Thomas K Thomas

How Vodafone Idea can be saved

Thomas K Thomas | Updated on February 20, 2020

Apart from lowering levies and taxes, the Centre should consider a relief package akin to the one offered to BSNL/MTNL

In 2016, the Chief Executive Officer of an incumbent telecom company started his presentation to the board of directors with the image of a calm sea under a stormy sky. The point that the chief executive made, during that meeting held in Dubai, was that his company will remain calm as it faced the storm created by Reliance Jio’s entry as an affordable data services operator. But what had gone unnoticed and perhaps forgotten was another storm that was brewing for almost 10 years — the regulatory battle with the centre over Adjusted Gross Revenue (AGR).

Four years on, just when the incumbent players thought they had ridden over the Reliance Jio storm, they have been hit with the AGR tsunami that is now threatening to drown Vodafone Idea and Bharti Airtel. The two operators have to pay nearly ₹85,000 crore as dues and penalties by March 17 after the Supreme Court ruled that revenue share has to be paid on non-telecom revenues also.

Even though the operators had ample time to secure themselves financially, from any adverse fallout of the court verdict, Airtel seems to be more prepared to pay the dues when compared to Vodafone Idea. Airtel has to pay about ₹35,000 crore of which it has already paid ₹10,000 crore.

Airtel raised $3 billion recently and has several assets which it can sell, if required, to meet the payment demand. Both Bharti Group and SingTel, the promoters, can also pump in additional equity if required.

Vodafone Idea, on the other hand, is in a precarious situation as it does not have a strong balance sheet or assets that can help the company raise more funds immediately. So far it has paid only ₹2,500 crore of the ₹50,000 crore dues. The company has a debt of ₹1 lakh crore and had declared losses of ₹6,500 crore in the third quarter of 2019-20. The promoters, Aditya Birla Group and Vodafone Plc, have indicated that they would not be investing more money into the telecom joint venture.

Under these circumstances, it is clear that the operator will not be able to sustain as a going concern and the only option then would be to go under the insolvency and bankruptcy process.

Given the legal complications engulfing the company, including the AGR dues and an earlier tax issue, it is unlikely that any entity would bid for the assets if it is put under the insolvency process. Vodafone Idea would then cease to exist, impacting thousands of jobs, investors, and banks. The telecom market would become a duopoly which can be dangerous for a nascent digital ecosystem.

Even if Vodafone Idea managed to pay the dues somehow, it will be left with no room to invest in ramping up networks or buy more spectrum to improve the quality of service. At the same time, the consumers will be asked to pay more so that the operator can recover the investments made for meeting regulatory payments. Neither of these scenarios augurs well for a country that is embarking on an ambitious digital journey.

Intense competition

Telecom networks are at the heart of our digital future and affordable services are a key factor to enable the democratisation of data. One of the hallmarks of India’s telecom market so far has been the intense competition, which hitherto ensured consumers got the best deals when it comes to tariffs.

Nearly 500 million users in India have changed their operator so far using mobile number portability only because there were multiple operators vying to offer services.

India is expected to have over 900 million internet users by 2023, up from 500 million now. It is a large enough market for three private players and one public sector company. Therefore, it is important to ensure Vodafone Idea survives. The telecom sector has proven to be the graveyard for over 20 companies over the last two decades leading to massive erosion of value and job losses. Another exit now would sound the death knell for the sector.

In this context, the Centre has rightly announced a ₹70,000-crore package for BSNL and MTNL to keep the public sector firms floating. A similar package must be offered to save Vodafone Idea. This would be the perfect time to bring down levies and taxes on telecom companies, which pay nearly 30 per cent of their revenues to the Centre in addition to the upfront spectrum fees after each round of auction.

The concept of revenue share was introduced in 1999 when the spectrum was given on subscriber-based criteria. But since 2010 the operators have been buying spectrum through an auction mechanism. While there is no justification to continue collecting licence fee or spectrum usage charge in the form of revenue share, the Centre may collect only 1 per cent of the revenue to meet administrative costs. This alone will save nearly ₹50,000 crore for the struggling telecom operators.

Lower the revenue share

The Department of Telecom could also consider lowering revenue share with retrospective effect, from 2010 onwards when the spectrum was given through the auction mechanism for the first time. After lowering all the levies, the Centre could adjust the AGR dues against the past and future payments of the revenue share by the operators.

The DoT should also amend its erroneous position on collecting revenue share on income generated from non-telecom services. One of the bizarre outcomes of DoT’s stand is that even non-telecom public sector undertakings such as GAIL (India) Ltd, Oil India Ltd and Power Grid Corporation of India Ltd are being asked to pay revenue share on the entire income of these companies merely because they took telecom licences.

For example, GAIL has been asked to pay ₹1.83-lakh crore even though a significant part of its revenue comes from selling gas. Will DoT also ask Reliance Industries to pay a revenue share on its income from the petroleum business just because it owns Reliance Jio? The Centre must make it clear that the revenue share will be collected only on income generated from telecom services.

The Telecom Dispute Settlement Appellate Tribunal had upheld this view in 2015.

Such a package would save the non-telecom public sector companies who have been asked to pay AGR and, more importantly, from the telecom consumer point of view, it will ensure that Vodafone Idea survives. In return, the Centre can push GAIL and Power Grid, which have optical fibre assets, to play a more active role in the creation of the national broadband network.

In the case of Vodafone Idea, the possibility of handing over the company to a board led by the employees, similar to how Larsen & Toubro is managed, should be considered.

If BSNL and MTNL were asked to shed a large part of their employee base because salary costs were a massive drag on their balance sheet, the current management of Vodafone Idea also has to be held partly responsible for the mess the company finds itself in.

While poor regulatory decisions by the Centre have been the primary contributor to the company’s precarious situation, some short-sighted strategies adopted by the company management, especially when it came to adopting 4G technologies, has only added to its woes. Telecom consumers should not pay the price of these follies.

Published on February 20, 2020

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