PremiumThe conversion of a share of what Vodafone-Idea owes the government into state-owned equity would keep India’s telecom sector a three-player market, excluding the state-owned also-rans MTNL and BSNL, prevent inordinate delays in the commencement of 5G networks in India and spare the banking system a telecom addition to its bad loan burden.
Ironically, despite its outward appearance as a generous bailout, the move would reinforce India’s reputation as a country where companies are expected to carry the can, without complaint, when flawed policy places large, unfair hurdles in the path of business.
The conversion of the net present value of the interest payable on the four-year deferment of spectrum payment dues and the so-called AGR dues of the troubled telecom company Vodafone Idea would make the government the largest shareholder in the company, although the original promoters Vodafone Group and Aditya Birla group together would still have a combined stake of 46.3%, which would be 10.5 percentage points higher than the government’s stake of 35.8%.
With the government as a major but passive shareholder and the largest debtor, the company would shed a major part of the uncertainty surrounding its continued existence. It would now be able to raise the fresh capital needed to invest in 5G networks and compete with Reliance Jio and Bharti Airtel.
But some questions remain to be addressed. One, will the government accept Vodafone Idea’s estimate of the net present value of the interest payments that the government is willing to convert into debt? At least one analyst seems to think Vodafone Idea’s estimate of ₹16,000 crore is a serious underestimate. If the government shares that view, its eventual stake would be pegged much higher than 35.8%. In any case, if the telcos take up the government’s offer to convert not just the interest on deferred dues but the deferred dues themselves into equity at the end of the four-year moratorium on payments, a possibility announced last September, along with the interest-equity conversion, the government’s share would go up above 35.8%.
Two, will the government’s zeal for reform in telecom extend to a change in the way spectrum is allocated for 5G? And, three, will policy stand in the way of the blurring of cloud and telecom networks and of hardware and software that promises to define 5G telecom in countries other than China?
It might strike some as strange that we do not question the government’s commitment to act as a passive shareholder and not meddle in the running of the company. We already have the example of state-owned vehicles owning significant chunks of a company such as ITC, without the government trying to interfere in the plans or management of the dynamic company. Nor is it likely to bring the work culture of BSNL/MTNL to Vodafone Idea by trying to merge the companies.
We can only see how the valuation exercise would pan out in sarkari computations when it happens. But the government can change its thinking on 5G auctions and the 5G ecosystem.
Instead of having to lock up capital in buying 5G spectrum upfront from the government, telcos should have the option of leasing as much spectrum as they want on a pay-as-you-go basis. This would happen in two cases. One, a sale and leaseback arrangement is established for spectrum, on par with what airlines have for planes. A pool of patient capital would buy the spectrum the telcos win in auctions and lease it back to the telcos. Two, the government precludes an auction of spectrum to telcos and instead assigns the spectrum to a telecom public sector undertaking, which, in turn, leases out the spectrum to telcos. Converting spectrum cost from a sunk cost, as in a fixed overhead, to working expense, financed out of working capital, would greatly ease the financial burden on telcos.
The innovation in 5G is to replace custom-built telecom gear, including switching equipment, with software. Open Radio Access Networks (O-RANs) is the name of the game. The software would reside in the cloud, meaning server farms. Rakooten in Japan already offers ORAN based 4G and 5G services. This is a substitute for dedicated 5G telecom gear, in which China’s Huawei is a dominant player. Microsoft’s Azure and Amazon Web Services are gearing up to host O-RAN software. The policy must not stand in the way of the smooth evolution of technology and its adoption by Indian telcos.
Finally, the current bailout does not address the question as to why such a bailout was required. It became necessary, in the first place, because the government reneged on its promise, made in 1999, to accept the sector regulator Telecom Regulatory Authority of India’s recommendations as to what constitutes the sharable revenue when the telcos migrated from fixed, extravagant licence fees to licence fee as a share of the adjusted gross revenue (AGR). The regulator, and the appellate authority, TDSAT, which refined the regulator’s recommendations, came out with a definition of shareable AGR that excluded revenues whose generation did not call for the exercise of the telecom licence, such as treasury profits, real estate income and the like.
AGR mattered not only for determining the licence fee but also the spectrum usage charge (SUC), which, again, was paid as a share of the revenue.
But the government ignored these recommendations and insisted that the telcos share their total revenue. This was litigated, and the litigation continued till 2019 when the Supreme Court ruled, ratifying the government’s claim. This imposed a burden of ₹1.6 trillion on all the telcos combined, of which 70% was penalty and interest. All this would have been avoided if the government had accepted the TRAI recommendation to define sharable AGR to exclude non-telecom revenue.
Taking a fat licence fee and a SUC made sense when the spectrum used to be allocated administratively, bundled with the licence, given for a nominal upfront fee. But since 2010, when spectrum auctions began, and telcos started paying huge amounts to acquire the spectrum, the government should have done away with both licence fees and SUC as shares of revenue. Last September’s telecom relief package accepted that there would be no SUC for spectrum acquired through auctions, but this applies only prospectively.
A misguided policy imposed this huge burden on telcos and made a bailout necessary. But at the end of the bailout, the government emerged as a major shareholder of the bailed-out companies. If you throw someone into the deep end of the pool and offer to pull out the drowning, gasping victim if he paid a ransom, that would be considered extortion in most places. In India, we call it telecom reform.
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