Government Telecommunications Lifeline – What does it change for Vodafone Idea, Bharti Airtel and Reliance Jio?

First and foremost, this is an excellent program offered by the government. All the measures indicated in structural reforms are very sensible and rational, and were probably something that should have been done some time ago.

Likewise, procedural reforms have long been calling for adoption. These address some really important areas of pain – the uncertainty of when the auction would take place; import of wireless equipment; very cumbersome and anachronistic manual KYC requirements in a digital sector. The SACFA authorization for telecommunications towers is also a very important procedural reform.

All structural reforms, for example by eliminating non-telecom revenues [from AGR calculation] is a very obvious measure that has been needed for some time now. The previous situation, where telecommunications companies generally had only telecommunications revenues and non-telecommunications revenues were only an insignificant part, is no longer valid. It hasn’t been for a decade or more now. It made no sense to continue with this definition, as it did with all bank guarantee requirements.

Increasing the spectrum duration with a 10-year exit option provides both certainty and an escape route. Abolishing spectrum fees for future auctions and making spectrum sharing easier are all very welcome and very rational steps.

The other category of reforms announced, with the aim of removing some of the liquidity problems facing players in the sector – notably Vodafone Idea but to a lesser extent Bharti Airtel and to a very small extent Reliance Jio – which was sought after to be resolved by deferral for a maximum of four years, but protecting the NPV at the current value.

Giving the option to pay it off in the form of equity provides an escape route for a business from a cash outflow. It is in two parts, the details will have to be understood. One is that the option for the telecommunications service provider to pay the interest arising from the equity. The second is that the government has the option of converting the amount due from the deferred payment into equity 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 amount owed is at the option of the government. We’ll have to wait for the fine print on this to see what kind of equity – is it equity of preference or to pari passu (on an equal footing) with the original promoters, etc… all these questions will come back later. In a sense, this provides a mechanism for not forcing the extraction of cash from a business. Of course, that means to some extent diluting ownership based on the fine print of the contribution or interest conversion provision to equity.

Net net, for the sector, this package is a very good thing, there is no doubt, well thought out and reasoned, rational and offers the kind of oxygen that the sector badly needed.

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