Cash-strapped telecom operator Vodafone Idea Limited’s (VIL) future hangs in the balance as it inches closer to bankruptcy. The telco could go out of business soon if it fails to raise adequate capital or receives no support from the government.
If the third-largest telecom company goes under, it will have a widespread impact on existing staff, customers, lenders and even the government. It will also reduce the Indian telecom market to an effective duopoly, leaving behind only two major private players in the market – Sunil Mittal’s Bharti Airtel and Mukesh Ambani’s Reliance Jio.
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VIL’s absence will not only have a devastating impact on the future of India’s telecom market but also discourage other foreign players from investing in the crucial sector, which is effectively the backbone of India’s future digital endeavours.
In the near term, however, VIL’s bankruptcy could trigger an immediate crisis for the government and lenders. Rescuing the stressed telecom firm from an imminent collapse seems crucial, given the money it owes to lenders and the government.
TRACKING THE VODAFONE IDEA MERGER AND CRISIS
Vodafone Idea came into existence after a merger of two major telecom operators in 2018 – UK-based Vodafone and Idea Cellular, a subsidiary of Aditya Birla Group (ABG). Vodafone Group holds approximately a 45 per cent stake in the company while ABG has just over 27 per cent share.
The two telecom firms had announced a merger in 2017 to tackle the rising dominance of Reliance Jio that took the telecom sector by storm after launching in 2016.
Reliance Jio tasted immediate success as it disrupted the telecom sector by introducing free voice and data plans for its users. Even after the lucrative introductory offer that lasted over a year, Jio kept the prices of its plans low and kept gaining subscribers.
Mukesh Ambani’s telecom venture forced other telcos to sharply revamp their plans, leading to a tariff war never seen before in the sector’s history. Within a couple of years, Reliance Jio pipped major telecom companies such as Bharti Airtel, Vodafone and Idea to become the market leader, emerging victorious in the tariff war.
On the other hand, its legacy competitors suffered deep losses as a result of cutting down prices; they also lost a large chunk of market share to Jio. The fact that older telecom players had to cut down rates hurt operations severely, given their higher debt ratio.
The evolved telecom market dynamics proved hard for all the legacy telecom firms and was the biggest factor behind Vodafone and Idea’s decision to merge three years ago.
The Vodafone Idea merger, valued at $23 billion, created a huge buzz as Vodafone Idea become the largest telecom company in the country, with the largest share of active customers (around 35 per cent after the merger) and subscribers (430 million).
VODAFONE IDEA CRISIS FACT BOX
* Vodafone Idea’s total debt is approximately Rs 1.8 lakh crore, including AGR dues, deferred spectrum charges, and bank loans
* VIL has never reported a quarterly profit after the merger of Vodafone and Idea Cellular in 2018
* The telco posted the highest-ever loss by an Indian firm at Rs 73,878 crore in FY20
* Vodafone Idea has a negative net worth of over Rs 44,000 crore
* The telecom firm has lost over 50 million subscribers since January 2020
* The company may head towards bankruptcy without immediate relief measures or adequate fundraising
MASSIVE DEBT AND MOUNTING LOSSES
Despite Vodafone Idea’s best efforts to increase operational profit, Reliance Jio’s aggressive pricing was too much for it to handle.
Vodafone Idea kept losing customers and struggled, evident by its poor company results since the merger — the telco has never reported a quarterly profit since the merger.
The ratio of its losses kept increasing, making it harder for the entity to survive as it needs to clear a massive pile of debt, pegged at Rs 1.8 lakh crore.
The Covid-19 pandemic made the situation worse for the company, but a 14-year-long matter seems to be at the heart of its existential crisis.
The biggest hurdle for the ailing telecom company is the matter revolving around the adjusted gross revenue dues. Vodafone Idea has been asked to pay adjusted gross revenues (AGR) dues to the tune of over Rs 58,000 crore.
Telecom firms Vodafone Idea and Bharti Airtel have argued in the past that AGR dues should not include non-telecom revenue, but the telecom regulator (Department of Telecommunications or DoT) did not agree.
In total, the DoT said telecom firms have to clear AGR dues to the tune of Rs 1.52 lakh crore, with the burden of the largest share falling on Vodafone Idea (Rs 58,000 crore) and Bharti Airtel (Rs 43,000 crore). In comparison, Reliance Jio had a liability of just Rs 191 crore as per the DoT’s calculation.
The telcos challenged the matter in court and fought vehemently to reduce the dues. All they got was an extension to clear their debts. In 2019, the top court ruled in favour of the DoT and directed telecom firms to repay their pending AGR dues within March 31, 2031 in annual instalments.
Vodafone Idea has paid Rs 7,854.37 crore of its total dues, but over 50,000 crore remains outstanding. It has to pay its next instalment in 2022.
