The Hindu Business Line : Tracking every telecom penny

Telecom operators will have to do their financial reporting with greater transparency as per new guidelines of the regulatory authority. It looks like every penny that makes it to the operators' coffers can now be tracked.

IN a move that is widely expected to streamline the operations of telecom service providers and make them more "accountable", the Telecom Regulatory Authority of India (TRAI) has issued guidelines for a System on Accounting Separation (SAS) that is to be officially notified by the Department of Telecommunications (DoT) soon.

Not only is it expected to bring in more transparency in the functioning of most of the telecom operators — be they cellular, basic, limited mobility, long distance, VSAT, radio paging, or the Internet - but it is also expected to help the Authority in monitoring the sector better.

The present system of financial reporting by most of the telecom operators in the country at the corporate/entity level presents aggregate information, which is of little help to the Authority in effectively regulating the sector. For keeping a better tab on the telecom industry, the TRAI needs more accurate accounts from each player for measuring financial performance of products/network services and services; monitoring licensees' returns on products/network services and services regulated with price ceilings; identifying cross-subsidisation practices, which influence the profitability of any segments; understanding the inter-operator arrangements in terms of their associated pricing and costs; and monitoring the adequacy of access deficit charge payable by the contributing licensees.

As noted by the Authority: "The current capabilities of information and tools available to TRAI for purposes of tariff and cost analysis do not present a complete picture/scenario to allow TRAI to effectively carry out its mandated tasks. During the tariff-rebalancing exercise of 1999 and subsequent efforts aimed at establishing a cost-based tariff regime for telecom tariffs in India, the lack of an information base for determining cost-based charges proved to be a major hindrance. The process of aggregating information provided by service providers had its limitation for the purpose of tariff and cost analysis. Thus was felt the need for a more detailed and disaggregated information."

It may be recalled that the TRAI Act 1997, as amended by the TRAI (Amendment) Ordinance 2000, mandates that every service provider shall maintain such books of account or other documents as may be prescribed. The Central Government may, by notification, make rules prescribing the category of books of account or other documents, which are to be maintained. The SAS constitutes the guidelines to be followed by the service providers in maintaining their Books of Account.

The SAS is, therefore, significant from the regulatory perspective in a multi-operator environment.

The objective of the new system that is to be introduced is to make available to TRAI and managements the capability to analyse the costs, revenues and capital employed in the major areas of a service provider's business. Accounting Separation also facilitates the availability of more detailed information on costs on a regular basis, with greater transparency.

The system would provide the basis for an "Operator-specific Accounting Separation Manual (OASM)" to be prepared by each service provider. The OASM would contain operator-specific detailed procedures for implementation of the Accounting Separation and Reporting requirements mentioned in the SAS.

Implications for operators

What does it mean for the operators?

Well, for one, the accounting system currently being followed by the operators may require changes/upgradation to meet the envisaged SAS and reporting requirements. However, the TRAI has assured them that an endeavour has been made to follow the existing accounting practices and standards to the extent possible to minimise the changes. All the companies, which are engaged in one or more of the following telecommunication activities, will, however, have to separate their accounts in the manner discussed in the SAS.

While detailed accounting separation has been prescribed for integrated service providers, considering the cost of Accounting Separation, a much simpler framework for accounting separation has been prescribed for companies providing services in single circle or city and those companies providing services like Radio Paging, VSAT etc.

The accounts have to be separated in the following segments:

Type of Operating License/Service — The accounts have to be separated for each telecom service. This separation has been prescribed to measure financial performance of individual services and to identify Cross-Subsidisation, if any, across services.

Geographical Area - The Department of Telecommunication (DoT) has issued licences to the telecom service providers mostly geographical area-wise. To review and compare results across licensed areas, this form of Accounting Separation has been prescribed.

Product/Network service - The term "product/network service" for Accounting Separation means a service within a licensed service, which is priced or regulated separately. The separation of accounts of products/network services is required, to make transparent the costs involved in the provision of that product/network service.

Network Cost - Separation of network cost has been prescribed to unbundle cost of network elements. Unbundled cost of network elements provides the basis to study the cost of interconnection arrangement and also provides inputs for cost-based tariffs.

These accounting separation statements have to be submitted to TRAI on an annual basis. The reporting period would be the same as being followed by the operators for preparing the Annual Financial Accounts under the Companies Act, 1956. In case, the above reporting period consists of more than 12 calendar months but does not exceed 15 months, a break-up of the results for the 12 months and the balance period is not required. In case the reporting period exceeds 15 months, break up of the results into 12 months and the balance period is required for reporting to TRAI. The operators are required to submit the reports within 6 months of the accounting year-end.

The reports to be submitted to TRAI would need to be audited by an independent auditor.

The auditor would be appointed by the Operator who is a practising member of the Institute of Chartered Accountants of India (ICAI) and is eligible to be appointed as statutory auditor under the Companies Act, 1956 or any member of the Institute of Cost and Works Accountants of India (ICWAI) who is eligible to be appointed as cost auditor under the Companies Act, 1956.

No room for secrets

While most of the telecom operator have publicly welcomed this move by the Authority stating that although late in coming the guidelines would be to their advantage, they are privately worried. Not only will all their secrets, which they have carefully hidden in the "aggregate accounts" be revealed, but more importantly, the competitors will now be privy to their system of functioning.

While the authority has stated that it would use the information provided by the operators for its regulatory duties and limit the disclosure of such information to its staff and advisors/consultants as considered necessary, it "may however disclose full/part of the information only if it is considered necessary in public interest.

However, before making public any confidential information, an opportunity would be given to the operators for raising objections to such public disclosure. TRAI may, however, overrule such objections if considered necessary in the public interest".

No prizes for guessing why the operators are worried. Most of them are privy to DoT/TRAI policy documents even before the signs appear on the dotted lines. The wheel, it would seem, has come a full circle now.

grambabu@thehindu.co.in

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