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OPINION: Big Telecom Reforms Part of Modi Govt’s Long Trajectory of Structural Changes

By: Sanju Verma

Last Updated: September 28, 2021, 18:06 IST

Modi’s approach to foreign policy is different from previous governments. He knows that to be an effective global power, India has to be strong, both financially and militarily, writes Amish Devgan.

Modi’s approach to foreign policy is different from previous governments. He knows that to be an effective global power, India has to be strong, both financially and militarily, writes Amish Devgan.

The recent telecom reforms by the Modi government will restore back to health a sector that was repeatedly impaired by successive Congress regimes.

The recently cleared Big Bang telecom reforms, including 100% foreign investment through the automatic route will usher the industry into a new era, boost investment and reduce the debt burden and ease cash flows. The Cabinet also allowed a four-year moratorium on all dues that telecom operators have to pay to the government, including annual payments of dues arising out of the adjusted gross revenue (AGR) judgment and spectrum purchased in past auctions excluding the March 2021 auction. The moratorium will start from October 1 this year. These reforms are deep, broad and structural. They will bring in change today and in the future and are revenue-neutral for the government. Moratorium or deferment on due payments of spectrum purchased in past auctions (excluding the auction of 2021) for up to four years with net present value (NPV) protected at the interest rate stipulated in the respective auctions is a landmark step.

Allowing telecom players to pay the interest amount arising due to the said deferment of dues by way of equity is a huge step too, which will drastically bring down the unsustainable debt levels of some players. This will also help various banks having substantial exposure to the telecom sector.

The definition of AGR which had been a major reason for the stress in the sector has been rationalised by excluding non-telecom revenue of telecom companies from the ambit of AGR with prospective effect. AGR refers to revenues that are considered for payment of statutory dues. Telecom companies had been asking for a change in definition of AGR since 2005 and it finally happened in 2021 thanks to the sweeping, bold reforms by Prime Minister Narendra Modi. A four-year moratorium to pay government dues (but with interest) is a welcome step too.

The Modi government has also allowed permission to share scarce airwaves. The scrapping of spectrum usage charge (SUC) for airwaves acquired in future spectrum auctions is again a decisive measure. Though this is with prospective effect, it will lead to massive savings for telecom players as currently anywhere between 3-5% of AGR is paid as SUC and about 8% of AGR as a licence fee. Allocation of spectrum through an auction for 30 years as compared to the present 20-year period is another out of the box move. Also, telecom operators will be allowed to surrender the spectrum that will be acquired in future auctions after 10 years of the lock-in period. In effect, the recent telecom sector reforms by the Modi government will restore back to health a sector that was repeatedly impaired by successive Congress regimes that squeezed it by forcing companies to bid for auctions at ridiculously expensive prices. Thereafter, licence fees, SUC, penal taxes only made the going more difficult for telcos with banks, who loaned a large sum of money to these telcos, saddled with NPAs and bad debts under the incompetent Congress. However, all that will now be a thing of the past as the recent measures will put the sector back on track.

Easing of customer acquisition norms for telecom operators by replacing the need to fill physical forms with digital forms for instance shows the detailing that went into the relief package announced for the telecom players.
In effect, the structural and process reforms in the telecom sector will protect and generate employment opportunities, promote healthy competition, protect interests of consumers, infuse liquidity, encourage investment and reduce regulatory burden on telecom service providers. In the backdrop of the outstanding performance of the telecom sector in meeting Covid-19 challenges, with huge surge in data consumption, online education, work from home, interpersonal connect through social media, virtual meetings, the reform measures will further boost the proliferation and penetration of broadband and telecom connectivity. The reforms reinforce PM Modi’s vision of a robust telecom sector with emphasis on competition, customer choice, Antyodaya for inclusive development, bringing the marginalised areas into the mainstream and universal broadband access to connect the unconnected. The package is also expected to boost 4G proliferation, infuse liquidity and create an enabling environment for investment in 5G networks.

Huge reduction in bank guarantee (BG) requirements (80%) against Licence Fee (LF) and other similar levies are an important step too. Henceforth, there will be no requirement for multiple BGs in different licensed service areas (LSAs) regions in the country. Instead, one BG will be enough. Also, from October 1, 2021, delayed payments of LF/spectrum usage charge will attract interest rate of SBI’s marginal cost of lending rate (MCLR) plus 2% instead of MCLR plus 4%, which will give huge breathing space to telcos. Interest will be compounded annually instead of monthly with penalty and interest on penalty removed. For auctions held henceforth, no BGs will be required to secure instalment payments as industry has matured and the past practice of BG is no longer required. Additional SUC of 0.5% for spectrum sharing has been removed.

Ease of doing business is being promoted with cumbersome requirement of licences under the 1953 customs notification for wireless equipment removed. Self-KYC (app based) has been permitted. E-KYC rate has been revised to only Rs 1. Shifting from prepaid to post-paid and vice-versa will not require fresh KYC. Paper customer acquisition forms (CAF) will be replaced by digital storage of data. Nearly 300-400 crore paper CAFs lying in various warehouses of TSPs will not be required. Warehouse audit of CAF will not be required. SACFA clearance for telecom towers has been eased. DoT will accept data on a portal based on self-declaration. Portals of other agencies (such as civil aviation) will be linked with the DoT portal.

