Existence danger on VodafoneIdea in India: What awaits the telco?
An unfavorable verdict of a legal battle between the Government of India and mobile operators of India has put one of the oldest telecom operators – Vodafone Idea – in a fix. While the company was already struggling with a massive debt of Rs 1,800 billion and a limited cash reserve of Rs 3,500 million, the recent denial of its appeal to recalculate AGR dues has put Vodafone Idea in a sticky position. We dwell upon what led to all this and what lies ahead for the telecom operator.
Telecom services are very important. they provide the substratum for a large number of online gigs that could lend the economy of India just the edge it needs in this age of digital value creation. Our telecommunication sector, for cyber startups to thrive, should be efficient, robust and customer-oriented, a combination that is best assured by the prevalence of sufficient competition. sadly, with a debt-laden Vodafone Idea (VI) gasping for survival, the sector is at risk of being reduced for all practical purposes to a duopoly of reliance Jio and airtel. the VI crisis has escalated in the last few days after the supreme Court dismissed telecom companies’ pleas to recalculate the adjusted gross revenue (agr) payable to the government.
the government is also working overtime to work out a solution that enables VI to stay afloat and not head towards bankruptcy by bringing out a relief package that might set things straight for the telecom company. a big question is what happens if Vodafone Idea goes bankrupt? also, there are too many question expected from the government. How is the relief package going to help it survive? How will VI get relief from the package? What will be announced in the package? We’ll discuss now.
Slow death of VI after a mega-merger
the VI was completed in august 2018. since then, India’s third-largest service provider – Vodafone Idea Limited – has been bleeding customers. In the last three years, the telecom operator has lost more than 17 crore active subscribers, from about 43 crore subscribers to 26. the tariff hike was a solution for growth, but even that failed only for VI. the company could not report substantial growth in its revenue despite a 30 per cent tariff hike taken in December 2019. amidst this, landed the unfavorable outcome of a twodecade-old dispute over how revenue is to be defined for spectrum usage charges and license fee. the telecom operators are liable to pay around 4 per cent and 8 per cent of the average gross revenue (agr) as spectrum usage charges and license fees, respectively, to Department of telecommunications (Dot).
the argument was on, while calculating agr, what to include and exclude. Operators thought only receipts from core telecom services were to be included, but the Dot wanted a piece of other revenues as well, that is, from dividend, rent, and interest income to profit on sales of fixed assets. the supreme Court of India upheld the demand of the government in October 2019, putting VI on the hook for rs 58,300 crore. Once the outcome was done, the operators continue their pleas to rectify what they say are errors in the calculations of the government and for staggered payment. the court did allow staggered payout as the operators were incapable of paying thousands of crores as penalties and dues at one go. Owing to this, VI did avoid bankruptcy last year, but its viability is again in doubt as recently the apex court rejected the rectification plea. british firm Vodafone group CEO Nick read made it clear on July 23 itself that he will no longer invest a single rupee in Indian joint venture (Vodafone Idea). recently, industrialist Kumar mangalam birla also resigned from the post of non-executive director and non-executive chairman of Vodafone Idea, which was stuck in debt. the board of directors of the company accepted his resignation.
Ballooned Debt
the total debt of Vodafone Idea, as of march 31, 2021, stood at rs 1.8 lakh crore which is equal to the market capitalization of JWS steel Ltd, largest steel company of India. Of this lofty debt of rs 1.8 lakh crore, nearly 87 per cent is owed to the government of India. Of the remaining, according to reports, among banks, the telecom operator owes a large chunk to sbi, Yes bank and IDFC bank. this goes
without saying that Vodafone Idea is in no position to pay these dues. according to the Care ratings, which has given a b+ rating to its NCDS and bank facilities, bonds worth rs 6,000 crore are up for maturity from December 13, 2021, to February 14, 2022. the banking system in this case is relatively safe – the impact is only rs 23,000 crore but spread across banks, mutual funds, and the like.
