodafone Idea's consolidated debt stood at nearly Rs 2 lakh crore in June.

Additionally, the government has acquiesced to the recalculation request from the telecom companies as non-telecom revenue will no longer be added to AGR, reducing the overall debt burden on the telcos in the future. The government will also be keeping the option of converting existing debt into equity in the companies after the moratorium comes to an end.

Foreign direct investment

To boost foreign investment in the debt-ridden sector, the Centre also approved 100 percent foreign direct investment through the automatic route in the telecom sector. The move is expected to bring relief to equity holders in Bharti Airtel and Vodafone Idea who wish to exit their positions.

Also read: Airtel will opt for moratorium to redirect cash flow to build network: Sunil Mittal

Other reforms, including spectrum usage charges, raising the tenure of spectrum lease to 30 years from 20, free sharing of spectrum between carriers, and licence fee changes were also announced.

“This regime was an undue burden on the industry participants. Today, it has been rationalised. Monthly compounding of interest has been changed to annual compounding. A very reasonable interest rate of MCLR plus 2 percent has been approved, and the penalty has been eliminated," Vaishnaw said.

Problem not completely solved

The relief package has been welcomed by the three remaining telecom companies and banks with exposure to telecom debt and investors.

But experts have remained silent on the long-term effectiveness of the changes brought forth.

With the moratorium being a deferment of payment instead of a waiver of dues, Vodafone Idea would still need to turn its balance sheet completely around in order to have any chance of fulfilling its debt obligations. While Bharti Airtel is in a better spot, its balance is still in the red. The companies availing the moratorium would also be paying their debt back with interest in order to protect government revenue.

Also read: Telecom relief package paves way for Vodafone Idea to become a PSU: IIFL

But the two companies may just be too large to fail at this point. The potential collapse of Vodafone Idea would send a ripple through the Indian banking sector, many of which were significantly exposed to its debt. The loss of a major carrier would also force the remaining two players to now suddenly deal with an influx of users, while thousands of jobs would be destroyed as well.

(Edited by : Shoma Bhattacharjee)

First Published:Sept 16, 2021 6:50 PM IST