Indian government throws a lifeline to Vodafone and other telcos

The Indian telecom industry has welcomed the relief measures announced by the government earlier this week, establishing a four-year moratorium period on dues and adjusting the definition of adjusted gross revenue (AGR). The industry has been in distress for several years now, and the reforms are designed to address issues faced by the telcos. 
The trigger for the reforms was the particularly distressing situation of Vodafone Idea, India's third-largest service provider.

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The company was staring at bankruptcy because of massive debt, partly because of several charges and duties levied by the government. The collapse of Vodafone Idea would have reduced India to a duopoly. 

As per Vodafone Idea's June quarter earnings report, its debt was $24.4 billion (INR1800 billion), which included spectrum payment dues of $13 billion (INR962 billion), AGR dues of $7.94 billion (INR584billion) and $3.18 billion (INR230 billion) debt to the banks and financial institutions. On the other hand, Vodafone Idea had cash of just $125 million (INR9200 million).

Who's the biggest beneficiary of the government changes?
In this context, Vodafone Idea is also the biggest beneficiary of the reforms. The four-year moratorium for the payment of AGR and spectrum payment dues gives more time to the company to clear dues. 

On the other hand, Bharti Airtel, India's second-largest service provider, has decided to opt for the deferred payment mode to free up funds to invest in network upgrades and the upcoming 5G auction.

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Welcoming the reforms, Airtel's MD and CEO Gopal Vittal, said, "These fresh reforms will further boost our efforts to invest in this exciting digital future and enable us to be one of the leading players in India's digital economy. More needs to be done, however, toward a sustainable tariff regime to ensure the industry gets a fair return. This will, in turn, allow it to continue investing in new technologies and innovation to bring world-class services to customers."
India's largest service provider, Reliance Jio, also welcomed the new reforms, "Telecom sector is one of the prime movers of the economy and the key enabler for making India a digital society. I welcome the Government of India's announcement of reforms and relief measures that will enable the industry to achieve the goals of Digital India," said Mukesh Ambani, chairman of Reliance Industries, the parent company of Reliance Jio.

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Understanding the reforms

Apart from the four-year moratorium, the government has changed the definition of AGR, much to the relief of the telcos. The government has prospectively altered the AGR's definition, and the non-telecom revenue will not be included in the AGR now. 
After a legal battle spanning 15 years, India's Supreme Court had ruled in favor of the government in 2019 regarding the definition of AGR. While telcos believed that non-telecom revenue should not be included in AGR, the government didn't think so. As a result, the AGR-related dues and penalties had pushed the industry into debt.

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The new measures offer the option to the service providers to pay the interest amount arising due to the said deferment of payment by way of equity. Airtel's board will decide on converting interest on dues into government equity, which may lead to a 2-3% dilution. Vodafone Idea will likely take this option.
Another key measure relates to spectrum policy. The spectrum tenure has been increased from 20 years to 30 years now. The service provider will also have the option to surrender spectrum, acquired in future auctions, after 10 years. Further, the new reforms have also addressed the longstanding industry demand of doing away with the Spectrum Usage Charge (SUC). The telcos will not be required to pay SUC for spectrum acquired in future auctions.
The new rules allow 100% Foreign Direct Investment (FDI) in the telecom sector through an automatic route, which will help boost investment in the industry. Earlier, only 49% of investment through FDI was allowed through the automatic route. 
The reforms address several issues faced by the industry. The measures will possibly help Vodafone Idea acquire funding. The company has been trying to get investors, and the clarity from the government will give confidence to the prospective investors.

The collapse of Vodafone Idea would have impacted India's image in attracting foreign investment. These measures will help the company in the short term to continue its operations in India. At the same time, the payments are just deferred, and it still has to clear its debt of massive debt.