India’s telecom reforms are state extortion by another name

Ironically, despite its outsized appearance in the form of a generous bailout, the move would cement India’s reputation as a country where companies are expected to carry cans without complaint when the flawed policy Puts big, unreasonable obstacles in the way of business.

The conversion of net present value of interest payable on four-year moratorium of spectrum payment dues and so-called AGR dues of troubled telecom company Vodafone Idea, would make the government the largest shareholder in the company, though the original promoters of Vodafone Group and Aditya Birla Group together. There will still be a combined stake of 46.3%, which will be 10.5 percentage points higher than the government’s 35.8% stake.

With the government as a major but passive shareholder and largest debtor, the company would leave a great deal of uncertainty surrounding its continued existence. It will now be able to raise the fresh capital needed to invest in 5G networks and compete with Reliance Jio and Bharti Airtel.

But some questions remain to be addressed. One, will the government accept Vodafone Idea’s estimate of the net present value of interest payments that the government is willing to convert into debt? At least one analyst thinks Vodafone Idea estimates 16,000 crore is severely underestimated. If the government shares that view, its final share will be pegged at over 35.8%. In any case, if telcos accept the government’s offer to not only convert interest on deferred dues, but also convert themselves into equity in deferred dues at the end of the four-year moratorium on payment, last September A prospect is announced with interest in . Equity conversion, the government’s stake will go up from 35.8%.

Second, will the government’s enthusiasm for reforming telecommunications extend to a change in the way spectrum is allocated for 5G? And, three, will the policy stand in the way of the cloud and telecom networks and hardware and software blurring that promises to define 5G telecom in countries other than China?

It may seem strange to some that we do not question the government’s commitment to act as a passive shareholder and not interfere with the company’s operations. We already have the example of state-owned vehicles that own a significant portion of a company like ITC without the government trying to interfere with the plans or management of a dynamic company. Nor is the work culture of BSNL/MTNL likely to be brought in by trying to merge companies with Vodafone Idea.

We can only see how the evaluation exercise in government calculations when this happens. But the government may change its thinking on 5G auctions and the 5G ecosystem.

Telecom companies should have the option of leasing as much spectrum as they want on a pay-as-you-go basis, rather than forking off capital to buy 5G spectrum in advance from the government. This will happen in two cases. One, sale and leaseback arrangements have been put in place for spectrum that airlines have for aircraft. A pool of patient capital will buy spectrum available to telcos in auction and lease it back to telcos. Second, the government prohibits auctioning of spectrum to telecom companies and instead assigns spectrum to a telecom public sector undertaking, which in turn leases spectrum to telecom companies. The conversion of spectrum cost from sunk cost as a fixed overhead, to working expenditure financed from working capital will significantly reduce the financial burden on telecom companies.

The innovation in 5G is to replace custom-made telecom gear, including switching equipment, with software. Open Radio Access Network (O-RAN) is the name of the game. The software will live in the cloud, which means a server farm. Rakuten already provides Oran-based 4G and 5G services in Japan. It is an alternative to the dedicated 5G telecom gear, which is dominated by China’s Huawei. Microsoft’s Azure and Amazon Web Services are gearing up to host O-RAN software. The policy should not come in the way of smooth development of technology and its adoption by Indian telecom companies.

Finally, the current bailout does not address the question of why such a bailout was needed. This became necessary in the first place, as the government reneged on its promise made in 1999, to accept the recommendations of the Telecom Regulatory Authority of India, that shareable revenues when telcos shifted from fixed, redundant license fees What constitutes. License fee as part of adjusted gross revenue (AGR). The regulator, and the appellate authority, TDSAT, which refined the recommendations of the regulator, came out with a definition of shareable AGR, which did not include revenues, such as treasury profits, real estate income and the like.

AGR mattered not only for determining the license fee but also for spectrum usage charges (SUC), which were again paid as part of the revenue.

But the government ignored these recommendations and insisted that telcos share their total revenue. It was prosecuted, and the trial continued until 2019 when the Supreme Court ruled confirming the government’s claim. it burdened 1.6 trillion on all telcos, 70% of which was fines and interest. All this could have been avoided had the government accepted TRAI’s recommendation to define shareable AGR to exclude non-telecom revenue.

Taking a hefty license fee and an SUC made sense when spectrum was allocated administratively, bundled with the license, for a nominal upfront fee. But since 2010, when spectrum auctions began, and telcos started paying huge amounts to acquire spectrum, the government should have removed both the license fee and the SUC as part of the revenue. Last September’s telecom relief package acknowledged that there would be no SUC for spectrum procured through auction, but applied only prospectively.

A misguided policy put such a huge burden on the telecom companies and necessitated a bailout. But at the end of the bailout, the government emerged as a major shareholder of the bail-out companies. If you throw someone into the deep end of the pool and offer to take out a drowning, gasping victim if he or she paid the ransom, it would be considered extortion in most places. In India, we call it Telecom Reform.