What the telecom mess teaches us

Debasish Mallick | Updated on March 01, 2020

The woes faced by telcos today are a fallout of the price wars between them, which may have benefitted consumers but also hindered progress in the telecom industry

The Supreme Court has refused to extend the deadline for payment of licence fees, on the basis of the adjusted gross revenue (AGR), as appealed for by the telecom companies. The aggregate payout by virtue of this order is estimated at ₹1.47 lakh crore. The industry comprises three large private sector players — Bharti Airtel, Reliance Jio and Vodafone Idea, along with the BSNL/MTNL combine. The licence fee (past dues) include dues of ₹53,000 crore from Vodafone, ₹35,600 crore form Airtel; and ₹195 crore from RJio. The order puts additional financial burden on all these companies, albeit to varying degrees.

It also adversely affects telecom companies which have exited the market, with Tata Tele’s reported dues of ₹14,000 crore being prominent. In an unfortunate turn of events, a few PSU majors engaged primarily in the non-telecom business, who had obtained a licence but were yet to put it into use, are also now obligated to pay licence fees. Such cumulative dues of non telecom PSUs aggregate ₹2.65 lakh crore. The PSUs have referred the matter to the appellate for remission.

The sector is now on the edge, with chances of closure of operations by Vodafone Idea looking likely only a few days ago. Of course, the threat appears to have been somewhat warded off with Vodafone having paid till date an amount of ₹3,500 crore. Bharti Airtel has paid ₹18,000 crore, while Reliance Jio has paid the entire amount within the original deadline.

Vodafone has sought a protracted payment schedule on a staggered basis, over a number of years, submitting that it may have to close down operations otherwise.

Whatever may be the final judgment on the request, the sector definitely looks vulnerable. The order of the SC coming into effect could threaten the existence of one or more of these remaining players and reduce the industry into a virtual duopoly or even a monopoly, and retard growth prospects. Such developments could also lead to decline in service quality, increase in prices and dissatisfied/disgruntled customers.

Leaving apart the aforesaid PSU majors, who have unwittingly got caught in the tangle, the present crisis has happened primarily on account of “inability to pay” by the operators. Infusion of exogenous funds by the company/promoters appears to be the only way to meet the situation. Reports suggest that companies are considering fresh debt issuance to meet this liability. Prospects of infusion of fresh equity appear remote, perhaps indicating less confidence on the long-term business prospects.

Competition aborted

The telecom industry was privatised in the 1990s, with city-wise licences granted to individual companies. A few of the Indian corporates in collaboration with overseas telecom players then started operations. The services were evidently convenient, but the market expansion happened only with adoption of innovative marketing strategies and price rationalisation/cuts. Shake-outs in the industry had, however, been continuous for various reasons, including prospects of a profitable exit.

In subsequent years, two events made a fundamental alteration in the industry — the initiation of predatory pricing, which pushed prices below the average operating cost of the industry; and the “telecom scam” which forced the exit of a few major global players who had proposed greenfield operations. While the first made business unremunerative for a number of smaller players, the second created a virtual “Entry Barrier”. The present situation with prospects of emergence of a duopoly/monopoly is a consequence of the above events.

Pricing issues

India’s telecom business has not been very profitable, in recent years, primarily due to the ongoing price war. Though the price war had a beneficial effect on the consumers and has been instrumental in expanding the market, it perhaps has left the industry with little surplus to invest in business improvement. It has also impeded ability of the companies/operations to generate surplus and accrue reserves of any sizeable order to meet such exigencies.

Ironically, the same consumers are today faced with the prospect of lesser number of players/competition and consequent adverse impact. A similar situation could arise in other industries too. There may, therefore, be a case to introspect the need to strengthen business financially, by setting not only a ceiling but also a floor below which prices cannot be pushed down.

This critical price level should be set at a level which can leave a surplus for business improvement. It is no doubt a difficult issue, but is perhaps necessary for the medium and long term.

The writer is MD&CEO of IDBI Asset Management Company and former Deputy MD of EXIM Bank

Published on March 01, 2020

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