Adam Smith, the father of modern economics, wrote that the best economic benefits for all can usually be accomplished when individuals act in their self-interest. As Vodafone India faces a crisis paying its Adjusted Gross Revenue dues, what course of action would be in the government of India’s best interests? To let telecom firm Vodafone Idea go into liquidation be in its best interests? Or is there an alternative?
Vodafone Idea owes government Rs 53,000 crore in Adjusted Gross Revenue, which is calculated after deductions specified in its licence agreement with the Department of Telecommunications is allowed for.
Besides these dues, Vodafone Idea’s gross debt, excluding lease liabilities, was Rs 115,850 crore on December 31. This figure included deferred spectrum payment obligations of Rs 88,530 crore due to the government. The company’s taxes, regulatory and other statutory liabilities as of March 31, 2019, was Rs 4,293 cores. If spectrum charges, statutory liabilities and Adjusted Gross Revenue dues are added up, Vodafone-Idea owes government roughly Rs 1.5 lakh crore.
This is close to former Comptroller and Auditor General Vinod Rai’s fantastical figure of the presumptive loss to the nation because of the 2G scam. Remember the hair-raising figure of Rs 1.76 lakh crore, which dealt the fatal blow to Manmohan Singh’s government? The only difference is that this time the loss is not presumptive – it’s real.
If one adds the loss to the banking and financial system to the government’s loss, the scenario of Vodafone Idea’s collapse may be the most serious blow to the Indian economy in recent memory. Vodafone Idea has Rs 250 billion in bank debt. The State Bank of India is the lead lender to Vodafone Idea, with an exposure of Rs 12,000 crore. Punjab National Bank and the Bank of Baroda have substantial exposure too. Among private sector banks, IndusInd Bank has an exposure of Rs 3,000 crore, ICICI Bank has Rs 1,700 crore and HDFC Bank Rs 500 crore.
Some analysists believe if that if Voda Idea goes bankrupt, this will increase India’s fiscal deficit by 40 basis points.
It’s quite apparent that if Vodafone Idea with its 370 million subscribers is pushed to bankruptcy, everybody will lose. The Indian telecom sector will turn into a private sector duopoly. Customers will be worse off, having to choose between two private telecom services. Banks will take a substantial haircut, presuming there will be a buyer if the company goes in insolvency. The telecom compay’s 13,500 employees will overnight be left without jobs. Many more employed indirectly will be adversely impacted. Vendors and suppliers will lose their dues. The India growth story will take a severe hit.
Will the promoters save the company?
The promoters of Vodafone-Idea have made it clear on numerous occasions that they are not going to infuse fresh equity into the project. We won’t throw good money after bad money, said Kumarmanglam Birla at a media event in Delhi last month. Vodafone, the parent company, has already written off the book value of its 45% stake in the Vodafone Idea joint venture to nil. Vodafone CEO Nick Reed has been categorical that without government intervention Vodafone Idea is headed for liquidation. And no government intervention seems coming at the moment.
The company on Monday paid out Rs 2,500 crore and said that another Rs 1,000 crore will be paid by Friday. But there are no reserves to pay the remaining Rs 50,000 crore Adjusted Gross Revenue dues.
Will anybody gain from this debacle?
In the post Vodafone Idea demise scenario, assuming a 40:60 share of Vodafone Idea’s subscribers for Jio and Airtel, Jio could see an earnings before interest, tax, depreciation and amortisation (or Ebitda)
addition of Rs 15,000 crore, while that figure could be Rs 10,000 crore for Airtel, according to an analysis by Motilal Oswal. It added that these figures could have a 50% margin.
For Jio, this would mean a jump of 29% on Ebitda to Rs 67,100 crore in Financial Year 2022. For Airtel, this would mean a 22% jump to Rs 54,700 crore. Rajiv Sharma, research head at SBICap Securities, estimates the adjusted value of Vodafone Idea’s spectrum that the company acquired in the previous auctions is roughly $14 billion.
“In a duopoly scenario, Airtel and Jio might bargain hard and get the government to auction VIL’s spectrum at a significant discount by getting it to slash the reserve price,” Sharma told The Economic Times.
Saving Vodafone Idea from liquidation is in the best interest of the Indian government.
The only solution that seems viable at this moment is the government buying over Vodafone Idea and merging it with the flailing state-run telecom firm BSNL. At the current market valuation, the government could buy almost a 90% stake in Vodafone for Rs 50,000 crore, which is the current outstanding of Vodfone Idea towards Adjusted Gross Revenue payment. It would be like the government taking money out of one pocket and putting it in another. But in return, the new government-owned entity would gain 370 million subscribers and the entire telecom infrastructure and telephone spectrum that Vodafone Idea has.
As per recent TRAI report, BSNL has 10.19% wireless market for all India and 11.07% in BSNL licence area, excluding Delhi and Mumbai. Its total subscriber base stands at roughly 12 crore. The total wireless subscribers (GSM, CDMA and LTE) stood at 117.37 crore at the end of September 2019. Out of this, Airtel’s total user base is 32.5 crore, while Jio has 35.5 crore subscribers. With Voda’s 37 crore subscribers, the newly created Vodafone-Idea-BSNL would have 50 crore subscribers.
It would be the single largest player with the greatest amount of spectrum, telecom infrastructure and maximum subscribers. Besides saving tens of thousands direct and indirect jobs, it will also save banks their money, the government its dues, vendors their payments and India its reputation. It will give BSNL a new lease of life and prevent India from becoming a duopoly telecom market.
It will show that the government can think out of box. The brutal truth is that today no major foreign investor wants to invest in India. While Indian businesses don’t have the money to invest, the government has state-run banks, and therefore it has no liquidity problem. At the moment, it is the only player that can invest.
Vodafone-Idea-BSNL merger is just the kind of state capitalism that India needs at the moment.