Should govt offer a lifeline to embattled Vodafone Idea?

A fervent appeal by one of India’s biggest industrialists, Kumar Mangalam Birla, to the government to take over his stake in Vodafone Idea Ltd (VIL) raises several important questions. Birla wrote to the cabinet secretary in June this year, well before the Supreme Court upheld the calculations for payment of past licence fee dues of telecom companies, asking for government takeover while alluding to the dire financial situation and eventual collapse of VIL.

If the government were to consider such a takeover, this would not be the first such instance. But in previous cases, the reason given for government takeover was larger public good. Can saving 27 crore telephone subscribers from higher tariffs, while also ensuring NPAs do not mount for public sector banks and a fund-starved government gets its dues running into thousands of crores, be a good enough reason to listen to Birla?

After the SC dismissed telcos’ plea last month for a re-computation of AGR (Adjusted Gross Revenue) dues to rectify ‘calculation errors’, VIL’s situation was widely expected to worsen. The AGR case involved payment of past dues by telecom companies, where the method of calculation of those dues had been in dispute; Bharti Airtel and other telcos are also liable to pay these dues.

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But these dues have led to an existential crisis for VIL, in which British major Vodafone Plc holds nearly 44 per cent stake, since the telco owes the government the most at nearly ₹60,000 crore. Analysts say that had the SC reconsidered the telcos’ plea, the dues would have more than halved for VIL to ₹21,500 crore. “Any relief in AGR dues would have abated VIL’s debt woes and facilitated a much-needed fund-raising. In absence of VIL’s capital raising and tariff hike, we see the market moving towards a duopoly,” a Mumbai-based brokerage had said right after the SC judgement.

It is the prospect of India’s telecom market turning into a duopoly which has prompted some experts to nudge the government to consider taking over VIL. As of now, Reliance Jio Infocomm (RJio) has over 36 per cent, or more than a third, of total subscribers, followed by Bharti Airtel at just below 30 per cent while VIL has nearly 24 per cent share of subscribers. In other words, every fourth telecom subscriber would be affected by VIL’s demise. State-owned BSNL is at just under 10 per cent. If VIL goes under, RJio and Bharti would become the two largest telecom operators, turning the market into a duopoly. And this prospect is one of the arguments that supports Birla’s plea.

Takeovers

In 2018, the government superseded the board of Infrastructure Leasing & Financial Services (IL&FS) after large-scale fraud threatened to engulf the entire NBFC sector. A decade back, it had similarly superseded the board of Satyam Computers. But more recently, in 2019 it was seen making some quick moves during the Jet Airways crisis even though there was no takeover and the company eventually went to bankruptcy after shutting shop. There was a promise made for emergency bank funding of ₹1,500 crore, exit of Jet’s chairman Naresh Goyal and a promise to preserve the slots of the airline if it were to revive operations.

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In the case of SpiceJet, another Indian airline that was on the verge of closure in 2014 after it failed to pay for even fuel to operate flights one cold December morning, the government had supported the airline through some regulatory measures like allowing advance sale of tickets and lifting of fuel on credit. Here again, there was no takeover but support was offered from the outside.

J.N. Gupta, MD at proxy advisory firm Stakeholder Empowerment Services (SES), points out that the situation for SpiceJet or Jet Airways and that for VIL are vastly different. “In the case of the airlines, the government waived off payments but in VIL’s case, the knife is being twisted by the government only since AGR payments are to be made to it. The government cannot very well say do not pay these dues.” He also sought to differentiate the IL&FS takeover from the VIL situation, pointing out that while the former was a case of fraud, the latter is a business failure.

VIL’s debt

As per the company’s latest quarterly results statement, gross debt as of March 31, 2021, was a little over ₹1.8 lakh crore. This figure includes deferred spectrum payment obligations of nearly ₹96,000 crore, AGR liability of nearly ₹60,000 crore and debt from banks and financial institutions of nearly ₹23,000 crore.

Chronology

The crisis VIL finds itself in has not arrived suddenly. In fact, it has been at least two decades in the making. Way back in 2000, the Department of Telecom (DoT) had proposed to include revenue from non-licensed activities of a telco in the AGR calculation while granting telecom licences under the new regime. In the 20 odd years since then, while the telcos and the DoT have fought a prolonged battle over what should and should not be included in licence fee calculation, the actual amount kept getting inflated. A telecom sector expert, who did not want to be identified, pointed out that telecom companies always had the option of not signing licence agreements in case of dispute of licence conditions. “But they signed on the dotted line, believing they could work around the system and get DoT to reduce liabilities. This assumption has cost them dear,” he said.

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So should the government take over VIL? Votaries in favour of this argument point towards the prospect of imminent tariff increase in a duopoly and one even said that in case only two private sector players survive, telecom auctions would become redundant. Also, a government takeover is the right answer if the government wants to save the banks and FIs from more bad debts and promote a healthy telecom sector in general.

But R. K. Upadhyay, former chairman and MD of BSNL, said that the government should not take over VIL. “The government already has its hands full with loss-making PSUs like BSNL and MTNL in the telecom space and in aviation, there is Air India. If government were to take over VIL, it could turn out to be another BSNL or Air India. This will not be in the interest of taxpayers.”

In the case of the telecom PSUs, for example, the government sat on its haunches while they continued to bleed, agreeing to launch a VRS scheme years after it was first mooted. BSNL continues to report record losses. When the government has been unable to manage its own two telecom companies, what guarantee can it give a private entity that is already in dire straits?