The union cabinet has reportedly approved the waiver of bank guarantees (BGs) submission by the telcos for spectrum bought before 2022. The government removed the need for the telcos to submit BGs for spectrum bought post-2022. This relief measure was introduced in the reforms package released in September of 2021. It allowed the telcos to improve their cash flow. Vodafone Idea Limited (VIL) had asked the government to get done with the BGs for spectrum bought before 2022 when they didn't need to submit BGs for spectrum bought after 2022.
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Notably, Vi defaulted on the payment of Rs 350 crore worth of bank guarantees due on November 1, 2024. The telco had communicated to the government that it is not in any position to pay bank guarantees for spectrum bought before 2022. Now, according to a report from CNBCTV18, the union cabinet has green-flagged the BG waiver proposal which will be a boost for the country's telecom sector. While all the private telcos will benefit from this, Vodafone Idea will be the biggest beneficiary in the context of the situation in the market.
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Vodafone Idea's CEO, Akshaya Moondra, in the company's recent investors call, said, "One of our representations to the government is that if it (bank guarantees) has been done away for future auctions, then why do we really need to keep it for past auctions? It should be done away as rational for doing away with the bank guarantees should be the same.
In reality, the way it impacts us is that we are seeking a certain facility from the banks, and if we are going to seek the bank guarantee facility, it will reduce our ability to get debt funding. So, it is very clear that bank guarantee is something which the banks themselves will not be very willing to offer. We are trying to get debt funding, which will go towards making investments, which will help in improving our performance and then improving our cash generation. Bank guarantees will not have that result. So, in the first place, the bank guarantees that are being talked about, that is, not possible to get.
Also it is not as if against that spectrum nothing has been paid as large amounts have been paid against the earlier auctions and there is a payment schedule. So, everything taken into account together, bank guarantee is something where we have requested the government, and we believe the rationale is understood and it is an industry request also. It's not only VIL request. The entire industry has requested that the bank guarantees should be done away with. So, that is where we are on the question of bank guarantees."
Since banks won't be required to provide the bank guarantees for the telcos, it might mean that they would be more favourable to give debt funding, as per the statement from Vi CEO. But the decision to give debt is contingent on many factors, not limited to only bank guarantees. Thus, we will have to wait and watch how things pan out for the industry in the coming months.
