The Union Cabinet has recently approved a series of significant structural and process transformations in the Telecom sector. Among these are an updated interpretation of the contentious Adjusted Gross Revenue (AGR) concept, a four-year pause on Telecom Service Providers’ (TSPs) dues to the government, and multiple other changes.
Spectrum-Related Reforms
Changes have been made to the spectrum, the radio frequencies designated for mobile industry communications and other sectors’ over-the-air conversations. Annually, spectrum auctions will be held in the final quarter of every financial year. Future auctions will now extend over 30 years, moving up from the previous 20-year period.
Telecom companies will be allowed to relinquish their spectrum after a 10-year lock-in period from the purchase date. In addition, the Spectrum Usage Charges (SUC) additional 0.5% for spectrum sharing has been eliminated, and the sharing of spectrums is being encouraged.
AGR Rationalization
Previously, AGR was based on all revenue and not limited to a company’s primary telecom operations. This interpretation was acknowledged as flawed by the government, who decided this change will reduce future financial stress on companies. Going forward, telecom firms will pay a fixed percentage of their AGR, excluding non-telecom revenues, to the government as statutory levies.
Moratorium on AGR Dues
The previous understanding of AGR left telcos liable to an approximately Rs. 1.6 lakh crore payment. This obligation crippled the telecom sector financially and affected businesses such as Vodafone, leading to a duopoly of Reliance Jio and Bharti Airtel. To revitalize the sector, a four-year moratorium on all spectrum and AGR dues has been put into effect. TSPs that choose to adhere to this moratorium will be obligated to pay interest on the availed amount.
Interest Rates Rationalized and Penalties Removed
The Spectrum Usage Charges (SUC) interest will now be compounded annually, not monthly, and the interest rate will be reduced to MCLR + 2% from MCLR + 4%. Moreover, all penalties and interest on penalties have been abolished.
FDI Reforms
Foreign Direct Investment (FDI) in the sector has been allowed up to 100% via the automatic route, a significant increase from the prior limit of 49%.
Adjusted Gross Revenue Overview
AGR is a mechanism for fee-sharing between the government and telcos who transitioned to the ‘revenue-sharing fee’ model in 1999 from the ‘fixed license fee’ model. Telcos are expected to share a portion of AGR with the government, including a percentage as annual License Fee (LF) and Spectrum Usage Charges (SUC). However, a dispute over the government’s definition of AGR calculation arose in 2005, which was resolved by the Supreme Court upholding the Department of Telecom’s (DoT) interpretation in October 2019.
Significance of Telecom Sector Reforms
The introduction of a four-year moratorium is expected to stimulate companies to enhance customer service and adopt new technology. The allowance of 100% FDI indicates a return to an investor-friendly environment and promotes easier business operations.
These reforms also serve the Digital India initiative by empowering the telecom sector, a major driver of the economy, to achieve its goals. Additionally, they aim to facilitate substantial investments in the sector, specifically in 5G technology, and create more job opportunities.
The Way Forward
While the moratorium on AGR and spectrum dues offers temporary financial relief, these postponed payments will inevitably have to be paid back with interest. Consequently, all stakeholders involved should aim to create a sustainable tariff policy.