Vodafone-Idea
Vodafone-Idea

The story so far…

10 years ago India had over a dozen telecom service providers. Idea and Vodafone were two separate entities that enjoyed a strong market share with a fast growing subscriber base. But all that changed in 2016 when Reliance Jio entered the market. It provided very cheap data and voice call subscriptions. In fact, data rates per GB in India dropped to amongst the lowest in the world. This resulted in Jio gaining massive market share. Other companies had to lower their rates and take huge losses to keep up with Jio. Players like Tata Docomo, Aircel, Telenor and Reliance Communications had to either shut shop or merge with other entities.

In 2018, Vodafone merged with Idea and was renamed Vodafone Idea Ltd. (VIL). The combined entity had the highest subscriber base in India with 418mn subscribers followed by Airtel with 340mn subs and Jio with 280 million subscribers. But Airtel and VIL were losing subscribers very fast at the rate of 3.8 million subscribers a month. Low tariffs were eating away company’s revenues and in Sept’19 quarter, VIL posted highest ever corporate loss of Rs.50,922 Cr. in 1 quarter.

Conditions were bad for VIL, but were about to get worse. In October 2019, telecom companies lost a 15-year regulatory battle against the government regarding payment interpretation of AGR dues. This ruling meant that telecom companies now owed the government around Rs.1.47 lakh crores in spectrum charges, license fees, interest and penalties. Of the total amount, VIL owed around Rs.58,000 crores, and Airtel around Rs.44,000 crores. But VIL and Airtel’s self-assessment of the AGR charges amounted to only Rs.21000 crores and Rs.13000 crores respectively, that is, less than half demanded by the government.

In lieu of this, telecom companies filed for a review petition which was rejected by the Supreme court. The apex court also ordered the companies to pay the dues before 23rd January 2020. But, the companies failed to comply with court orders and no amount was deposited. The government took a soft stance against these companies, knowing fully well that the companies could not pay the amount. On 14th February 2020, the apex court slammed the companies for failure to comply and set a March 17 deadline. Companies again tried to file pleas for consideration of self-assessed amounts. The Court on March 17 furiously warned companies of contempt of court and threatened to throw company’s top management in jail.

VIL is in no position to pay these charges to the government and VIL Chairman, Kumar Mangalam Birla, has openly said that the company would declare bankruptcy if no help arrives from the Government of India. So far, VIL has paid Rs.6854 Cr. which they consider to be base AGR dues without interest and penalties. Considering the implications, the government is planning to provide a 2-year moratorium to these companies and the charges to be paid over a 20-year period. With this package, VIL is liable to pay around Rs.5200 crores annually for 20 years in addition to around Rs.14000 crores in annual payouts towards deferred spectrum liabilities which kick in FY23. For context, VIL needs Average Revenue Per User (ARPU) of Rs.180 (+40% YoY) in FY21 just to pay for capex, AGR dues and interest payments, assuming no loss in subscribers.

On the other hand, Bharti (Airtel) has raised around Rs.21,500 crores already. Rest of the cost can be funded by banks and internal accruals. It has a comfortable net debt to EBITDA of 2.2 times. Jio has half the debt of VIL and no impending AGR dues. This puts Airtel and Jio in a very strong position to consolidate market share if VIL goes belly up.

Impact:

Ironically, even after winning the case the biggest loser in this situation could be the government. VIL has Rs.1.2 lakh crores in debt. State-owned banks SBI, PNB and BoB have an exposure of Rs.11,200 crore. Private banks like IndusInd, ICICI and HDFC have an exposure of Rs.3000 crore, Rs.1700 crore and Rs.500 crore. respectively. If VIL goes bankrupt, it will have serious repercussions to an already challenged banking sector.

VIL has around 300 million subscribers and around 13.5 thousand employees. With slowdown in full effect, the government cannot afford to lose company of the size of VIL to bankruptcy. It would also create a duopoly market controlled majorly by Airtel and Jio. Hence in the interest of the banking sector and that of consumers VIL should survive. But how does the government ensure this? Harish Salve, a noted advocate practicing at the Supreme Court of India may have an answer.

He believes that the apex court’s ruling is harsh. If the government is acting in the larger interest of the country, the court should not dictate the terms to the government. Passing a legislation regarding AGR dues may in fact be one of the few tools that the government has at its disposal.

One thing is certain. VIL’s survival would depend on timely intervention by the government. If the government does not come up with a way to provide relief for AGR dues, we could well be looking at a duopoly in the telecom sector.

