Free Fall

The fight between older telecom operators and Reliance Jio has reached the penultimate stage. Operators such as Bharti Airtel, Vodafone India and Idea Cellular have suffered a body blow in the two quarters since Jio stormed the market with its disruptive pricing. Now, after waiting for long, and making some noises with telecom regulator TRAI, the older telcos are scurrying and meeting top bureaucrats and ministers to find a way to arrest their fall.

These players have few options. The sharp deterioration in financial performance has put a big question mark over their debt repayment capabilities. In April, for instance, the Reserve Bank of India asked banks to make higher provisioning for loans to telecom companies. With debt of close to Rs 4.5 lakh crore, and EBITDA of Rs 53,800 crore, it is one of the most indebted sectors in the country. This translates into a debt-to-EBITDA ratio of 8.3, far higher than the global benchmark for telecom companies.

The telcos blame exorbitant spectrum prices for their high debt. According to some estimates, 70 per cent sector debt is due to deferred payments for spectrum. In a meeting with TRAI Chairman R.S. Sharma recently, the incumbents asked, among other things, an increase in the tenure to pay for spectrum to 20 years from 10 years. The other demands included introduction of a floor price to prevent predatory pricing, reduction in licence fee, spectrum usage charge (SUC) and GST rates, and scrapping of the Universal Services Obligation Fund (USOF) levy.

Most of these demands have been around for quite some time, but floor price was suggested by Idea Cellular and BSNL, primarily to counter Jio's free voice calls and lower data tariffs. A Morgan Stanley report says floor price on bundled services has been implemented by only a few countries such as Morocco. Most developed markets do not have any floor price for either data or voice, it says. TRAI is expected to float a consultation paper over floor pricing in the next few months.

However, the government will find it tough to meet the bulk of these demands. The fall in tariffs, and the consequent decline in telcos' revenues, is already affecting flows to the exchequer. The Budget shows a 44 per cent dip in revenues from the sector in 2017/18 to Rs 44,342 crore.

In spite of high spectrum prices, the government earns more from levies and taxes, which include licence fee, SUC, and contribution to the USOF. Around 11 per cent of telcos' revenues go to the government as levies, over and above direct and indirect taxes. The Cellular Operators' Association of India data show that the government's annual revenue from licence fee, SUC and service tax has exceeded revenue from auctions since 2011/12. For instance, the government earned Rs 48,700 crore from levies and taxes in 2015/16, more than double the revenue from auctions - Rs 22,600 crore. The revenue from auctions has three components: upfront payment for the most recent auction, instalments for previous auctions, and interest on instalments. In 2017/18, the government is again expecting to make more money from licence fee, SUC and taxes than deferred spectrum payments.

Little Wiggle Room

The government seems to be in a tight spot. On the one end, it has little flexibility to reduce levies and tax rates. On the other hand, without relief measures, there's a strong possibility of telecom companies defaulting on loans. With banks saddled with record-high non-performing assets, the country cannot afford more loans turning bad at this stage. Early June, the seventh-largest telecom operator, Reliance Communications, got itself seven months "standstill" from bankers to service debt of Rs 45,733 crore. Ten bankers had raised the red flag on RCom for loan default after its first-ever annual loss in 2016/17. The high indebtedness of telcos can partly be blamed on easy availability of debt and incentives from the government to acquire spectrum. Last year, for instance, DoT introduced a number of incentives to encourage operators to bid aggressively for its over-priced spectrum in the 700 MHz band.

In a scenario where debt availability wasn't an issue, telcos also started overlooking the need to invest fresh capital from own pockets. Take the case of Airtel. Its fresh equity infusion since 2010 is Rs 6,978 crore as against the total debt raised of Rs 2.28 lakh crore. Spectrum is the most prized possession of telcos. In an adverse situation, banks would likely take it over. However, due to over-leveraging, there will be few takers for this asset.

Meanwhile, Jio has rubbished the SOS call from older telcos. It has taken an opposite view on almost all major demands of the industry. Jio, in its presentation to the inter-ministerial group, said there were glaring signs of cartelisation between the three large operators."Incumbent operators which have tried to block the entry of new operators and prevented the launch of new technologies are now passing the blame and seeking relief," said the Jio presentation.

The faulty policies of the government and reckless expansion by operators has created this mammoth problem, and there are no easy solutions in sight.

@manukaushik