Government pulling out all stops to ensure success of spectrum sale

New Delhi: The government is pulling out all stops to ensure that the coming spectrum auction is successful.

The plan includes persuading the Reserve Bank of India (RBI) to relax overseas borrowing rules, a step that is likely to allow telecom operators to raise the required funds to bid in the mega spectrum auction later this year.

The government is readying a presentation to convince RBI to modify its 30 November notification on external commercial borrowing (ECBs) so as to ease the ability of infrastructure firms, especially telecom firms, to raise short-term foreign-currency loans, said two government officials, requesting anonymity.

The government is relying on what some economists have termed rather optimistic revenue estimates from spectrum auctions to meet its budget deficit target for the year starting 1 April.

Without access to foreign funds, India’s financially strapped telcos may find it difficult to acquire spectrum and, in turn, jeopardize the government’s ability to meet its fiscal targets.

“If you look at the Bharti deal with Videocon, the telcos that need to acquire the spectrum are preferring to buy it from the smaller operators rather than wait for the auction. The price is so high, and the lack of ecosystem will discourage telcos that can afford the spectrum to participate in the auction. They may prefer waiting and taking a gamble on the government lowering the price due to lack of participation,” a telecoms analyst with a Mumbai-based multinational brokerage firm said.

The government expects at least around ₹ 55,000 crore from the coming auction, according the Union budget documents.

Mint reported on 9 March that RBI changed the rules regarding ECBs, making it more difficult for telecom companies to get short-term (3-5 years) loans from foreign banks. They can, however, avail of long-term foreign currency loans and short-term rupee loans.

The primary reason why RBI changed the rules was to encourage longer term foreign currency borrowing and rupee-denominated ECBs. But the problem lies in the fact that most foreign banks shy away from long-term lending while domestic banks charge much higher interest rates.

Domestic banks are also reluctant to lend to companies with debt-to-Ebitda (earnings before interest, taxes, depreciation and amortization) ratio of more than 3X, given their struggle with bad loans.

As part of the presentation, the government has put together the debt-to-Ebitda ratios for the telcos, which paint a stark picture. Bharti Airtel Ltd, India’s largest carrier, has a debt-to-Ebitda ratio of 2.38 times, followed by Idea Cellular Ltd, with 3.08 and Vodafone India Ltd at 5.33 times.

The smaller telcos are in a far worse position. Tata Teleservices has a debt-to-Ebitda ratio of as much as 31.47X. The debt-to-Ebitda ratio of Reliance Communications Ltd is at 5.72 times while for Aircel Ltd it is 10x, the data showed.

The high amounts of debt make it tougher for telcos to borrow more in India.

The telecom sector is also lobbying the government to get the service tax on spectrum trading, announced in the Union budget, rolled back.

The telcos already owe almost ₹ 50,000 crore to the Department of Telecommunications (DoT) in the form of licence fees ( ₹ 17,782 crore), spectrum usage charges ( ₹ 24,281 crore) and other charges and penalties.

Around 50% of these are under litigation.

They also owe as much as ₹ 3 trillion in debt, on an annual revenue of around ₹ 2.2 trillion.

DoT is also currently reviewing every aspect of the coming spectrum auction, which could delay it by a few months.

In January, the telecom regulator submitted its recommendations for reserve price for 2142MHz of spectrum to be auctioned in the 700MHz, 800MHz, 900MHz, 1800MHz, 2100MHz 2300MHz and 2500MHz bands.

Going by the prices suggested by the Telecom Regulatory Authority of India, the total value of the spectrum to be auctioned is estimated at ₹ 5.5 trillion, five times the amount raised in any of the previous spectrum auctions held since 2010. The Telecom Commission, the country’s highest telecom policy making body, is expected to take up the recommendations for approval on 28 March.