10 years ago India had over a dozen telecom service providers. Idea and Vodafone were two separate entities that enjoyed a strong market share with a fast growing subscriber base. But all that changed in 2016 when Reliance Jio entered the market. It provided very cheap data and voice call subscriptions. In fact, data rates per GB in India dropped to amongst the lowest in the world. This resulted in Jio gaining massive market share. Other companies had to lower their rates and take huge losses to keep up with Jio. Players like Tata Docomo, Aircel, Telenor and Reliance Communications had to either shut shop or merge with other entities.

In 2018, Vodafone merged with Idea and was renamed Vodafone Idea Ltd. (VIL). The combined entity had the highest subscriber base in India with 418mn subscribers followed by Airtel with 340mn subs and Jio with 280 million subscribers. But Airtel and VIL were losing subscribers very fast at the rate of 3.8 million subscribers a month. Low tariffs were eating away company’s revenues and in Sept’19 quarter, VIL posted highest ever corporate loss of Rs.50,922 Cr. in 1 quarter.

Conditions were bad for VIL, but were about to get worse. In October 2019, telecom companies lost a 15-year regulatory battle against the government regarding payment interpretation of AGR dues. This ruling meant that telecom companies now owed the government around Rs.1.47 lakh crores in spectrum charges, license fees, interest and penalties. Of the total amount, VIL owed around Rs.58,000 crores, and Airtel around Rs.44,000 crores. But VIL and Airtel’s self-assessment of the AGR charges amounted to only Rs.21000 crores and Rs.13000 crores respectively, that is, less than half demanded by the government.

In lieu of this, telecom companies filed for a review petition which was rejected by the Supreme court. The apex court also ordered the companies to pay the dues before 23rd January 2020. But, the companies failed to comply with court orders and no amount was deposited. The government took a soft stance against these companies, knowing fully well that the companies could not pay the amount. On 14th February 2020, the apex court slammed the companies for failure to comply and set a March 17 deadline. Companies again tried to file pleas for consideration of self-assessed amounts. The Court on March 17 furiously warned companies of contempt of court and threatened to throw company’s top management in jail.

VIL is in no position to pay these charges to the government and VIL Chairman, Kumar Mangalam Birla, has openly said that the company would declare bankruptcy if no help arrives from the Government of India. So far, VIL has paid Rs.6854 Cr. which they consider to be base AGR dues without interest and penalties. Considering the implications, the government is planning to provide a 2-year moratorium to these companies and the charges to be paid over a 20-year period. With this package, VIL is liable to pay around Rs.5200 crores annually for 20 years in addition to around Rs.14000 crores in annual payouts towards deferred spectrum liabilities which kick in FY23. For context, VIL needs Average Revenue Per User (ARPU) of Rs.180 (+40% YoY) in FY21 just to pay for capex, AGR dues and interest payments, assuming no loss in subscribers.

On the other hand, Bharti (Airtel) has raised around Rs.21,500 crores already. Rest of the cost can be funded by banks and internal accruals. It has a comfortable net debt to EBITDA of 2.2 times. Jio has half the debt of VIL and no impending AGR dues. This puts Airtel and Jio in a very strong position to consolidate market share if VIL goes belly up.

Impact:

Ironically, even after winning the case the biggest loser in this situation could be the government. VIL has Rs.1.2 lakh crores in debt. State-owned banks SBI, PNB and BoB have an exposure of Rs.11,200 crore. Private banks like IndusInd, ICICI and HDFC have an exposure of Rs.3000 crore, Rs.1700 crore and Rs.500 crore. respectively. If VIL goes bankrupt, it will have serious repercussions to an already challenged banking sector.

VIL has around 300 million subscribers and around 13.5 thousand employees. With slowdown in full effect, the government cannot afford to lose company of the size of VIL to bankruptcy. It would also create a duopoly market controlled majorly by Airtel and Jio. Hence in the interest of the banking sector and that of consumers VIL should survive. But how does the government ensure this? Harish Salve, a noted advocate practicing at the Supreme Court of India may have an answer.

He believes that the apex court’s ruling is harsh. If the government is acting in the larger interest of the country, the court should not dictate the terms to the government. Passing a legislation regarding AGR dues may in fact be one of the few tools that the government has at its disposal.

One thing is certain. VIL’s survival would depend on timely intervention by the government. If the government does not come up with a way to provide relief for AGR dues, we could well be looking at a duopoly in the telecom sector.

Free Press Journal

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