4-year moratorium on AGR dues will give relief for now to telcos, but may not stop balance sheet bleed

Wednesday’s relief package for the telecom sector has come close on the heels of bankers getting involved in seeking some respite for the industry, particularly Vodafone Idea.

The relief package for the telecom sector, while offering the prospect of an annual cash flow breather of an estimated Rs 45,000 crore to the fund-starved industry, falls short of addressing the significant smudges of red already on the balance sheets of a majority of the players.

The measures, all of them prospective in nature, also potentially miss out on fostering a more sustainable tariff regime which, according to industry players, could have come as a shot in the arm for players in the capital-intensive sector and other stakeholders, such as banks that have an exposure exceeding Rs 1 lakh crore to telecom companies.

Among the measures, the announcement of a moratorium up to four years on dues arising out of the Supreme Court judgment on annual gross revenue (AGR), and on due payments of spectrum purchased in past auctions, is seen as positive in stemming the bleed in the short term.

However, those choosing to avail of the moratorium will have to pay an interest of MCLR+2%, something that will effectively protect the revenues of the government.

Ratings agency ICRA has assessed that the moratorium on AGR dues provides annual cash flow respite of around Rs 14,000 crore for the industry, while the moratorium on spectrum dues gives another Rs 32,000 crore of annual cash flow relief for the industry as a whole.

But this deferment may only provide temporary relief.

“The deferment for AGR dues cannot be construed as waiver since the package only envisages a moratorium of four years on such AGR dues from 1st October 2021 (appointed date) with the interest and penalties accruing for such deferral. On other issues such as spectrum payments, bank guarantees etc., the relief appears to be prospective in nature. While this will temporarily provide some relief, it does not essentially alleviate the already bleeding balance sheets of telecom operators since the dues will ultimately have to be paid with interest,” Akshat Jain, Partner, J Sagar Associates, said.

Additionally, at the end of the moratorium period, the government will provide an option to the telecom player to pay the interest amount arising out of the deferment of payment by way of equity, and at the option of the government, to convert the entire due into equity. The guidelines for this will be finalised by the Ministry of Finance.

A banking source close to the development said the steps announced by the government will “help the company conserve cash and it will significantly improve the probability of repayment at least for the next 3-4 years”. Another source said the announcements are likely part of a three-way agreement where the government effectively conveys that “I will provide you moratorium, you (promoters) bring in money into the company, following which the government will be open to taking some equity exposure into the company at a later date”.

A senior telecom industry executive said that this, alongside the provision for 100 per cent FDI through the automatic route, could potentially pave the way to allow gradual exit of some of the equity stakeholders of Vodafone Idea in due course. As of June 30, Vodafone Idea’s gross debt was Rs 1.9 lakh crore, comprising deferred spectrum payment obligations of Rs 1.06 lakh crore and AGR liabilities of Rs 62,180 crore.

In October 2019, the Supreme Court had ordered telecom operators to pay Rs 1.19 lakh crore to the Department of Telecommunications as pending AGR-dues. Of this, Vodafone Idea’s dues were Rs 58,254 crore, while Bharti Airtel’s dues were Rs 43,980 crore. However, in September 2020, the apex court granted 10 years to the companies to make deferred payments of AGR dues, including penalty, interest and interest on penalty through March 31, 2031.

A major point of contention in the AGR litigation was the inclusion of non-telecom revenues in the definition of adjusted gross revenues, which significantly increased the AGR-based levies such as spectrum usage charge and licence fee (that are a percentage of AGR). In Wednesday’s announcement, the government said non-telecom revenue will be excluded from the definition of AGR “on a prospective basis”.

Notably, Wednesday’s relief package for the telecom sector has come close on the heels of bankers getting involved in seeking some respite for the industry, particularly Vodafone Idea. News agency Reuters had reported earlier this week that a group of banks, led by State Bank of India, had written a letter to the government, asking for more time for Vodafone Idea to clear its dues. Last month, the Department of Telecommunications had a series of meetings with bank officials, including from SBI and Bank of Baroda, to discuss financial problems ailing the sector.

Banking industry sources said the telecom package comes as a relief to the banks as it mitigates the imminent possibility of default by vulnerable operators. This would help in stabilising and reducing the non-performing assets in the sector.

“Banking sector’s exposure to the telecom players is significant at over Rs 1 lakh crore, comprising fund-based and non-fund based books. The four-year moratorium on dues payable to government, along with the relief on bank guarantees, provides telcos the flexibility to manage their cash flows better. While it provides time to put their house in order, the telcos’ overall liability does not come down and ultimately they will have to raise tariffs to generate sufficient cash flows,” a senior banker with a public sector bank said. “As the rationalisation in AGR definition is only prospectively, the telcos need to generate resources, or raise capital, to eventually service this along with payment of bank dues,” the banker said. Among the private banks, Yes Bank and IDFC First Bank have significant exposure to Vodafone Idea.

For the year-ending March 2021, Vodafone Idea reported a net loss of Rs 46,293.70 crore while Bharti Airtel reported a net loss of Rs 25,197.60 crore. For the quarter-ending March 31, 2021, Jio Platforms, Reliance Industries’ telecom unit, reported a net profit of Rs 3,508 crore, 47.5% higher than a year ago.

A long-standing demand for the government’s intervention in setting telecom floor tariffs, as it has done in the civil aviation sector to protect competition, did not find a place in the relief package.

Gopal Vittal, MD & CEO (India and South Asia), Bharti Airtel, 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, towards a sustainable tariff regime to ensure the industry gets a fair return. This in turn will allow it to continue investing in new technologies and innovation to bring world-class services to customers.”

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