Uncertain call for Vodafone Idea

The telecom relief package has offered the ailing telecom service provider only a breather; it will have to earn its way to the longer-term policy benefits

To save Vodafone Idea, the government’s challenge was to determine how much fiscal risk it was willing to absorb. This was why the telecom package was delayed by a week; the Department of Telecommunications (DOT) and the Ministry of Finance (MOF) argued over this point. The decision went down to the wire pretty late on Tuesday night before the Cabinet met on Wednesday morning to approve the package of nine reforms for the sector, five procedural changes plus four relief measures.

As the package announced by telecom minister Ashwini Vaishnaw shows, the government has taken little fiscal risk except for foregoing additional spectrum usage charge of 0.5 per cent for companies when they jointly use a particular band of airwave.

It is important to get this perspective because the beleaguered telecom service provider had pleaded with the government to pick up some of its equity as a key clause of the package. Lenders to Vodafone Idea would have gained some assurance had there been a notional sovereign guarantee; this would have reduced the cost of fresh loans the company will need to continue and expand its operations as India’s third-largest telecom service provider by subscriber numbers, after Bharti and Reliance Jio.

But if the government had done so, there would have been political pushback against the hefty rise in subscription rates Vodafone Idea must now introduce. India badly needs to deepen digital connectivity but that, in turn, needs the three private sector companies to stay in good health. A partly nationalised Vodafone Idea raising telecom rates would have been too hot to handle, although state-owned BSNL and MTNL are already likely to do so.

Instead, Vodafone Idea has been effectively told that the government support is contingent on the telecom service provider bringing in fresh capital. In a huge relaxation, foreign investors can invest 100 per cent in the sector under the automatic route. To make the deal work, the government had dropped the threat of retrospective tax claim of ~22,100 crore on the parent company in August this year.

The question is why the parent should invest or the lenders offer fresh capital. The government has offered a moratorium of up to four years in annual payments of dues arising out of the judgment of the Supreme Court on the telecom service providers on the adjusted gross revenue (AGR) they need to share with the government. DOT estimates the liability at ~58,000 crore for the company over a 10-year period, while the latter puts it at ~29,300 crore. The government has also offered the same sort of concession for spectrum payments in future auctions — a fouryear moratorium for payments on spectrum companies win in auctions such as those for 5G coming up in 2022.

But, again for both, the rider is that the government will protect the net present value (NPV) of its dues, which means the government will charge interest on companies that opt for the deferment. The rate is currently about eight per cent annually. The implication is the later payment will be steep, but the calculus is that Vodafone Idea would have repaired itself to be able to make them by then. In other words, the Consolidated Fund of India will not suffer any financial loss now or in the future.

Meanwhile, there is space for the company to rearrange its books to continue operations and expand. One of those offers, again prospectively, is a crucial reduction in the scope of the AGR. The company, like the other two, can hive off its non-telecom services into separate companies and insulate those revenues from the sharing formula. DOT has also agreed there will be no spectrum usage charges for future airwaves any telecom company buys in addition to what they will pay as auction fees. This is something that the MOF, for instance, had suggested to the DOT for some years.

So the package looks something like this. Vodafone Idea does not have to pay its current dues to the government.

It can participate in auctions and add spectrum to fill gaps in telecom circles where it operates. It has been offered long-term certainty about its future cash flows in terms of what it will share with the government. Some of those time lines have been expanded — such as the holding period for spectrum, which will now be 30 years instead of 20.

The company, however, has to earn its way to the goodies. Even before the package was announced, shareholders were doubtful about the viability of the company as a going concern. Kumar Mangalam Birla resigned as chairman in June to offer the government a free hand if it wanted to partially nationalise it. The option to pick up a stake in the company essentially meant that. These are the reasons why both the Federation of Indian Chambers of Commerce & Industry (Ficci) and the Confederation of Indian Industry (CII) offered a guarded reaction to Vaishnaw’s announcements.

Still, does cabinet approval for the telecom package also mean a nudge for the largely state-owned banking sector to offer the company fresh credit? The question is relevant if you recall how the government’s decision on coal auctions revived interest among the banks to lend to new bidders.

Wednesday’s deal was a difficult one for the government to sign. Despite the estimated humungous debt load of ~1.92 trillion for Vodafone Idea, the Centre has never before offered to address the liquidity woes of any company this way. The usual mode has been to offer a tax waiver. Those routes were not available in this case. So DOT and the MOF had to write a fresh playbook that could become a template for other sectors. In the circumstances they have done well. But whether they have done enough to ensure the telecom sector does not become a two-company race is for Vodafone Idea’s shareholders to decide.