“Telecom sector is under immense financial stress (as) admitted by all stakeholders. Further demand of ₹92,000 crore will dampen the sentiment of telecom operators and raising funds for broadband, network expansion and Digital India will hit a significant roadblock. The impact is not limited to telecom operators but will have a domino effect on the larger digital value chain. This requires immediate intervention by all stakeholders to get the sector back in shape," said Prashant Singhal, emerging markets, technology, media and telecom leader, EY India.
When telcos such as Aircel Ltd and Reliance Communications Ltd went bust, Bharti Airtel chairman Sunil Bharti Mittal had said that the consolidation in the sector had happened in a disorderly fashion and that a whopping $50 billion in investments in the sector had been wiped out.
Vodafone Idea Ltd is certainly in a far bigger league. It happens to be India’s largest telecom company by number of subscribers and it is also the company with the largest foreign direct investment into the country.
Its possible demise will clearly be more disorderly, both in terms of the disruption it causes in the industry, but also for future foreign direct investment prospects.
Among other things, experts have blamed an unstable regulatory environment, high cost of operations, hyper-intensive competition and rock-bottom tariffs for the current state of the company.
On Tuesday, however, its chief executive officer Nick Read said that Vodafone has pledged not to put any more money into the business in India, and Vodafone Idea may be headed for liquidation unless the government eases off on demands for mobile spectrum fees, according to a Reuters report.
“If you don’t get the remedies being suggested, the situation is critical," Read said at a press round-table in London on Tuesday. “If you’re not a going concern, you’re moving into a liquidation scenario—can’t get any clearer than that."
The UK-based telecom company’s 12-year journey in India has seen highs and lows, much like the telecom sector. The big hit came with the government enacting a retrospective tax rule to recover what it thought was its rightful share of profit from Hutchison’s sale of its stake in its India operations to Vodafone Group.
Even as the operator was reeling under the effects of this blow, the next big shock hit Vodafone India when Reliance Industries chairman Mukesh Ambani’s new telecom venture Reliance Jio Infocomm Ltd entered the market in September 2016.
Jio disrupted the market with free data and voice offerings, shrinking revenue streams of all other operators. This also led to a brutal consolidation that reshaped the entire telecom sector. Companies that were already saddled with debt, due to expensive airwaves bought in previous spectrum auctions could not compete with the sharply low tariffs offered by Jio.
As a result, Vodafone India and Idea Cellular in March 2017 decided to merge their pan India networks to stay in the battlefield. Airtel acquired Tata Teleservices, Telenor and Tikona Digital. Aircel and Reliance Communications went bankrupt.
The next hit to both Airtel and Vodafone Idea came in September 2017 when the regulator decided to slash interconnect usage charges (IUC) from 14 paise to 6 paise a minute. The two incumbents which both enjoyed huge incoming traffic were hit hard. On the other hand, Jio’s costs on delivering voice calls to rival networks also came down.
At that time, Vodafone also lashed out at the regulator. “We only ask for a level-playing field in terms of regulation. I think it’s fair to say that for the last two years, we have had many regulatory outcomes that have worked against everyone in the market except Jio. We have made these points clear even earlier," Read said at a press briefing at the Mobile World Congress in Barcelona in February.
Today, however, Vodafone Idea and its arch-rival Airtel are fighting for survival, having been dealt a body-blow after the recent Supreme Court verdict upheld the Union government’s definition of revenue, which requires these telcos to pay past dues to the government. Bharti Airtel on Thursday said that its liabilities/provisions as on 30 September aggregate ₹34,260 crore. Vodafone Idea has made provisions for ₹25,677.9 crore. This demand, at a time when the industry faces a mountain of debt and rock-bottom revenues, will not only hurt investment climate in the country, but will also be detrimental given the huge resources that telcos need to raise for broadband proliferation, network expansion and to realize Digital India.
Telcos are the backbone of digital services and a crucial stakeholder for the country to unlock the $5 trillion GDP dream by 2024. Without government offering relief, there will be a domino effect on the larger digital value chain.
However, Reliance Jio disagrees with this prognosis. In a letter to the government, the company said, “We further submit that the failure of two operators, even in the unlikely event of it actually happening, will not have an impact on the sector dynamics with existence of vibrant competition including presence of the PSUs and there is no restriction on entry by new operators. Further, there will be no impact on digitization and government programmes, as these operators, anyway were not investing sufficiently in the sector and have been claiming a financial stress for a long time now and they have not shown any inclination to modernize the networks, as evident for Trai data in its IUC consultation paper." Incumbents such as Vodafone Idea and Airtel, on the other hand, claim that their networks reach the poorest of the poor, given the fact that 4G compatible handsets are out of the reach for this set of customers.
“A sudden demise of a player in India will reduce competition within the sector becoming a two-player market. The market will not be able to handle extra subscribers and quality of service will be impacted especially in rural markets which has a large 2G and 3G base, which is not catered to by Jio’s pure 4G network," said Rajiv Sharma, head of institutional equity research, SBICAP Securities.
To be sure, following the court verdict, the Centre last month set up a Committee of Secretaries under the cabinet secretary to suggest measures to alleviate financial stress in the sector. The panel will look into the demand of telcos for deferment of spectrum auction payment dues for the years 2020-21 and 2021-22 in order to ease cash flow. It will also look at measures such as reducing levies, including spectrum usage charges and the universal service obligation fund (Usof) fee paid by telcos.
Cellular Operators Association of India (COAI) has sought an easier payment schedule for spectrum bought in previous auctions, waiving penalty and interest arising out of adjusted gross revenue (AGR) dues, and a 14-year period to pay the principal amount of AGR dues.
The DoT, however, has now demanded payments from telcos within the three-month deadline set by the SC. Even as it awaits recommendations of the top panel, Union telecom minister Ravi Shankar Prasad has assured operators that the department of telecommunications (DoT) will review prices for upcoming auctions.
Subscribe to Mint Newsletters
* Enter a valid email
* Thank you for subscribing to our newsletter.
Never miss a story! Stay connected and informed with Mint.
our App Now!!