After Mahanagar Telephone Nigam (MTNL) on Wednesday announced that its board has approved the proposal for a service agreement with Bharat Sanchar Nigam (BSNL) for a period of 10 years, sources said the department of telecommunications (DoT) is looking at any tax implication possibility before giving its nod to the deal.

The pact can be revoked earlier than 10 years by giving a notice of six months or extended by mutual consent between the parties, the company said in an exchange filing.

A service agreement between BSNL and MTNL would mean that the former will be given the authority to manage the latter, without the need of merging the entities. Officials said BSNL will come on board as a management agency for MTNL, and the same is being done to avoid the complexities of a merger, which was earlier being looked at as one of the options.

“The agreement is just related to managing of MTNL by BSNL and does not pertain to transfer of any liabilities to BSNL. We are currently seeing if there is some sort of tax implication that will arise or if any commercials need to be involved between the entities to proceed with the service agreement,” an official said.

A tax implication is being checked as the government wants to refrain from any kind of money outgo with regard to the proposed agreement. 

Currently, MTNL provides services across Delhi and Mumbai, and BSNL in the remaining circles pan-India. MTNL has about 1.9 million wireless subscribers with a market share of 0.2% as of May-end, according to the data by the Telecom Regulatory Authority of India (Trai).

Currently, MTNL has total borrowings of Rs 7,873.52 crore from banks and financial institutions, and the total debt of the company stands at Rs 31,944.51 crore. On August 5, the company said it defaulted on bank loan payments worth Rs 422.05 crore, which includes a Rs 93 crore interest for the June and July period.

“The government is behind any kind of payments pertaining to sovereign bonds. Currently, there are no discussions on government support for MTNL’s other liabilities including bank debt,” an official said.

The service agreement between MTNL and BSNL is aimed at making MTNL Ebitda neutral first, which means its revenue is matching with its expenses, the official added. The same will also pave the way for easy rollout of 4G and 5G services by BSNL across Delhi and Mumbai also.

On Wednesday, the MTNL board also approved sale of shares of MTNL in Mahanagar Telephone (Mauritius) (MTML), an overseas wholly-owned subsidiary of MTNL. The board also approved the proposal of sale of shares of MTNL in MTNL STPI IT Services Ltd (MSITS) by complying with the provisions of the joint venture agreement with STPI. The company has also approved the proposal for closure of Millennium Telecom Limited (MTL), a wholly owned subsidiary of MTNL.

Officials said the same is being done to simplify the structure of the company. The plan, however, is not to delist MTNL from the Indian stock exchanges currently, officials said.

In the April-June quarter, MTNL’s net loss narrowed to Rs 773.5 crore from Rs 783 crore in the previous quarter. The company’s revenue from operations fell 12% sequentially and 8% YoY to Rs 183.9 crore in the quarter. The government has so far allocated a total of Rs 3.2 trillion as part of three revival packages for BSNL and MTNL.

BSNL has currently deployed over 15,000 4G sites across Punjab, Himachal Pradesh, Uttar Pradesh West, and Haryana. The company is targetting to deploy 80,000 sites by the end of October. Simultaneously, the company will soon begin 5G trials.

While both BSNL and MTNL are loss-making and losing subscribers continuously, for the latter the government is targetting a 25% market share by 2025 end, FE reported on July 24, citing officials in the know.