The law that can be a boon for Vodafone Idea

The government released the draft Indian Telecommunications Bill, 2022, late on Wednesday, simplifying norms for mergers and acquisitions and permitting relief, write-off or deferment of dues in cases of payment default under extraordinary circumstances.

The proposed measures are expected to benefit companies and consumers and ensure adequate competition at a time the No. 3 telco faces challenges in paying vendors, given its perilous financial situation and inability to raise external equity funding of ₹20,000 crore.

“It’s a step in the right direction for the sector, especially if one considers the situation Vodafone Idea is in," said Rohan Dhamija, managing partner, India and the Middle East at Analysys Mason.

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An industry executive who did not want to be named said the proposed measures were clearly aimed at helping Vodafone Idea.

“It should help them for sure; some of their payments will fall due in FY23, and government debt is already very high. In the event that some of the charges or fees are waived, it would be a good move," he said.

However, a senior executive noted that while the provisions may appear to help one telecom company, they were applicable to the entire sector and companies that will fall under the ambit of telecom services after the bill becomes law.

“We should not look at the near future, think about four to five years down the line when who knows what the debt positions of the telcos will be, or if there can be other licence holders that may face financial stress," he said.

Under the proposed rules, if a telecom licensee, registered entity or assignee defaults in payments, the government can defer the payment, convert it into shares, write it off, or provide relief of full or part of the amount, provided it can determine an extraordinary circumstance of financial stress, consumer interest, maintaining competition in the sector, or reliability and continued supply of services.

The bill also proposes that government can have the power to waive fees, interest, additional charges, penalties or grant exceptions from the provisions of the bill once it becomes an Act.

Brokerage CLSA said that adjusted gross revenue (AGR) relief of $5-6 billion was crucial for Vodafone Idea. A Supreme Court hearing on the ongoing case related to correction of computational errors in AGR is yet to take place.

The Aditya Birla Group-backed telco owes majority of its gross debt of ₹1.99 trillion to the government, comprising ₹1.16 trillion or about 60% of deferred spectrum dues, ₹67,300 crore of AGR dues and ₹15,200 crore of bank debt of which ₹5,000 crore is due for repayment by end FY23.

Rivals Reliance Jio and Bharti Airtel, too, have taken on debt, but they are profit-making and have healthy cash flows as opposed to the No 3 carrier, which clocked losses of ₹7,296 crore on revenues of ₹10,410 crore for the quarter ended June 2022.

Given Vodafone Idea’s debt obligations due in the next 12 months, its auditors have stressed the need to raise money quickly and successfully negotiate with lenders for continued support, without which its status as a going concern could be in doubt. The matter was highlighted in the carrier’s annual report for FY22. The telco had said that it intended to raise external funding of ₹20,000 crore via debt and equity routes, but it has not concluded the raise so far.

Industry watchers said that the financial constraints will also impact Vodafone Idea’s ability to roll out the 5G network, which has been behind peers Bharti Airtel and Reliance Jio, which intend to launch services as early as this month, as the telco is yet to secure fresh bank loans and finalize equipment procurement contracts with suppliers.

Vodafone Idea has also opted for a four-year moratorium on payment of spectrum dues in September last year, and earlier this year, it opted to convert the interest on the moratorium—amounting to ₹16,000 crore—into equity to be owned by the government, which is about 33%. However, the government is yet to complete the conversion, even as approvals were given by the finance ministry two months ago.

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