New ECB norms, reserve price may cast shadow over spectrum auction

The inability of telecom operators, especially the smaller ones, to raise short-term foreign debt, coupled with high reserve prices, is likely to cast a shadow on the auction of spectrum.

A 30 November Reserve Bank of India (RBI) notification on external commercial borrowings (ECBs) redefined the rules and disallowed infrastructure companies from short term foreign borrowing, defined as that maturing 3-5 years.

Telecoms, being part of the infrastructure sector, is considered to be the worst-hit, given that most of them are already burdened by high debt they acquired to bid in previous spectrum auctions.

Infrastructure companies are allowed only long-term foreign currency borrowing and rupee-denominated ECBs.

“The fact is most of the foreign banks are shying away from long-term lending. And the domestic banks charge higher interest rates. They are, in general, uncomfortable with lending to the telecom sector for a number of reasons,” a senior executive with one of the major telcos said on condition of anonymity.

“Apart from the already high amount of NPAs (non-performing assets or unpaid loans) that they are dealing with, there is also the fact that many of the telcos, especially the smaller ones, are already heavily leveraged. They are also uncomfortable with using spectrum as collateral, which can only be done after signing tripartite agreements with the Department of Telecommunications (DoT).”

The primary reason why the RBI changed the rules was to encourage longer term foreign currency borrowing and rupee-denominated ECBs.

The country’s telcos owe as much as ₹ 3.5 trillion in debt, on revenues of around ₹ 2.2 trillion. The larger operators like Bharti Airtel Ltd, Vodafone India Ltd and Idea Cellular Ltd have debt-to-Ebitda (earnings before interest, tax, depreciation and amortisation) ratios of under 3x—far more comfortable than Reliance Communications Ltd, for instance, that has debt-to-Ebitda of around 5.2 times.

“This move also encourages these companies to borrow from the domestic banks, in the short term. Most companies prefer foreign banks due to the much lower interest rates,” Devraj Singh, executive director with consulting firm E&Y said.

However, the domestic banks are unlikely to be keen to lend to the telcos at this juncture.

“They (the banks) are generally shy of lending to companies with debt-to-Ebitda margins of more than 3-3.5x. Most of the telcos are beyond this range or getting there,” a Mumbai-based telecom analyst with a multinational brokerage firm said.

However, not everyone agrees.

“RBI may allow the telcos to take the ECB route for spectrum allocation, on a case-to-case basis, under the approval route. They also understand the need for the funds, when a fresh round of spectrum auction is coming,” a senior corporate lawyer at a law firm said on condition of anonymity.

India’s telcos earn as much as ₹ 20,000 crore in foreign exchange every year, mainly from international roaming and calls, making the ECB route even more attractive for them.