Birla, the chairman of Vodafone Idea, said he was hopeful that the company will not find itself in a situation where it would need to exit the market.
“But, at the same time, if you ask me specifically, it is true we will shut shop if we don’t get relief. Because there is no company in the world that can pay that kind of fine in three months; it just doesn’t work like that," Birla told the Hindustan Times Leadership Summit.
The Vodafone Idea stock fell sharply on the BSE, ending 5.34% lower on Friday to ₹6.92, on a day the benchmark Sensex fell 0.82% to 40,445.15 points.
On 24 October, the Supreme Court allowed the central government to recover ₹92,641 crore in adjusted gross revenue (AGR) from telecom companies. The verdict hit Bharti Airtel Ltd and Vodafone Idea the hardest. The court accepted the government’s definition of AGR, which includes income from revenue lines that are not central to their main business.
Income from sale of handsets, termination and roaming charges, rent and dividends should count as part of the AGR, which determines what telecom companies pay as licence fee and spectrum usage fee, the court ruled.
The verdict came at a time when debt-laden service providers were already under intense pressure because of adverse regulatory orders, hefty levies and intense competition amid a price war set off by the entry of Mukesh Ambani’s Reliance Jio Infocomm Ltd in 2016. Both Vodafone Idea and Bharti Airtel posted record losses in the September quarter.
The court order came in a 16-year-old case stemming from DoT claims that telecom companies had under-reported their revenue and, thus, paid less for spectrum and in the form of other levies.
“So, the big elephant in the room is AGR which is something that lies in the courts (with the judiciary). I believe the government can have a dialogue—this was a suit filed by the government against the TSPs (telecom services providers). Since the government has won, it gives them headroom to talk to the judiciary and find some sort of a solution. And I hope that happens," Birla added.
He said the government had come to realize that “this is a very critical sector, the whole digital India programme rests on this, and it is a strategic sector."
“They have publicly stated that they want three players from the private sector and one player from the public sector, so I think we can expect much more stimulus from the government because it is required by the sector to survive. If we weren’t getting anything, then I think that is the end of the story for Vodafone Idea."
At a London roundtable in November, Vodafone Plc.’s chief executive officer, Nick Read, had said the situation in India’s telecom sector was critical. “If you’re not a going concern, you’re moving into a liquidation scenario—can’t get any clearer than that," Read was quoted as saying in Bloomberg report. He distanced himself from the statement a day later.
“I think since Nick made that statement, the government seems to have done a lot," Birla said. “The realization is now that you need more players in the sector, because it is strategic. And it is not in national interest having so many TSPs shutting down."
In November, the government offered ₹42,000 crore in relief to Bharti Airtel, Vodafone Idea and Reliance Jio by unveiling a two-year moratorium on the yearly instalments they have to pay for spectrum they bought in auction.
Vodafone Idea has a cash balance that’s half the ₹40,000 crore it owes the government, and Birla stressed that without government intervention, the company could choose not to infuse more money into the business. “It does not make sense to put good money after bad."
Birla also pitched for more stimulus measures from the government, which has already offered a corporate tax cut that entails a revenue sacrifice of ₹1.45 trillion a year, easier access to credit for non-banking financial companies, a real estate fund to revive stalled housing projects and a more transparent and efficient income tax regime. He also called for lower goods and services tax (GST) rates.
“The government has taken many steps, but we need a stronger fiscal stimulus. If GST is brought down to 15%, that would be a huge stimulus," Birla said.
The Indian economy, Asia’s third-largest, is in the middle of a slowdown that has caused the growth rate to decline for six consecutive quarters, most recently to 4.5% in the quarter ended September, the lowest pace of growth since March 2013. On Thursday, the Reserve Bank of India cut its gross domestic product growth forecast for the current fiscal year from 6.1% to 5%.
“It could take the Indian economy 18-20 months before it improves," Birla said, adding that the global economic mood was also sombre. “It is more than a trade war—no parallel to the US-China trade war in history. It is a war for global economic supremacy. History has no parallel to indicate how it will play out."
“Vodafone Idea and Airtel, have filed a limited review petition on AGR. Till the time that review petition is decided upon, it is difficult to say what is going to happen. However, if the decision is adverse to these companies, then definitely it is going to be a significant issue to cough up those kinds of funds within such short timelines," said Jaideep Ghosh, Partner, KPMG.
Ghosh added that such a situation could create a “ripple effect on the economy—because they have large subscriber base, employees and vendors they work with".
Asked why, despite measures taken by the government and the Reserve Bank of India, the “animal spirits" were yet to be unleashed in the Indian economy, Birla cited a combination of three factors, while adding that “animal spirits"—a term coined by British economist John Maynard Keynes denoting investor confidence—are always there in India.
The three factors mentioned by Birla are: bad loans that squeezed credit growth; corporates with very high debt that has squeezed their capex plans; and the crisis in non banking financial companies (NBFCs) beginning with Infrastructure Leasing & Financial Services (IL&FS) defaults last year.
“NBFCs actually provide 30% of the credit to the economy. You had IL&FS with ₹1 trillion of debt that just collapsed one day," he said, adding that while NBFCs depend on banks for short-term funding, lenders stopped funding to all NBFCs across the board following this crisis.
Non-banks are yet to completely absorb the systemic shock caused by the IL&FS defaults and the consequent shortage in funds available to them.
In addition, most NBFCs have borrowed short-term money to fund long-term assets—they were able to continually refinance their borrowings as long as liquidity conditions were easy. As liquidity tightened, they were left facing debt repayment challenges and prospects of rating downgrades.