The Modi government is also laying down the framework for incorporation of a Bad Bank with all the regulatory approvals in place.

The high level provisioning by public sector banks (PSBs) of their stressed assets calls for measures to clean up the bank books. An asset reconstruction company limited (ARCL) and asset management company (AMC) is being set up to consolidate and take over the existing stressed debt and then manage and dispose of the assets to alternate investment funds (AIFs) and other potential investors for eventual value realisation. The incorporation of the national asset reconstruction company limited (NARCL) was registered with the registrar of companies (RoC) on July 7, 2021. Paving the way for a major clean-up of bad loans in the banking system, the Modi government last week cleared a Rs 30,600-crore guarantee programme for securities to be issued by the newly incorporated Bad Bank for taking over and resolving non-performing assets (NPAs) amounting to Rs 2 lakh crore.

The Reserve Bank of India is in the process of granting a licence to the National Asset Reconstruction Company Limited (NARCL), following which toxic assets worth Rs 90,000 crore that banks have already fully provided for will move to the NARCL. The Cabinet’s decision to extend a five-year guarantee for NARCL-issued security receipts to banks completed the entire cycle of cleaning up India’s banking system that began with the recognition of the extent of bad loans in 2015. The erstwhile Congress-led UPA never fully provided for bad loans. Instead, the Congress ran the banking system like a private fiefdom by spending good money, after bad. NPAs were not fully recognised during the UPA era and banks were forced to lend money to fraudulent companies so that they could simply repay the earlier loans availed from banks by these companies. In effect, the erstwhile Congress regime ran a huge “ponzi scheme” with banks being made unwilling accomplices. PM Modi’s zero tolerance for corruption rewrote the rules of the game in the last seven years with banks being restored back to health.

Under the new proposed mechanism, the NARCL will acquire assets by making an offer to the lead bank. Private sector asset reconstruction (ARCs) firms may also be allowed to outbid the NARCL. Separately, public and private lenders will combine forces to set up an India Debt Resolution Company (IDRC) that will manage these assets and try to raise their value for final resolution. The Modi government has completely overhauled the banking system by tightening prudential norms and recognising bad assets. A 15% cash payment would be made to the banks based on objective valuation and the rest 84% will be given as security receipts (SRs). For those to hold on and have their value intact, there is a need for the government to give a back-stop arrangement and that is why Rs 30,600 crore has been cleared by the Modi government.

Once the NARCL and the IDRC have finally resolved the bad assets, preferably as a going concern and not through liquidation proceedings, the balance 85% held as security receipts would be given to the banks. The government back-stop of Rs 30,600 crore will come in only as much as to pay the gap between the realised value and the face value of those receipts and this will hold good for only five years. While there are 28 ARCs in the private sector, they did not take up big ticket resolutions so a need was felt for government-backed security receipts and the NARCL. The whole idea is to ensure that value that is locked in the assets is realised and comes back to the banks; banks then use it as Growth Capital and the banking system becomes more robust. The five-year limit on the guarantee with an increase in the fees charged for the guarantee every year is an incentive for the resolution process to be completed at the earliest. The Modi government has addressed the issues facing the banking system in totality that in 2015 was a major challenge for the economy. The twin balance sheet problem, which caused a lot of stress has been resolved in a holistic way. The government guarantee for the proposed security receipts is a positive stepping stone for unlocking stressed assets. The upfront cash payment by the NARCL to banks will immediately be accretive for the profitability and capital of the banks. The ability of the NARCL to resolve these assets in a time-bound manner will be critical for future provision write-back by banks and that is precisely what the NARCL will look to do.

Public sector banks will have a 51% ownership in the NARCL while their shareholding along with that of public sector financial institutions will be capped at 49% for the IDRC with private lenders bringing in the rest of the equity capital. About 16 banks, including private players, would put up about Rs 6,000 crore as equity for the NARCL. “Our government is ready to take the biggest risk in the interest of the nation. GST was stuck for so many years only because those who earlier in the government could not muster up the courage to take political risks. We not only implemented GST but today we are witnessing record GST collection. “Recently, we decided to scrap retrospective tax which was praised by the industry. It will strengthen the bond between the government and industry,” these are some pertinent lines spoken by PM Modi at the CII conference in August. Setting up a Bad Bank and the telecom reforms are only an added dimension to the long trajectory of structural and process driven reforms by the Modi government and yes there is more to come.

Sanju Verma is an Economist, National Spokesperson of the BJP and the Bestselling Author of ‘Truth & Dare-The Modi Dynamic’.

(The views expressed in this article are those of the author and do not represent the stand of this publication.)

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first published:September 28, 2021, 18:05 IST
last updated:September 28, 2021, 18:06 IST