Home >Markets >Mark To Market >Govt’s late rescue act for telcos means it stands to lose the most

On 24 October 2019, when the Supreme Court ordered telecom companies to pay dues related to licence fee and spectrum usage charge, this column had said that the government should be the first to protest the order. Even though it had won the case, it had far more to lose if the order was implemented strictly.

According to its own calculation, telecom firms owe the government 1.69 trillion in all, as a result of the order. The government is unlikely to receive even half of this, not to mention the risk of losing out huge amounts in deferred payments due from Vodafone Idea Ltd, which is expected to go bankrupt.

Besides, there are a number of other consequences, such as disruption in telecom services, and risks to the banking sector, which the government tried to explain in an affidavit to the Supreme Court.

In addition, a self-assessment of dues by telcos themselves came up with a far lower liability figure. For telcos that are still operational, the liability figure through the self-assessment method stood at just 31% of the amount calculated by the government.

(Graphic: Sarvesh Kumar Sharma/Mint)
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(Graphic: Sarvesh Kumar Sharma/Mint)

But pointing all this out has earned the government the Supreme Court’s ire. One way to look at this is that the government overplayed its hand. But a more accurate reading, say analysts tracking the sector, is that the government is to be blamed for the state the industry now finds itself in. Its rescue act came too late in the day.

Vodafone Group Plc. has already written off its investment in the Indian operations, and is unlikely to invest large amounts to salvage the situation. This means that the government will be the biggest loser, in terms of lost revenue.

The only hope now is that the apex court agrees to the government’s proposal of staggered payments. But even then, the massive liability— 58,254 crore in all for Vodafone Idea—is expected to break the company’s back. It has already paid 6,854 crore, and doesn’t have much cash left on its books for additional repayments.

Even with a further hike in tariffs, cash flows may not be enough to service the massive debt and other regulatory payments. If the government is really keen on Vodafone Idea’s survival, it would now need to consider measures such as sharp reductions in regulatory levies.

Meanwhile, investors are pricing in the worst. Shares of Vodafone Idea fell 35% on the National Stock Exchange on Wednesday. Shares of tower infrastructure company, Bharti Infratel Ltd, fell 23% and are now close to all-time lows, with investors fearing the loss of a major tenant.

With one less tenant to share costs, lease rentals for Bharti Airtel Ltd can rise, warn some analysts. The silver lining for the telco is that it has raised adequate funds to meet the higher liabilities being demanded. Still, even its shares fell over 6% on Wednesday.

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