The telecom firms moved the Supreme Court again in January, claiming there were errors in the DoT’s calculation of AGR dues. However, the pleas for recalculation of AGR dues were struck down by the top court. The court also directed Vodafone Idea, Bharti Airtel and Tata Teleservices to clear dues within the March 31 deadline.
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ON THE BRINK OF BANKRUPTCY
In addition to the AGR dues, Vodafone Idea also has a huge pile of bank debts and deferred spectrum charges. To make matters worse, the stressed telecom firm has not been able to raise any capital after getting approval from its board last year to raise Rs 25,000 crore.
With no clear road to recovery visible, Aditya Birla Group Chairman Kumar Mangalam Birla had even offered to give up his stake to the government. In June, he wrote a letter to cabinet secretary Rajiv Gauba and offered to hand over his stake to the government.
Explaining the precarious situation, he said investors are not willing to invest in the telecom company as there is no clarity on the AGR liability, moratorium on spectrum payments and floor pricing regime above the cost of service. He also said that Vodafone Idea will come to an “irretrievable point of collapse” without immediate active support from the government.
“It is with a sense of duty towards the 27 crore Indians connected by VIL, I am more than willing to hand over my stake in the company to any entity- public sector/government /domestic financial entity or any other that the government may consider worthy of keeping the company as a going concern,” Kumar Mangalam Birla mentioned in the letter.
A few days ago, the 54-year-old billionaire businessman decided to step down as the non-executive chairman of the telecom firm. It may be noted that both ABG and Vodafone Group Plc have ruled out additional capital infusion to the ailing telecom joint venture, given the broad liabilities, declining business and continuous losses — the telecom firm has lost over 50 million subscribers since January 2020.
Though Vodafone Idea has not defaulted on any dues yet, analysts tracking the telecom sector have said that Vodafone Idea will not be able to honour repayments due in 2022 in the present scenario.
In the past few days, the company’s share prices have declined rapidly, especially after Kumar Mangalam Birla stepped down from his position. Though VIL’s shares regained some ground, analysts are not optimistic about the company’s prospects.
Many brokerages have maintained a “sell” rating for the telecom company’s shares in view of the company’s stressed position.
CONSEQUENCES OF VIL’S COLLAPSE
There are several reasons why saving the telecom is important, but the most important one is related to the massive loss to the government. The bulk of VIL’s debt is owed to the government including AGR dues and deferred spectrum charges, totalling over 1.50 lakh crore as of March 2021.
Lenders, too, will have to write off losses worth nearly Rs 30,000 crore if the company goes bankrupt. A bulk of these dues will also have to be borne by the government as the State Bank of India (SBI) has high exposure to the telecom operator. A total of eight banks, led by SBI, will stand to lose if the telecom company goes under.
While the government will face a massive financial loss in the near term, VIL’s exit from the sector will have a major impact on the telecom market. Without VIL, the only major operators left would be Reliance Jio and Bharti Airtel besides state-owned BSNL-MTNL.
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The entire process of absorbing VIL’s customer base would cost the ailing telecom sector, and it could even lead to a rise in tariff prices. Therefore, the ultimate burden will fall on subscribers who will have little choice in the absence of a third major telecom operator.
In addition, the large pool of employees working for the stressed telco – directly and indirectly – will be rendered unemployed if the company’s operations shut.
WHAT OPTIONS ARE THERE FOR A RESCUE?
The options for rescuing Vodafone Idea are limited at the moment as the government has already turned down Kumar Mangalam Birla’s request to take over his shares.
People from the industry and experts agree that VIL needs to be rescued in order to prevent widespread consequences. Most experts said that the bankruptcy process may not be enough to benefit stakeholders, adding that the government should take urgent measures for providing relief.
Multiple reports suggest that the government is planning a detailing, long-term relief package for the entire telecom sector. The package may include redefining AGR to exclude non-telecom items, besides allowing telcos to surrender unused spectrum for a small penalty.
However, such long-term measures may prevent telcos from facing future crises but is not enough to rescue VIL.
Lenders recently met with DoT officials and suggested the government should convert the VIL’s debt to equity, reported The Economic Times. One of the lenders quoted in the report said the way formed is to restructure the funded exposure and covert the unsustainable debt into equity.
A few weeks ago, Deutsche Bank agreed to what the lenders have proposed in the meeting with DoT. In the research report, Deutsche Bank said the government should take control of Vodafone Idea by converting the company’s debt into equity to avoid a duopoly in the telecom sector.
“The only viable solution is for the government to recapitalise Vi by converting its debt into equity, preferably while merging it with BSNL, and then providing it a clear commercial mandate based on profitability targets and incentives,” said Deutsche Bank research analyst Peter Milliken said in his report.
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