Telecom Sector Relief Package
the telecom industry association Cellular Operator association of India (COAI) has written to the Dot, the Cabinet secretary and the finance ministry seeking a huge revival package from the government, covering all types of levies, tenure of spectrum lease, and easier payment terms for statutory dues. s. p. Kochhar, Director
general, COAI, to telecom secretary anshu prakash, said in a letter dated august 17, 2021, “Indian telecom sector remains one of the most heavily taxed sectors. the government needs to recognize that the current revenue sharing regime of around 32 per cent of revenue outgo as taxes and levies is unsustainable and will always be detrimental to growth of the Industry due to perennial lack of surplus cash to reinvest.”
the major demand brought up by the telecom sector is to double the tenure of all auctioned spectrum holdings, both existing and future, from 20 years at present to 40 years without seeking any additional amounts and to also consider a moratorium period of up to 10 years for present and future spectrum payments. Furthermore, the sector has demanded a sharp reduction in license fees, from 8 per cent currently to 2 per cent points of the agr of the operators as well as a reduction in the spectrum usage charge (suc), much more than what was recommended by the telecom regulatory authority of India (trai). the license fee comprises two components — general exchequer (3 per cent) and the universal service obligation fund (8 per cent). COAI wants both the components to be reduced to 1 per cent each.
Relief package might include all of this
a consortium of banks led by state bank of India has told the Dot that converting the telecom company’s debt into equity could help the company come out of the crisis. However, the Dot is expected to come out with a relief package for India’s telecom sector very soon. the government will look to reduce the telcos’ financial burden so that operators like Vodafone Idea can have a future in the Indian market. the relief package is not final yet and government still in the process of making it. according to the reports, the Dot might be looking to set up a panel or hire external consultants for preparing a relief package for the telcom sector of India besides being a lifeline for Vodafone Idea. While no specific data has been announced by the government, several officials have shared details about the telecom sector relief package, which will include a plan to exclude ‘non-telecom items’ and agr dues. the package is expected to provide a massive relief to legacy telecom firms, which have to repay a huge amount of spectrum charges and agr dues.
as per the discussions going around in the industry, the relief package for the telecom sector is expected to reduce levies like license fees and spectrum usage charges. also, the package might reduce agr dues by excluding all the nontelecom revenues that the operators make. Further, the government might reduce bank guarantees that operators need to provide. In the package, there’s might be a few more things to make the life of the operators easier. However, there’s no guarantee when
the government might come out with the relief package and who’ll sit on the panel to make it. previously, the government had sought inputs from Iim-ahmedabad and Deloitte for making the package for the state-run telecom operator bsnl. these inputs and consultations from professional bodies will help the government in coming out with the most effective relief package for the ailing sector.
What went wrong with Vodafone Idea?
In the telecom industry, Vodafone and Idea have been two of the strongest players. as of 2016, they were in fact the largest telecom companies by their subscriber base, only falling behind airtel. after the merger in 2018, Vodafone Idea led in terms of market share, capturing over 28 per cent of the subscriber base. However, after the entry of mukesh ambani’s reliance Jio, it started having an impact on Vodafone’s customers, business and profits. Jio captured over 33 per cent subscribers within a matter of three years. reliance-backed Jio made voice calls free after its entry into the telecom business in september 2016 and since then the condition of VI started deteriorating. Jio now leads the market with a 35 per cent market share, followed by airtel at 29 per cent, and Vodafone-idea at a mere 25 per cent. If the government did not give any relief package to VI, then the company may get closed.
What happens if Vodafone Idea dies?
the failure of Vodafone Idea as a company will affect the government along with the banks. after the failure of anil ambani’s reliance Communication, the government did not get any money. even after the failure of aircel, the government and bank did not receive any money. the government’s spectrum fee of 96,300 crores on VI, 61,000 crores as agr dues and about 21,000 crores of banks’ debt remains. Let’s get to know what will be the impact if Vodafone Idea goes bankrupt.
Government will have a loss of 1.60 lakh crores
back in 2019, when the supreme Court of India dealt a big blow to the telecommunication companies by ordering that the telecom companies, in their agr payments, must include noncore revenues and would also have to pay penalty and interest, the government was staring at a huge windfall of thousands of crore in additional revenues. If the telecom company Vodafone Idea – which is going through losses, debt and big changes – shuts down, then its biggest loss will be to the government of India. the government may suffer a loss of rs 1.6 lakh crore from this. In case of spectrum payment and agr dues, this amount is outstanding. according to various estimates, Vodafone Idea owes around rs 1.5-1.6 lakh crore to the government. It has rs 16,000 crore for annual spectrum payment and rs 8,400 crore for agr dues coming up in march, april 2022 itself. but, with a loss of rs 44,233 crore in the year ended march 2021, it is in no position to repay its debts, which stood at rs 1.86 lakh crore (including interest accrued, but not due and agr liability) as of march 31. the company’s collapse will clearly blow a bog hole in the revenues of the government.
