FDI Policy Changes and Other Reforms In The Telecom Sector

FDI POLICY CHANGES AND OTHER REFORMS IN THE TELECOM SECTOR

In the event the Government had not announced these reforms, the exit from the telecom sector by Vodafone Idea would have meant there being a duopoly in the Indian telecom market i.e., only two players viz Bharti Airtel Ltd and Jio

The Government of India recently announced a relief package for the telecom sector¹. One of the key relief measures announced by the government was the amendment to the Foreign Direct Investment Policy, 2020 ("FDI Policy") to allow 100% foreign direct investment in the telecom sector under the automatic route (i.e., where no prior approval of the government was required). This decision was subsequently notified vide Press Note 4 of 2021 ("Press Note 4") issued by the Department for Promotion of Industry and Internal Trade ("DPIIT"). To understand the implications of the reforms one need to understand the telecom sector in India, and we will explain below.

As mentioned above, the Press Note 4 amended the earlier FDI Policy in the telecom sector to allow 100% FDI in all telecom services (including telecom infrastructure service providers category 1). Consequently, Indian companies engaged in all telecom services are eligible to receive FDI to the extent of 100% under the automatic route, including telecom infrastructure providers category-I, viz. basic, cellular, United Access Services, Unified license (Access services), Unified License, National/International Long Distance, Commercial V-Sat, Public Mobile Radio Trunked Services (PMRTS), Global Mobile Personal Communications Services (GMPCS), all types of ISP licenses, Voice Mail/Audiotex/UMS, Resale of IPLC, Mobile Number Portability services, Infrastructure Provider Category-I (providing dark fiber, right of way, duct space, tower), Other Service Providers and as may be permitted by the Department of Telecommunications ("DOT").

The Press Note 4 further provides that the licensing, security, and any other terms as may be specified by the DOT from time to time shall be observed by the entities providing the telecom services and the investors. The Press Note 4 also clarifies that investments in the telecom sector from countries sharing a land border with India will however require prior government approval.

The preceding law permitted FDI up to 100% but any investment beyond 49% required the prior approval of the Government. Press Note 4 has done away with the requirement for prior government approval (except in certain cases as set out above).

The automatic route provision for FDI by the Government is a welcome step to the telecom sector as it facilitates investment in the sector. The sector until the telecom reforms were announced was cash-strapped with some of its players like Vodafone Idea being on the verge of bankruptcy due to the levy of past AGR dues by the DoT.

To understand the implications of the reforms, one need to understand the telecom sector in India. India is currently the second largest telecommunications market in the world with a subscriber base of 1,198.5 million². India also has the fastest growing app market and the second highest number of internet users in the world.³

The telecom sector used to be the poster boy of India's economic liberalization receiving substantial amounts of foreign investment and attracting global players like Vodafone, Hutch and Telenor. However high licensing fees, uncertainty in regulations, corruption and a controversial supreme court judgment overturning telecom licenses granted earlier led to many foreign players exiting the Indian telecom market. This was followed by the advent of Reliance Jio ("Jio") a company of the Reliance Industries group. Jio launched unlimited voice calls and 4G data services at extremely low prices. These prices were so consumer-friendly that Jio was able to penetrate the rural areas in India and thus increase internet penetration. The fall in telecom rates were matched by Bharti Airtel Ltd and Vodafone Idea Ltd (the other private telecom players in the sector). However, this led to a fall in the profitability of these companies.

The damage has been the most for Vodafone Idea Ltd. Bharti Airtel Ltd has done relatively better, although even its profits have fallen sharply. Jio meanwhile, had reported a steady increase in profits, although its cash burn has been the highest in the industry and its return ratios have been low^4.

Following the advent of Jio which caused a dent in the profitability of the remaining players in the sector came a Supreme Court judgment that past AGR dues must be paid. "AGR" or "Adjusted Gross Revenues" is the licensing fee and spectrum charges that telecom operators are required to pay to the DoT for using the spectrum owned by the Government. The AGR dues for Vodafone Idea Ltd amounted to ₹500 billion and if claimed immediately by the DoT would make the company bankrupt.

It was at this point of time that the Government intervened and introduced the reforms measures for the telecom sector. The key measures introduced by the Government are:

1. AGR Rationalization:

Non-telecom revenue to be excluded on prospective basis from the definition of AGR.

2. Four-year Moratorium/Deferment:

A four-year moratorium/deferment on AGR dues and payments of spectrum purchased in past auctions (excluding the auction of 2021). However, those TSPs opting for the moratorium will be required to pay interest on the amount availed under the benefit.

3. Promoting FDI:

The Reforms amended the FDI Policy with respect to the telecom sector to allow 100% FDI under the automatic route.

Other reforms included reforms on spectrum, rationalization of penalties and interest payments and rationalization of bank guarantees. Needless to say, the reforms have catalyzed liquidity infusion into the telecom industry. The reforms have also reinforced the Government's support to the telecom industry. This has in turn boosted investor confidence in the telecom sector and in the country as a whole.

Conclusion

In addition to the aforesaid, the reforms have averted the potential bankruptcy of Vodafone Idea Ltd as a result of which there continues to be three main players in the Indian telecom sector. In the event the Government had not announced these reforms, the exit from the telecom sector by Vodafone Idea would have meant there being a duopoly in the Indian telecom market i.e., only two players viz Bharti Airtel Ltd and Jio. This would have been averse to the interests of consumers and the sector as well. The understanding and support of the Government to the telecom sector must be truly appreciated.

Disclaimer – The views expressed in this article are the personal views of the author and are purely informative in nature.