What does future hold for Indian telecom operators facing financial pressures?
The telecommunications sector in India has been highly regarded as the backbone of
digital transformation
. Over the years, this sector has witnessed a remarkable growth with the proliferation of 5G, increased data consumption, innovation and digital connectivity in remote and underserved areas. However, it is a matter of public record that telecom companies in India are debt-ridden and subject to mounting financial pressures with high
spectrum costs
and license fees, while also navigating a price competitive market and diminishing margins.
With telecom operators being on the frontline of this digital transformation, it is imperative to highlight and address the complex realities of financial burdens encountered by these companies, especially in the current inflationary market.
In this article, we explore the financial strain on telecom operators caused by high spectrum costs and legacy 'Annual Gross Revenue' (AGR) dues.
Soaring spectrum costs: Spectrum charges contribute to one of the major financial pressures of telecom operators. According to Global System for Mobile Communications Association's study, telecom companies in India spend approximately 26% of their recurring revenues on spectrum fees. For perspective, telecom operators across the globe spend an average of 5-7% of their revenue. Accordingly, the spectrum cost incurred by Indian operators is not only concerningly high, but is also the highest globally. Such prices are bound to have a negative impact on the industry, affecting innovation and rollout of new technologies, quality of network and services and affordability. Notably, such spectrum charges constitute a major cause of debt suffered by telecom operators. Some of the smaller players have succumbed to the financial strain and have exited the market.
Legacy AGR dues: The conclusion of a regulatory dispute before the Supreme Court over the definition of 'gross revenue' turned into one of the most significant financial concerns in the history of the telecom industry. When telecom operators moved to a revenue-sharing model with the Department of Telecommunications (DoT), where they agreed to share a fixed percentage of their AGR as license fees, there was lack of consensus on the definition of 'gross revenue'. Telecom operators supported the view that AGR should only include revenue from telecom services, whereas DoT argued that AGR should include all income, including interest, dividends, capital gains, etc. This disagreement was finally put to rest in 2019, when the Supreme Court upheld DoT's definition of the AGR, and held telecom operators responsible for clearing all the past unpaid AGR dues, aligned with the new definition, including penalties and interest. This decision culminated in cumulative liability of several thousands of crores as AGR dues for telecom operators. Many companies were also on the verge of bankruptcy. To bring some relief, the Government stepped in with a telecom reform, which included a 4-year moratorium on AGR and spectrum dues. While the reform provided some comfort, till date, this decision continues to weigh on some of the telecom operators.
Impact of the financial liabilities
The heavy financial liabilities have significantly impacted the telecom operator's ability to expand network, invest in infrastructure and adopt new technologies. This hinders the achievement of India's overall growth strategy in terms of quality of network, expansion to rural areas and technology upgrades and innovation. This will also result in constraints on investments in digital services and diversification. Another direct impact will be on the tariff plans, which have been periodically raised by telecom operators since 2020. Further, the telecom market competition will be majorly affected, which is currently housing only 3 major players that have survived the financial challenges, post the exit of smaller players. Such impact on competition will leave subscribers with lesser choice, subject them to higher tariffs, and provide telecom operators lesser incentive to innovate.
Road Ahead
Given the country's vision and goal towards becoming a digital major and the 'essential' nature of telecom services, the financial challenges of the
telecom sector
is not just an industry issue, but should be a matter of national importance. Pursuant to the financial crisis and regulatory uncertainties, it is crucial to introduce policy reforms, regulatory changes, and incentives to relieve telecom sector of such challenges. Government can introduce measures to permit deferred payment of spectrum charges, rationalise of debts, prohibit excessively high spectrum pricing, etc. Additionally, regulatory clarity around revenue sharing and applicable obligations will boost the confidence of investors. It is also pertinent to strengthen the digital infrastructure and expand the digital ecosystem through policy backing and infrastructure sharing.
Telecom operators can also explore options to expand their revenues through provision of digital platform services, enterprise services such as cloud communications, etc. However, the definition of 'gross revenue' may be revisited and clarified so that telecom operators are not constrained from expanding and diversifying their business due to the fear of excessive license fee payment obligations. This will help in reshaping India's telecommunications sector to a more resilient and financially stable industry, with multiple players and improved competition.
(DISCLAIMER: The views expressed are the authors' personal.)
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