India’s third largest telecom service provider, Vodafone Idea Ltd IL), is struggling with a liquidity problem of such magnitude that it is inches away from bankruptcy.
The fallout from such a collapse would be widespread, which will be felt by the company’s subscribers, employees, lenders, and the telecom sector as well.
Without VIL, India’s telecom market, which once boasted of over a dozen operators, would be reduced to an effective duopoly.
But the biggest loser if VIL goes bust will be the government.
Because not only will it have to deal with fixing a wounded sector and assuaging the battered confidence of foreign investors, it will also bear the brunt of the financial losses arising from such a collapse.
VIL’s slide into crisis
The genesis of VIL’s current troubles may be placed quite squarely on the outcome of the over 14-year-long adjusted gross revenue (AGR) case at the Supreme Court.
The matter revolved around the definition of AGR, based on which telcos pay their statutory dues to the government. The telcos argued that AGR should not include non-telecom revenue; the Department of Telecommunications (DoT) disagreed.
Eventually, in October 2019, the SC delivered a verdict favouring the government and directed telcos to pay up their pending AGR dues along with interest and penalties.
According to the DoT’s computations, this figure came out to a whopping Rs 1.52 lakh crore, and the largest burdens fell on Vodafone Idea (Rs 58,000 crore) and Bharti Airtel (Rs 43,000 crore). Reliance Jio, a late entrant, got away with a liability of just Rs 191 crore.
After a series of appeals and petitions, telcos managed to get an extended 10-year payment schedule comprising annual instalments from the courts, but the SC has not budged on the amount that is due.
Now, the AGR verdict left both Airtel and VIL in financial trouble, but Airtel’s liquidity position was not as strained as the latter’s and it managed to raise enough capital through 2020 to offset the dent its AGR obligations delivered.
Things haven’t been the same for VIL. While its board has approved raising Rs 25,000 crore of capital, it has met with little success so far, and both its promoters-the Aditya Birla Group and British telecom giant Vodafone Plc-have ruled out additional capital infusions.
In fact, Vodafone Plc disclosed in December 2019 that it has written down the value of VIL on its books to nil.
VIL’s current status, after taking large losses due to provisions for the AGR liabilities and a steadily shrinking subscriber base, is that as of March 31 this year, it had a massive debt of Rs 1.8 lakh crore-with around Rs 23,000 crore in various payments coming due between December 2021 and April 2022. On the opposite column, it had cash and cash equivalents of just over Rs 350 crore.
With little success in its fundraising attempts, analysts note that VIL just doesn’t have enough cash to pay up when the time comes. And a series of developments over the past few weeks have only cemented this view.
The Supreme Court has rejected a petition to correct alleged “arithmetic errors” in the Department of Telecommunications’ (DoT) computation of AGR dues-a petition that, if entertained, could have halved VIL’s AGR liabilities; a letter to the Cabinet Secretary written by Aditya Birla group chairman Kumar Mangalam Birla, VIL’s Indian promoters, has come to light, where he has offered their stake to the Government of India (GoI) in order to keep the company running for its 27 crore subscribers; and then, just a few days later, Birla went on to step down as non-executive chairman of VIL, throwing the company’s stock into high volatility territory.
Broad spectrum damage
VIL is still India’s third largest telecom operator (it was once the largest) and the impact of its collapse would have far reaching effects.
If VIL defaults on future payments and is taken to bankruptcy court, the first hit will be taken by the company’s lenders such as banks and financial institutions which are owed around Rs 23,000 crore in total.
According to a report by Nomura, eight banks have large exposures to VIL, led by SBI, which is owed Rs 11,000 crore.
But, in terms of its total loan book, this comprises just 0.43%. Some large lenders include Yes Bank (Rs 4,000 crore, 2.4% of book), IDFC First (Rs 3,240 crore, 2.9% of book), and IndusInd Bank (Rs 3,500 crore, 1.65% of book). Other lenders have smaller exposures comprising less than half a per cent of their loan books.
The problem when telecom companies go to bankruptcy court, as noted by an industry insider who spoke to TNIE requesting anonymity, is that there isn’t much in terms of assets that can be sold or monetised except for their valuable spectrum licences.
“But the NCLAT has now ruled in the RCom case that these licences can’t be part of any resolution plan unless the statutory dues on them are paid to the government. If not, these licenses revert to the government. So, the lenders will have to take a huge haircut,” the executive noted.
But still, according to Nomura, a VIL default would be a “minor hiccup” for banks. Not so for other stakeholders in the saga. Take the subscribers and the telecom market, for instance.
Without a third private player in contention, it would turn into an effective duopoly, with Airtel and Reliance Jio the only options, other than the public sector BSNL-MTNL combine.
And while, like during the collapse of RCom, other telcos can absorb Vodafone Idea’s users over time, it will require money.
“The companies that are looking to absorb these users will have to spend more on infrastructure, and it will be done,” said an executive with a telecom infrastructure firm.
While VIL does not disclose employee data, industry sources say there are around 10,000 direct employees and several thousands more employed in the distribution system, with vendors, and in different points on the value chain, and all of them would all be impacted.
Vodafone Idea Ltd, Vodafone Plc, Aditya Birla group, and the DoT did not offer any comments.
GoI may be biggest loser
But even this may pale in comparison to what the government stands to lose. Because out of VIL’s total debt of Rs 1.8 lakh crore, it owes the government Rs 96,270 crore in deferred spectrum obligations and Rs 60,960 crore of AGR obligations-86% of VIL’s total liabilities.
If VIL goes bust, the government stands to lose much of this.
“It could receive the spectrum licences in the NCLT if no AGR is paid and it can auction them out again, but even the recent auction could sell only a fraction of the spectrum on offer. So, it will be tough to find bidders or get much value,” said the industry executive.
According to experts, it is almost inevitable that both the government and the lenders will take huge haircuts if VIL is put through an insolvency resolution process.
Time for a white knight
As things stand, the consensus among both industry insiders and analysts is that the company urgently needs a rescue in order to prevent widespread damage.
With a bankruptcy and resolution process looking quite unattractive to most stakeholders, there’s been pressure on the government to extend relief.
Last week, sources said that officials from the Prime Minister’s Office and the DoT discussed a possible relief package for the sector that may include relaxations on future AGR payments and other statutory dues.
However, even if a relief package is delivered soon as is widely expected, there is a strong body of opinion that the GoI should act on KM Birla’s offer and nationalise the company.
“KM Birla’s offer to give up his stake to give a potential lease of life to Vi and its customers should be welcomed and all options explored,” says V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, in a research note this week.
While government sources have pointed to the difficulty of taking such a measure, especially considering the government’s own financial situation, analysts say that if it does not act to keep VIL afloat, it stands to lose a lot more in prospective revenue.
Deutsche Bank went into more detail on how the government could effect such a measure.
“The only viable solution is for the government to recapitalise Vi by converting its debt into equity, preferably while merging it with BSNL, and then providing it a clear commercial mandate based on profitability targets and incentives,” it noted.
Heavy debt burden.
- Rs 1.803 lakh crore Total debt.
- Rs 96,270 crore Deferred spectrum payments.
- Rs 60,960 crore AGR dues liabilities.
- Rs 23,040 crore Owed to banks/NBFCs.