Mahanagar Telephone Nigam Limited (MTNL) has submitted CRISIL's rating rationale to stock exchanges under Regulation 30 compliance, with the credit rating agency maintaining its 'Watch Negative' status on the company's government-guaranteed bonds and debentures.

Rating Action and Current Status

CRISIL Ratings has continued the 'Watch Negative' rating on MTNL's debt instruments, maintaining the cautious outlook that was first implemented in September 2024.

The rating was initially placed on 'watch negative' on September 11, 2024, following non-adherence to the structured payment mechanism for government-guaranteed bonds. Though bond obligations were met on due dates, the payment mechanism specified in bond documents was not followed, with delays of 1-2 days in funding the designated account beyond the T-3 date.

Payment Mechanism Adherence

CRISIL has observed consistent adherence to the trustee-administered structured payment mechanism since September 21, 2024. For all subsequent interest payments from September 11, 2024, there has been adherence to timelines defined in bond documents. While there was a breach of T-10 days wherein funds were not deposited in the designated escrow account 10 days prior to the due date by MTNL due to liquidity challenges, the government has been consistently funding the designated escrow account on or before the T-3 trigger date.

Financial Performance Impact

MTNL's operating performance has continued to deteriorate during the rating period. Operating revenue declined to Rs.547 crore for the first nine months of fiscal 2026 from Rs.712 crore in the corresponding period of the previous fiscal. Consequently, the operating loss widened to Rs.241 crore (excluding non-operating income) from Rs.175 crore.

The decline in operating revenue is attributed to the service agreement with Bharat Sanchar Nigam Ltd (BSNL), effective January 1, 2025, which led to migration of certain customers in Delhi and Mumbai to BSNL, resulting in MTNL not recognising the revenue.

Key Financial Indicators

NM: Not meaningful as the numbers are negative

Rating Outlook and Risk Factors

CRISIL awaits confirmation from MTNL on the process to be followed for ensuring adherence to the structured payment mechanism. Sustained adherence to the stipulated T-structure payment mechanism will be a trigger to resolve the watch status. However, instances of non-adherence to the structured payment mechanism in upcoming repayments may lead to a rating downgrade.

The rating agency has noted that MTNL's loan account with Bank of India slipped into the non-performing account (NPA) category on September 4, 2024. All escrow accounts pertaining to the servicing of government-guaranteed bonds are maintained with Bank of India, though operational status of escrow accounts will not be impacted by the NPA status.

Government Support Structure

The rating continues to be supported by the credit enhancement provided by the unconditional and irrevocable guarantee from the Government of India through the Department of Telecommunications, Ministry of Communications, and the trustee-administered payment mechanism. The government has provided a loan of Rs.2,839 crore for payment of interest on sovereign guarantee bonds issued by MTNL.

Under the service agreement signed on November 22, 2024, between BSNL and MTNL for 10 years, the entire telecommunication operations of MTNL in Delhi and Mumbai are being run by BSNL with effect from January 1, 2025. BSNL will be responsible for capital expenditure and operational expenditure of MTNL, ensuring EBITDA neutral operations.

Mahanagar Telephone Nigam Limited has officially notified stock exchanges about its inability to fund the escrow account for an upcoming bond interest payment, marking a significant development in the state-owned telecommunications company's ongoing financial challenges.

Regulatory Disclosure Details

In a filing dated February 24, 2026, under Regulation 30 of SEBI (LODR) Regulations, 2015, MTNL disclosed its failure to fund the escrow account maintained at Bank of India for the 4th semi-annual interest payment. The company cited insufficient funds as the primary reason for this default.

Structured Payment Mechanism

The payment structure operates under a Tri-Partite Agreement (TPA) signed among MTNL, the Department of Telecommunications (DoT), Ministry of Communications, Government of India, and Beacon Trusteeship Limited. According to this agreement, MTNL is required to fund the semi-annual interest into the escrow account with adequate amounts at least 10 days before the due date.

This structured mechanism was designed to ensure timely payments to bondholders and provide additional security through the escrow arrangement.

Sovereign Guarantee Activation

All bonds issued by MTNL carry sovereign guarantees from the Government of India, providing ultimate security to investors. The company's filing confirms that in case of any default in payment of principal and interest, the sovereign guarantee will be invoked by the Debenture Trustee.

Once invoked, the Government of India becomes obligated to make the payment to bondholders, effectively transferring the financial burden from the company to the sovereign balance sheet. This mechanism is based on the Tripartite Agreements filed with BSE when the bonds were originally listed.

Financial Implications

The inability to fund the escrow account highlights MTNL's severe liquidity constraints and operational challenges. This development represents a critical juncture for the telecommunications company, as it moves closer to triggering government intervention through the sovereign guarantee mechanism.

The early disclosure, made well ahead of the March 6, 2026 due date, provides transparency to stakeholders about the impending default scenario and the subsequent activation of government guarantees.