Vodafone Idea issue and the telecom sector in India – Explained, pointwise

Introduction

The board of Vodafone Idea (VI) has approved the spectrum auction instalments and Adjusted Gross Revenue (AGR) Dues (an estimated Rs 16,000 crore) in the form of equity to the Government of India. Once done, the Union Government will own 35.8% of VI, while the Vodafone Group and Aditya Birla Group—the promoters of this joint venture—will see their stake dilute to 28.5% and 17.8%, respectively. The move will make the government a single largest shareholder of Vodafone Idea.

At present, the company (VI) faces liabilities of close to Rs 2 trillion. Reacting to this announcement, shares of Vodafone Idea fell 20.8%, indicating investor concerns over the prospects of the company.

The move will provide immediate cash flow relief to the company and help them to expand their 4G spectrum, as per experts. On the other hand, some view the move as a partial nationalization of a private joint venture. Despite the decision warding off the imminent crisis, the move towards a greater government role in the telecom businesses seems retrograde.

About the Telecom Reforms Package

Due to various challenges in the telecom sector, the Department of Telecommunications (DoT) had provided various options to telecom firms in October 2021 as a part of its Telecom Reforms Package to clear their dues.

One of the offers was to defer payment of spectrum auction instalments and AGR-related dues by four years. The interest arising out of the deferred payment could be paid to GoI in the form of equity shares.

The Vodafone Idea board accepted the offer and approved deferring payment in the form of equity.

About the Vodafone Idea issue and Vodafone Idea Rescue Plan

The financial health of Vodafone Idea has suffered since 2016 when Reliance Jio Infocomm Ltd. sparked a brutal price war and quickly became the top player in terms of market share. Reliance Jio’s takeover of the telecom market led to huge losses for other telecom operators, which quickly lost their loyal consumer base.

In 2019, the Supreme Court ruled in favour of the government on the definition of Adjusted Gross Revenue (AGR). This vested VI with a liability of Rs 58,000 crore, topped by penalties and interest.

Despite the merger, Vodafone Idea faced three issues of cash flow, profit and loss and a weak balance sheet. In short, the company faced major losses and was cash strapped, which halted its expansion efforts. The company has continued to lag behind Reliance Jio and Bharti Airtel. Today, as others prepare for the roll-out of 5G services, VI may have much to catch up on.

Hence, the recent decision of VI board will ease Vodafone Idea’s cash flow woes. The government recently said that it intends to liquidate its holdings “in due course” through the Department of Investment and Public Asset Management (DIPAM) and wants the companies to work out independent and strong revival and growth strategies.

What are the benefits of this decision?

Avoid duopoly in the Telecom Sector: India’s state-run duo of BSNL and MTNL are awaiting a merger, and have government-set social coverage goals to pursue. They can’t be considered competitors to private players. Without VI, India would have had a private duopoly (Jio and Airtel), which may have denied citizens the benefits of genuine competition.

Support for the economy: The move will provide short-term support to insulate the economy from the cascading effect of a drawn-out implosion of a large firm.

The economic recovery in India has been uneven. The financial sector hasn’t fully recovered from the bad loan problem, and the RBI estimates that it could rise to 9.5% of the advances by September 2022 in a severe stress scenario. A closure would have rippled out into the ecosystem and undermined a struggling financial sector.

Global Precedent: This kind of transient support has precedent in India and elsewhere. Following the global financial crisis in 2008, the US government supported General Motors (GM) and Chrysler and at one stage held 61% stake in GM.

What are the challenges faced by Indian telecom operators?

India’s telecom market has been described by analysts as the most difficult in the world. A decade ago, there were dozens of companies in India’s telecom pie. Today, the government has to take equity in one of the three remaining companies to prevent the sector from becoming a duopoly. The government is being forced to solve a problem that it itself created. The problems include,

Lack of fixed-line penetration: India has very little penetration of fixed-line in its network. On the other hand, most of the developed countries have a very high penetration of fixed lines. In developed nations, more than 70% of the towers are connected with fibre networks. But in India, it is only around 25%.

Limited Spectrum Availability: Available spectrum in India is less than 40% as compared to European nations and 50% as compared to China. This situation is worsening as ISRO and India’s defence forces are demanding a major reservation.

Low Broadband Penetration: As per a white paper from International Telecommunication Union (ITU), broadband penetration in India is only 7%.

Issues with the AGR formula: The formula to compute levies had inconsistencies in its treatment of service providers’ revenues from telecom services and other sources like rentals, investments etc. TRAI (Telecom Regulatory Authority of India) had disagreed with the formula for computing levies. So had Telecom Disputes Settlement and Appellate Tribunal (TDSAT) in the litigation before it.

DoT made little effort to resolve the anomalies, leading to endless litigation and the eventual shock to the very survival of a competitive telecom market.

Debt accumulation: The real trouble for the telecom operators began when the government decided to price the 3G spectrum at a very high rate. At that time, it helped the government to bridge the fiscal deficit, but it resulted in a massive debt accumulation by telcos in the coming years. The cumulative debt of the companies rose from Rs 82,726 crore in 2008-09 to Rs 2.5 lakh crore in 2012-13. Over the years, this high debt burden only worsened.

Pressure on Margins Due to Stiff Competition: With competition heating up post-entry of Reliance Jio, other telecom players are feeling the heat of a substantial drop in tariff rates both for voice and data.

Delayed rollout of innovative products and services due to the unfavourable environment caused by government policies and regulations.

What are the recent initiatives of the government to promote the telecom industry?

What should be done to revamp the telecom sector?

Revamping Vodafone Idea (VI)

The government should 1) Maintain a hands-off approach, 2) Provide operational freedom so that the VI should remain a privately-run enterprise, 3) Should keep away from operations as it has a poor record in the telecom business – BSNL and MTNL in the last three years have cumulative losses of Rs 47,508 crore.

Revitalise the telecom sector

Three large competitors are enough to maintain competitive dynamics if regulation is properly conducted.

Prioritise the implement the National Digital Communication Policy (NDCP): The policy advocates 1) Establishing a National Digital Grid by creating a National Fibre Authority, 2) Creating a collaborative institutional mechanism between Centre, States and Local Bodies for Common Rights of Way, standardization of costs and timelines, 3) Removal of barriers to approvals, etc,

The state governments should set up adequate telecom infrastructure to realise the NDCP.

The government should 1) Increase the optical fibre and fixed-line penetration across the rural areas, 2) Ensure a favourable environment for the entry and exit of new players, 3) Investment will be needed for 5G networks and other enhancements, 4) Reduce licence fee as India’s licence fees are one of the highest in the world, 5)  Increase its spending on research and development to make India capable of manufacturing and exporting hardware components like mobile handsets, touch screen monitors etc.

The Telecom sector is an essential service and not merely a revenue generator. It is estimated that the doubling of data use leads to an increase in the GDP per capita growth rate of 0.5 percentage points. In general, tariffs will have to rise from their unsustainably low levels in India. To realise India’s dream of a $5-trillion economy and digital Indian ambitions, the time has come for the government to prioritise stability, investment, and quality improvements in telecom.