Introduction
The Department of Telecommunications (DoT), in second half of 2021, released a series of notifications for reforming the telecom sector and bringing much-needed reforms. These notifications were compiled in a booklet titled “Telecom Reforms 2021” and released by the DoT (“Reforms”). The Reforms span over different areas of telecom regulations including: Know Your Customer (“KYC”) Norms, amending the definition Adjusted Gross Revenue (“AGR”), a percentage of which is the license fee, Foreign Direct Investment (“FDI”), Bank Guarantees, Customer Application Forms (“CAF”), sharing and assignment of spectrum, Standing Advisory Committee on Frequency Allocation (“SACFA”) clearance, Import of Wireless Equipment and liquidity requirements of Telecom Service Providers (“TSP”). In this blog, we provide an overview of the Reforms and present a brief overall analysis of the same.
1. KYC Reforms
The Reforms introduced simplified, faster, cost-effective and consumer friendly KYC norms for obtaining new mobile connection and converting pre-paid connections to post-paid connections.
The Aadhaar based KYC method has been reintroduced. The process is fully digital wherein the demographic details along with the photograph of the customer is received by the TSPs from the Aadhar database for a nominal sum of Re 1. Moreover, testing and verification in consultation with Government agencies are no longer necessary but TSPs must ensure security related compliances during implementation and intimate DoT and the Ministry of Home Affairs of actions taken.
Further, the process of self KYC as an alternate process for issuing new mobile connections has been approved. This allows customers to apply for a connection from their home/office and get the SIM delivered by applying through an App/portal where documents can be electronically verified through UIDAI or DigiLocker. Lastly, the One Time Password (OTP) based process has also been provided in the OM for OTP based conversion from pre-paid to post-paid and vice versa.
2. Relaxations in Case of Delay in payment of Licence Fee
Delay in the payment of licence fees/ other dues payable under the licence will now draw a lower rate of interest. Previously, any delay in the payment of dues would attract an interest of 4% above the Marginal Cost of Lending Rate (MCLR) of the State Bank of India (SBI) which has now been reduced to 2% above the MCLR of SBI. Additionally, the monthly compounding has been replaced with annual compounding of interest.
Another significant change is the doing away of the penalty of 50% of the short payment of licence fee (where total amount paid as quarterly licence fee for four quarters of the financial year falls short by more than 10% of the payable licence fee) in respect of the UAS Licenses, UL (VNO) Licenses, UL Licenses, CMRTS Licenses, ILD Licenses, NLD Licenses, PMRTS Licenses, Captive VSAT CUG Licenses, Commercial VSAT CUG Licenses and INSAT-MSS Reporting Services Licenses.
3. FDI Reforms
The Reforms have amended the Consolidated FDI Circular for 2020 (Para 5.2.14) and allowed 100 % FDI under the automatic route in the telecom sector. Earlier, 100% FDI in the Telecom Sector was permitted but only 49% through the automatic route and FDI above 51% was through the Government route.
To implement the change in the FDI norms, the DoT amended the guidelines and the license agreements for unified licence and the unified licence (virtual network operator). vide its respective notifications dated November 03, 2021. FDI up to 100% under the automatic route has been permitted subject to the licensee and investors complying with the licensing and security conditions notified by DoT. However, the requirements of the applicable Press Note 3 (providing that an entity of a country sharing land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country can only invest through the government route), continues to be in force and shall override the automatic route in respect of FDI in telecom.
4. Bank Guarantee Reforms
The amount of the Financial Bank Guarantee (FBG) to be submitted by the licensee before the signing of the Licence Agreement as part of the Captive VSAT CUG Licence and the CMRTS Licence has bee. Further, the amount of the Performance Bank Guarantee (PBG) that is to be submitted by the licensee as part of the Voice Mail/Audiotex/UMS Licence has been reduced. Additionally, the amount of FBG to be submitted subsequent to the signing of the licence agreement for the Captive VSAT CUG License has been reduced to 20% of the estimated sum payable annually towards licence fee, as opposed to the same being equivalent to entire sum payable annually towards licence fee. In respect of certain licenses including Commercial VSAT CUG Licence, UAS Licence, UL (VNO) Licence, UL Licence, NLD Licence, ILD Licence, CMRTS Licence, PMRTS Licence, the amount of FBG that is to be submitted subsequent to the signing of the licence agreement has been reduced to 20% of the estimated sum payable as part of licence fee for two quarters and other dues not otherwise securitized.