SBI will have more impact
Vodafone Idea has little chance to raise investments and in the event of bankruptcy, it will be difficult to repay the 28,700-crore debts of banks. the company currently has an outstanding debt of rs 1.75 lakh crore. If its assets are not enough to repay the creditors, they will have to write down their loans to the company. In case Vodafone Idea dies, the biggest impact will be on sbi, which has given a loan of rs 11,000 crores to the company. apart from this, Yes bank has given loans of rs 4,000 crores and Indusind bank has given loans of 3,500 crores. In terms of loan book, Vodafone Idea accounts for 2.9 per cent of the total debt for IDFC First bank. after this, the share in the loan book of Yes bank is 2.4 per cent and Indusind bank has 1.65 per cent. IDFC First bank has the highest risk given that its exposure to VI is the highest as a percentage of the loan book of the bank. However, some media report suggests that the bank has already marked the debt to the company as ‘stressed’, and created a provision for 15 per cent of the current outstanding debt.
Ancillary service providers will suffer too
ancillary service providers include tower
infrastructure companies, telecom equipment manufacturers, companies providing infrastructure rollout and maintenance services, among others. For example, the fortunes of one of India’s largest mobile tower installation companies - Indus towers – hinge greatly on the survival and operational capabilities of VI, apart from airtel. Vodafone Idea is estimated to contribute nearly 35-40 per cent to Indus tower’s topline. Not everything of this will be zero as the remaining service providers would require incremental towers to service new users. but, there would still be a significant impact on the financials.
“any deterioration in their [Vodafone Idea and airtel] financial health due to increased competition or inability to raise further funds can affect their ability to pay for infrastructure services, which could adversely affect Indus’ revenues, cash flows and overall financial condition”, Indus said in its annual report for the financial year 2020-21.
What will happen to Vodafone Idea users?
the immediate fallout of Vodafone Idea demise will be the subscriber exodus – at rates, which could be magnitudes higher than the current one. VI currently has a subscriber base of over 270 million and most of them are daily wage earners. If the company gets shut down, subscribers will be given enough time to port to other telecom service providers. according to the rules, telecom companies have to give at least 30 days advance notice to users before shutting down their services in India. meanwhile, the telecom regulatory authority of India (trai) should be notified 60 calendar days in advance. If the users choose to retain their mobile numbers, they would have to port out their number to some other service provider. Or, they can simply get a new mobile connection.
For example, in 2018, when aircel announced the closure of its services, subscribers were forced to opt a different operator. they were allotted unique porting codes (upc) by trai through which they could opt for mobile number portability (mnp). users were given a deadline till October 2019 to switch to some other network – bharti airtel, reliance Jio, bsnl, or Vodafone Idea. those who failed to port out within the deadline had to surrender their number late. to recall, aircel had closed down its operations due to intense competition in the market and also because its merger with reliance Communications fell apart due to delayed regulatory approvals.
Reliance Jio, Airtel not equipped to absorb 270 million users
The death of vodafone idea could over burden Jio and airtel. “the infrastructure of bharti airtel is not equipped to take on another 270 million people overnight. and Jio cannot do that either because they are not even equipped to take on 2g and 3g customers”, explained r Chandrashekhar, former secretary, telecom and information technology (It) in an interview to a leading daily.
While airtel and reliance Jiomay not be equipped to take on 270 million users of Vodafone Idea, these two telcos could come together as the interim caretakers for the subscribers, on the existing infrastructure of Vodafone Idea. this will not only help maintain the continuity of service for the 270 million users, but will also provide airtel and Jio the time to scalp up their network infrastructure to take in the inevitable influx of subscribers.
What can be done to fix the crisis?
Vodafone Idea, in Indus tower, expects the sale of its 11.15 per cent stake to compete in the next three to four months that could yield an approx. rs 6,000 crore. the board of directors of cleared the planned rs 25,000 crore rights issue at rs 12.50 per equity share. VI, in the longer game, will require more capital to go up against the might of Jio and airtel. ravindra thakkar, md & CEO, Vodafone Idea Limited said that they are focusing on their strategy to keep their customers ahead. also, the company is in talks with potential investors to raise funds. VI reported that the total debt on the company stood at rs 1,91,590 crore as of the quarter ended June 30. this includes spectrum payment liability of rs 1,06,010 crore and agr liability. there could be relief if the government decides to save the troubled telco by expanding the moratorium on spectrum-related payments as a majority of the debt of the company is owed to the government for spectrum. equity infusion by investors, relief package from government might make a difference in the survival or fall of the Vodafone Idea in India.