There has been a high-decibel debate in the media, both print and electronic, over Vodafone-Idea (VI) (and later Tata Teleservices) offering equity to the government of India to offset the interest burden that would accrue over four years. The government had granted them a moratorium for four years regarding interest payment on long-overdue adjusted gross revenue (AGR) arrears.
Since the government has taken equity stakes in these two companies, is this backdoor nationalisation of a private company? It is not nationalisation; it is rationalisation, in my opinion. Nationalisation connotes taking over the business lock, stock and barrel, and tough luck to the owners. In this case, Vodafone-Idea has volunteered to offer their equity in place of money they would have owed to the government as interest charges over four years.
Vodafone-Idea has a choice—declare bankruptcy and walk off, having failed to raise money either from the market or existing promoters. This would be a terrible outcome. It would not be a good idea at all for the consumer, for VI either to be handing over on a platter the business to a duopoly or continue with the business hoping to generate enough cash to service, debt, or invest in a business, or ask for waivers in true industry style of hamari maange puri karo at a later date. The path they have chosen, of securitisation by offering equity to create more liquidity without having to be facing the Damocles' sword over the ensuing years, is indeed, a wise one.
I see no downside for anybody. It is a win-win-win for present owners, all the upside for the government, and most importantly for the consumer since competition between 3-4 players in the market is ideal. If Bharat Sanchar Nigam Ltd (BSNL) is allowed to get its act together, everyone would have a fair share of the market and consumers will have choices. The key lies in the government’s approach to overseeing on a completely hands-off basis.
The main question has been whether the industry would be able to perform better to be able, not only to pay the arrears over four years hence but also the interest. Jio has become debt-free and can raise money. Bharti Airtel has strong backers in Singapore Telecom. It is only Vodafone-Idea that is at the crossroads of decision-making. With this approach of securitisation, there is the hope of survival because cash is conserved. It is certainly a sound approach. I will address it later.
A bit of background regarding what ails the telecom industry. It pains to say that there have been regulatory glitches that have brought the industry to this sad state, especially Vodafone-Idea, once touted to be the biggest after a merger in 2018. But what cooked the goose for the sector was the destructive price war brought about with the entry of Jio.
Jio was backed by regulatory support such as backdoor entry into voice, lower spectrum charge for spectrum acquired for data, which were used for voice, and the unduly long period of trial time given to customers that caused a shift preference for Jio. They sprinted ahead from a late-starter because of this support they got from various fronts. The result is, at least BSNL, with all the infrastructure, continues to go downhill because of no governance, and Vodafone-Idea appears to have lost the will to fight after being No1.
Vodafone-Idea is reeling from the expensive buyout of the cellphone business in 2007 and 2011 from Li Ka Shing of Hutchison and Essar group. Of course, they have a fair share of poor strategies in not investing in technology or not gauging customers’ aspirations. VI paid huge amounts of surrogacy money to various groups and individuals for holding shares artificially as Indian to comply with foreign direct investment (FDI) regulation.
Left to Vodafone, they would want to write off the losses and exit. They have refused to invest. It is the Indian partner that wants to continue, so it seems.
In all fairness, the market forces would like competition and not a duopoly.
BSNL is a non-starter with all the interference from Sanchar Bhawan. They look towards Sanchar Bhawan for even small decisions. In today’s fast-changing, technology-driven customer aspiration demands, one cannot be bothered to wait for someone in the government to wake up and respond. I wish they go through courses on how to govern.
What has driven the Vodafone-Idea combine to the ground is a complete mismatch of the two networks. It is reliably learnt that Idea had very little or no 4G coverage, resulting in integration delays. Consumers will not wait for service if they get a better choice from other operators at an affordable price, aided by number portability. This is the reason behind the fall in consumer base from a massive 400 million at the time of the merger to around 200 million now. Added to this misery, of course, came the body blow of AGR arrears.
If the government allows the company to be board-governed and professionally managed, at least this conversion to equity has created security which the government can monetise by selling its shares in future. Following this stability, investors may be attracted to Vodafone-Idea. Or the promoters, seeing an upside, might like to build their shareholding in the hope of getting dividends. Consumers get choices. At least, this action has prevented likely bankruptcy, which would have bled the banking system. Therefore, let us hope that the government takes up the offer of equity and keeps a hands-on approach for all to gain.
(Brijendra (BK) Syngal is a pioneer in the Indian telecommunication sector and is credited with bringing the internet to India. He is fondly referred to as the ‘Father of Internet & Data Services’. He has been the chairman of VSNL. His illustrious career is depicted in his biography, “The Telecom Man”.)