Government holding the strings of Vodafone Idea?

-Penned by Apoorva Grewal and Varnika Gupta

Running a telecom industry is no child’s play. There are a whole bunch of things involved in the industry like license fee, spectrum allocation to name a few. Moreover, there exists intense competition within this industry. Back in the day there were more than 15+ telecom companies in the market, however, with the rise of Jio, most of the companies crumpled to dust, and swept under the rug. At present, there are only 4 telecom behemoths surviving; Reliance Jio, Bharti Airtel and Vodafone Idea. However, even with only three players, there is some trouble brewing in the waters, with the Government now stepping into the picture. This week, let us see what is going on in the Telecom sector, with the government becoming a major shareholder of one of the telecom giants and what will be the future implications.

Background

Before the entry of Reliance Jio, Telecom companies were charging exorbitant amounts and providing minimal services, causing a dent in the consumer’s pockets. Moreover, all the players, in an unsaid agreement, were on the boat with this strategy. However, on the other side of the picture, they were also overpaying for everything. For example, most companies were bidding for the spectrum based on the projected future cash flows, which was financed by borrowings. In 2016, Airtel was in fact borrowing Rs 1.5 per rupee invested by their owners, thereby increasing their liabilities.

Fig. 1: Current shareholding in Vi after conversion of interest dues to government into equity.

Source: BusinessToday.In

The situation went from bad to worse with the advent of Reliance Jio in the market. Jio, unlike other competitors, did not bid based on future projected cash flows, and moreover, offered low cost plans, in an attempt to penetrate the market. This disruption of the market by Jio, caused other industry stalwarts to realign their operations and slash pricing, in order to have a foothold. However, this was a bit problematic, as the already mounting debt was going to further climb steeply.

But apparently, the worst was yet to come. In 2019, the government demanded government fees, also known as Adjusted Gross Revenue (AGR) to the already debt-ridden companies, amounting to Rs 20,000 crore each. Reliance Jio was saved from this fate, as it entered the picture in the later part of the decade. According to the Government, the companies have to pay government fees on whatever revenue it earns, regardless of the source, however telecom players paid the fees only on the revenue earned from telecom business till date. This led to a dispute between the two entities and Bharti Airtel and Vodafone Idea took the matters to the steps of the Supreme Court.

Fig. 2: A timeline of the AGR case

Source: Business Insider India

What happened?

With the battle between telecom vs the Government raging in the Supreme Court, SC rests the case by siding with the government, putting pressure onto the companies to clear its debt by 31st March, 2031. Vodafone Idea (Vi) tried to seek a bailout from the government, however, it was met with a brick wall, as the Government clearly told to either pay the amount or to shut its shop. With this, Vi stood at the brink of disaster with acute debt and trickling market share.

In September 2021, The Government, looking at the scarce situation of Vi, offered it an extension and an opportunity to convert its debt worth Rs 16,000 crore to equities, equivalent to 36%. This offer was recently taken up by the Vi, making the Government one of the largest owners of the organization, and stepping into the telecom sector. With this muddle, let us see the impact of this deal in the industry landscape and future implications.

Possible implications of the move

The picture of the Indian telecom industry at present does not look pretty. It currently has only four major players- Reliance Jio, Bharti Airtel, Vi, and BSNL. Out of these the government owns 100 percent of BSNL and over 35% of Vi. This raises questions on the conditions of fair competition in an industry heavily guarded by licensing norms, particularly where no company or legal person can have equity holding in more than one license company in the same area for the same service. There could be a possibility of a merger between BSNL and Vi where BSNL’s pan India optical fibre network and public sector assets and Vi’s 4G equipment and professional management could lead to synergies and possible growth for both entities. Having three strong players could also be beneficial for the industry and protect the customer base from the tyranny of a duopoly.

On the other hand, the government has also made it clear on multiple occasions that it has no business to be in business. Issues of red tapism, conflicting objectives, and excessive oversight are well-known to hamper value creation in a business. This is why we see efforts of divestment in all kinds of public sector undertakings. It is likely that the government could leave the promoters to run the company once it gets the house in order by attracting potential investors and helping the company raise funds. Although Vi’s stock crashed 20% on the day of the announcement, it is expected to recover as the fundamentals of the company and eventually the industry improve. It reduces the debt service obligations and introduces a shareholder with much better credit standing (GOI). The government also has the option of providing a credit backstop so that the company’s risk profile improves and hence its borrowing capacity. As the government has allowed 100% FDI in the telecom sector through automatic route since October 2021, offshore investors could be welcomed.

The road ahead

The long-term outlook of Vi and the industry at large depend upon how the management is able to turn things around now. Even a steady stream of cash inflow does not guarantee a check on the dwindling user base that the company has been facing since the entry of Jio. Vi needs to make fresh investments in 5G infrastructure, network expansion, and improvement in customer service while trying to generate upto Rs 250-300 average revenue per user (currently Rs 109). This is not going to be easy in an industry with high price elasticity of demand. The success of this move depends on how the government responds to the feedback it receives now on its economic policies as a key player in the sector and eases the regulations to improve the conditions to do business with much needed reforms. Government supported liquidity infusion in the industry could go a long way in enhancing its financial health which is important to realise the aspirations of Digital India.

The vision for India 2030 lies on the foundation of the JAM trinity: Jan Dhan, Aadhar and Mobile. It is imperative that affordable and accessible telecom services reach every nook and cranny of the nation so that everyone can be empowered to participate in it. An unhealthy telecom sector with only two players making the rules could be detrimental in this respect as subscribers may ultimately have to pay the price. Expansion is only possible when confidence is built in the sector’s growth potential and investment yields positive returns.

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