Further, for UL Licenses, the maximum amount that can be submitted as FBG and PBG for different services/service areas has been reduced from INR 44 crore to INR 8.8 crore and INR 220 Crore to INR 44 Crore, respectively. Also, the licence holders have now been given the option to submit Bank Guarantee (s) centrally at one place instead of Licensed Service Areas (LSA) wise, thereby avoiding submission of multiple Bank Guarantees.
5. Customer Application Forms (CAF)
One major reform is the discontinuation of the requirement of storage of paper CAFs. All unified access service licensees are now permitted to replace the paper based CAFs with digitally signed copies in accordance with the detailed guidelines issued in this regard. The guidelines specify that while digitally scanned copies of the CAF documents must be maintained for all the active customers, documents for the migrated or disconnected subscribers shall be retained for a period of three years from the date of migration/ disconnection. The existing paper CAF documents can be destroyed after digitisation, unless directed otherwise by the licensor/ law enforcement agencies/ courts. The existing provisions of storing paper CAF documents in warehouses and warehouse audit are also dispensed with. If the CAF documents are not legible/readable due to long storage period, the TSPs will have the option of reverification of subscribers through any of the existing KYC processes and store the fresh CAF documents in digital form.
6. Spectrum Related Reforms
i. Spectrum Assignment and Allocation
The DoT has vide its office memorandum dated October 08, 2021 issued certain guidelines in relation to assignment of spectrum. The submission of an FBG (to securitize the annual instalment) and Performance Bank Guarantee (roll out obligations, etc.) is no longer needed. However, the DoT would separately address the eligibility criteria to ensure that the participants have sufficient financial capacity. Access spectrum in all future auctions shall now be assigned for a period of 30 years, as opposed to 20-years under past auctions. However, spectrum acquired by licence holders prior to the reforms shall continue to be assigned for 20 years from the date of assignment. Further, TRAI recommendations have been sought for the associated conditions (like upfront payment requirements, number of deferred payment instalments, etc.) and related modalities. Auctions are to be normally held in the last quarter of every financial year and may be held at shorter intervals if needed.
For spectrum acquired in future auctions, Spectrum Usage charges (SUC) will not be levied. The conditions of minimum 3% weighted average SUC rate and SUC floor amount has also been removed. Further, the additional 0.5 % levy on the SUC rate in respect of spectrum sharing has been done away with.
Further, to help ease financial pressures, going forward TSPs will be permitted to surrender spectrum after a minimum period of 10 years for a surrender fee and the same will have to be informed one year prior to surrendering. TRAI recommendations have been sought in respect of conditions and fee for such surrenders.
ii. Access Spectrum Sharing Guidelines
The government issued guidelines dated October 11, 2021 for the sharing of spectrum by access service providers, holding a UASL/ UL (access service) and UL with authorisation in a licensed service area. TSPs using access spectrum in the same band are permitted to share the spectrum (including spectrum acquired by way of trading) but leasing of spectrum is not permitted. The right to share is subject to fulfilment of licence conditions and other conditions prescribed by the licensor/government. The SUC will not increase in lieu of sharing of spectrum.
The licensees will be individually and collectively responsible for complying with the sharing guidelines, including the interference norms. The prescribed limits for the spectrum cap shall be applicable for both the licensees individually. The spectrum holding of any licensee will be counted after adding 50% of the spectrum held by the other licensee in the band being shared as the additional spectrum to the original spectrum. An undertaking confirming the compliance with all the terms and conditions for spectrum sharing and licence conditions will have to be given by the licensees.
7. (SACFA) Clearance
The process for seeking SACFA approval has been simplified by means of the introduction of self-declaration and automated time-bound approval through the Saral Sanchar Portal of the DoT.
