4 min read.Updated: 09 Sep 2021, 01:21 AM ISTVijay Kelkar,Niranjan Rajadhyaksha
The government should accept special zero-coupon bonds for AGR dues to lighten the burden of struggling telecom companies
The ubiquity of mobile phones in India, combined with low monthly charges, has empowered citizens as well as enterprises. The rapid growth of online payments over the past few years is a case in point. It would not have been likely without widespread access to mobile phones that can use digital public goods such as the United Payments Interface. The online education—however imperfect—provided to millions of children during the pandemic would not have been possible without mobile communications. The need to maintain a robust telecom sector is important for country-wide access to citizens and for accelerating economic growth. The ongoing financial strain in the telecom sector thus requires policy attention.
We argue here that the Indian telecom sector is at the cusp of another ‘Vajpayee moment’. The context is worth reiterating. India opened up the telecom sector to private investment in 1994. Aggressive bidding by companies to get licences led to financial stress, including defaults. The New Telecom Policy was announced in 1999. The government led by Atal Bihari Vajpayee offered a grand bargain that set the stage for the telecom sector’s subsequent success story.
The government allowed telecom companies that held licences under the earlier auction to exit the contracts they had signed. Companies were allowed to shift from paying fixed licence fees to paying the government a share of their adjusted gross revenues (AGR). On their part, telecom companies agreed to withdraw the multiple cases that had led the entire telecom sector into a legal quagmire. The New Telecom Policy also made it clear that it sought to “transform in a time-bound manner the telecommunications sector to a greater competitive environment in both urban and rural areas providing equal opportunities and level-playing field for all players". Among the steps taken in that direction were easing of entry restrictions and strengthening the Telecom Regulatory Authority of India.
It has been about a year since the Supreme Court instructed telecom companies to share not just their core telecom revenues with the government, but also to take into account promotional offers to consumers, income from the sale of assets, bad debts that were written off, and dealer commissions. The apex court has allowed the affected telecom companies to make a small upfront payment and then pay their excess AGR dues to the government in ten annual instalments, from fiscal year 2021-22 to 2030-31, in an attempt to ease their immediate burden, which has raised concerns about the financial stability of Bharti Airtel and Vodafone Idea. Analysts estimate that the extra annual payments by all telecom firms could be around ₹22,000 crore a year.
The situation right now is different from the one that led to the introduction of the New Telecom Policy 25 years ago. However, it is similar in the sense that there is a good case for policy intervention by the government. There are three broad policy concerns that need to be addressed in the context of the telecom sector: consumer welfare, competition and financial stability. Possible tariff hikes to generate extra revenues to meet AGR commitments will hurt consumer access. The inability to charge consumers more could mean that the three-player telecom market becomes a duopoly, through either a firm’s failure or acquisition. The banks that have lent to domestic telecom companies are also worried about their exposure in case AGR dues overwhelm the operating cash flows of these companies.
Here is one possible solution to be pursued by the government. The administration should accept special zero-coupon bonds worth the entire amount due from telecom companies that have AGR funding issues, at a discount to face value, based on the comparable sovereign bond yield at the time of issue. The zero-coupon structure would mean that telecom companies will have no immediate interest costs, thus easing pressures on cash flows without tariff increases. The ideal tenure of the bonds could be 10 years, to match the payment schedule given by the Supreme Court in its decision in September 2020, but higher tenures can also be considered. These zero-coupon telecom bonds should be tradable instruments, so that the government does not necessarily have to hold on to them till maturity.
However, taxpayers should also be able to capture the upside of this investment in the telecom sector. The zero-coupon bonds that we are suggesting here should be accompanied by a voucher which gives the government an option to get a 10% equity stake in the issuing companies, at the six-month average share price at the time of the vouchers’ issue. Admittedly, the details of both the pricing as well as the convertibility clauses will be important issues to work on. The government should also set up an independent committee of experts, chaired by a retired judge of the Supreme Court, to calculate the excess AGR dues to be paid based on a transparent formula.
The solution we are suggesting here is only a broad framework—it would provide telecom companies with funding to meet their AGR commitments, it does not impose any immediate pressure on cash flows because of interest payments, and it allows the government to make capital gains through its equity stakes in telecom companies. A vibrant telecom sector is central to economic growth, and the past decade has seen investors suffer because of an unstable regulatory regime. Matters have now come to a head, and an innovative public policy response is needed. The Indian telecom success story after the telecom policy reforms introduced in 1999 by the A.B. Vajpayee government show that the benefits of such policy intervention can have a multiplier effect across the economy.
Vijay Kelkar & Niranjan Rajadhyaksha are, respectively, vice-president of the Pune International Centre, and a member of the academic advisory board of the Meghnad Desai Academy of Economics
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