Scrap bank guarantees for telcos: FM paper

At present, the telecom licenses require operators to submit two types of bank guarantees; one to secure their license fees and spectrum charges and a second, to assure rollout. The FM’s Strategy Paper, prepared by Senior Economic Adviser Dr H.A.C. Prasad, proposes doing away with both over time.

‘‘The provision of Bank Guarantees by telecom operators unproductively blocks the resources of the operator, which could have been invested in infrastructure creation, network upgradation, new services, etc,’’ says the Paper.

In the recent past, the Department of Telecom (DoT) itself has been reducing the scope and amount of Bank Guarantees, and it has completely withdrawn, for instance, bank guarantees from the revenue-share agreements. However, bank guarantees still must be furnished in several arrangements made by private operators with public sector telecom firms MTNL and BSNL, such as during their interconnection deals.

The FM Paper suggests that DoT should consider a recent decision by the Oil Ministry to exempt companies with a net worth above $500 million from submitting bank guarantees, for the telecom sector as well. It also says that the amounts of bank guarantees should be lowered and subsequently phased out.

‘‘This concept should be considered for the telecom sector as well by exempting the larger and serious players having a net worth exceeding a specific amount, from the requirement of furninshing bank guarantees,’’ says the Paper.

This, in fact, is a long-standing demand of the telecom industry, which has been bringing the matter up with DoT in its pre-Budget 2006 meetings. The industry’s suggestion is that a corporate guarantee should be accepted in lieu of the bank guarantees. The industry proposal, in line with the Strategy Paper and recent moves by DoT to lower the telecom sector’s entry barriers, is that companies like Bharti, Reliance, Idea, Hutch and other established players should be allowed to furnish corporate guarantees in lieu of bank guarantees.

In fact, private operators were invited to respond to the FM Strategy Paper, as part of a consultation that started six months ago and are now keen on its being implemented by the government.

‘‘If there is any default, the personal guarantee of a company is far more reliable and efficient than the system of bank guarantees, which cause delays and block resources. The government should implement its own suggestions made by the Senior Economic Adviser so that the high growth sector can continue to expand,’’ says SC Khanna, director-general AUSPI.