8. Reforms to Address Liquidity Requirements of TSPs
Considering the financial challenges and with a view to provide relief to telecom companies and banks with substantial exposure, the Reforms introduced various measures easing liquidity and cash flow. A moratorium of four years was granted in annual payment of dues arising out of the Supreme Court’s verdict in the AGR Judgment[1] with the Net Present Value (“NPV”) of the due amounts being protected and also for due payments of spectrum purchased in the past auctions (excluding auction in 2021). Moreover, TSPs have been given the option to pay the interest amount arising out of the protection of NPV on account of such deferred payments of spectrum and AGR in cash, or convert such interest amounts as equity to be issued to the President of India. However, TSPs were required to communicate such election of the option for equity conversion within 90 days of the date of the notification. The detailed procedure for such equity conversion of interest dues and the procedure for approval are laid down in the Reforms.
9. AGR Reforms
The Adjusted Gross Revenue (AGR) clauses in the UL Agreement, UASL Agreement and UL VNO Agreement were amended to reduce the actual licence fee payment obligations on the TSPs. Prior to the reforms, annual licence fee was calculated as a percentage of AGR. Going forward, AGR excludes non-telecom revenue for the purposes of calculation of AGR.
Other than revenue from non-telecom operations, revenue from activities under a licence by the Ministry of Information and Broadcasting, receipts from the Universal Service Obligation Fund and other income including income from dividends, interest, property sale and rent, gains from foreign exchange rate fluctuations etc. were also excluded from the purview of calculation of AGR.
The Reforms introduced Applicable Gross Revenue (ApGR) for all services, which would be calculated after deducting the exempted sources of revenue from the gross revenue. Subsequently, deductions already allowed to be excluded for arriving at the AGR (prior to the introduction of the Reforms (which vary for different services)), namely, (i) access charges paid to other eligible/entitled TSPs, (ii) roaming revenues passed on to other eligible/entitled TSPs, and (iii) GST paid to the government would be deducted from the ApGR to arrive at the final AGR of which a percentage is to be paid as licence fee. The Reforms also incorporated certain additional pass-through charges for some services like internet services and National Long-Distance Services. (“NLDS”).
10. Import of Wireless Equipment
Pursuant to the Reforms, TSPs will be allowed to import wireless equipment through self-declaration on the DoT’s Saral Sanchar Portal. A system-generated certificate authenticated by the DoT shall be available to download following the declaration. The said certificate shall be accepted by the Custom Authorities.
Analysis
The Reforms and the ensuing relaxations were provided with a view to provide relief to the existing players as well as attract prospective new entrants in the telecom industry. It is expected that more money in the hands of the licence holder will become available and resultantly enhance capital investment activities. These relaxations will go a long way in reducing the burden of service providers, both financially and for regulatory compliance. However, whether the telecom sector Reforms can address the underlying issues–such as market concentration, high entry barriers and high costs (high cost of spectrum, right-of-way cost, capex costs, etc.)–to be able to attract new players is doubtful. Despite several relaxed financial conditions– reduction of licence fee , reduction in interest rates for late payment and the reduction in amounts of FBG and PBG–it cannot be denied that the financial obligations towards DoT continue to remain prohibitively costly which is a likely cause of market concentration and limited players. While it is true that these obligations form a considerable source of revenue for the Government, the impact of these obligations on the sector in terms of the number of players in the market and their financial health must also be weighed. The introduction of the UL(VNO) regime is also likely to attract new players, but that may be more in the B2B segment as opposed to the B2C segment.
Conclusion
The Telecom Regulatory Authority of India (“TRAI”) had previously released its Recommendations on Enabling Unbundling of Different Layers Through Differential Licensing. Subsequently, TRAI also issued a Consultation Paper on Ease of Doing Business in Telecom and Broadcasting Sector. These documents clearly indicate that the process of reforms in the telecom industry is a continuing initiative and does not end with the Reforms. The Reforms, however incremental in their ambit, are a point of departure to tackle the issues plaguing the telecom industry. It remains to be seen if the DoT would continue with its pace of reforms in the future, especially with the onset of 5G technology, Government’s broadband connectivity targets for rural India and the increasing use of Internet of Things (IoT) in public administration.
For further information, please contact:
Sameer Chugh, Partner, Cyril Amarchand Mangaldas
sameer.chugh@cyrilshroff.com
