It’s Now Or Never For The Indian Telecom Industry

Vodafone Idea situation is a typical case of Nelson’s eye by institutions & failure of regulatory governance, writes Pradeep Mehta

A stop sign stands at the incomplete end section of new rail line under construction. (Photographer: Riccardo Gangale/Bloomberg)

The government must act fast to protect consumers.

The writing on the wall is quite clear now. The government including the judiciary has failed to acknowledge it. Vodafone Idea, one of the major telecom companies in India with about 27 crore subscribers, is in its final lap, unless some out-of-the-box remedial action is not taken by the government. It should privatise BSNL instead of dumping Rs 70,000 crores to support it, and give the same to VI as a soft loan payable over thirty years. Thus, protecting competition in the marketplace, and attendant economic and consumer benefits.

VI has an outstanding debt of nearly Rs. 1.8 lakh crore, coupled with uncertainty on new investments and investors. One of the primary reasons for such a monstrous debt is the adjusted gross revenue dispute, which stretched out for more than two decades. VI has about Rs 60,000 crore as AGR liability, Rs 23,000 crore as bank debts, and Rs 96,000 as deferred spectrum obligations.

This is a typical case of Nelson’s eye by the institutions and failure of regulatory governance.

The telecom industry is a critical economic multiplier, which cuts across all sections of society and is the base of communications and connectivity. During the Covid-19 lockdown last year, the industry enabled about 35% of the GDP, while directly contributing about 6% of the GDP. A decade ago, the telecom industry was overcrowded with as many as 12 players jockeying for a place in the sector. Right now, only four telecom companies are operating in the market, one being the state-run Bharat Sanchar Nigam Ltd. Alas, it is running on outdated 3G services, resulting in lesser subscribers compared to the other operators.

Shifting Sands To Quicksand

The government and the Supreme Court have the cardinal responsibility for the decline of the telecom industry in India. Under the 1999 Telecom Policy, the AB Vajpayee government had the sense and vision to move the telecom operators from the fixed annual licence fee to the revenue sharing model. Because, the licence fee model was unviable in running the services. Right now, telecom companies pay a percentage of their revenue as licence fees to the government. Alas, the definition of revenue was not clarified in the new agreements. This was the cause of the long-running case at the apex court.

In the new deal, DoT assured the operators that they would be consulted on the definition and TRAI will settle the matter. Without consulting both of them, the DoT decided to claim a share of the gross revenue, rather than the telephone business revenue. The rationale given by DoT was that it would pose fewer interpretation challenges.

Even in airports being run on a public-private partnership basis, non-aeronautical revenues are not part of operational revenue, which is to be shared with the government by the airport operator.

For the DoT, it seems that the telecom operators were making bumper profits, without sharing it with the government. Unfortunately, even the Supreme Court could not see both the smaller or the bigger picture, and larger public interest. All pleas by the operators to the court on several occasions did not succeed. Ridiculously, in its last judgment on Sept. 1, 2020, the court added that for assuring the payment of dues, the directors and managers of the telecom companies will be personally liable.

Perhaps, for this reason, Kumar Mangalam Birla resigned from the board of VI, which sent its shares tumbling. This event followed a media report about Birla’s letter to the Cabinet Secretary requesting the government or any other entity that the government may consider, to take over his 27% stake in VI, as a last resort to save the company.

The Way Out

This would turn the telecom sector into a duopoly with Bharti Airtel and Reliance Jio Infocomm as the only two telecom operators in the market, while BSNL would be an ‘also ran’ horse in the race. In any event, when the competition in the market decreases, it would adversely affect consumer welfare including impact on innovation, quality of services, pricing, etc. Thus, it is imperative that the government must intervene right now to save the industry and protect the consumers and economy.

Primarily, the government should provide support and relief to VI. This should be through extending soft loans to the company at marginal cost lending rate while using GST input credits as collateral and also by acquiring a minority stake in the company.

Even as the Vodafone Group Plc CEO Nick Read clarified that the group would not put in any additional equity in India, this support by the government would go a long way in helping VI survive and compete in the market. The government should also rationalise licence fees and spectrum usage charges.

Additionally, the government must privatise BSNL. The Finance Minister in her union budget speech this year said that the government would retain only the bare minimum public sector units. This is a welcome stance, but BSNL should have featured in the list. In 2019, the union cabinet also approved a Rs 70,000-crore revival package for BSNL and MTNL, out of which almost 43% or Rs 29,937 crore was spent towards a voluntary retirement scheme for employees above 50 years of age.

The revival plan has not gained any momentum yet; especially the monetisation of assets, guarantee for fundraising, and its 4G plan is still to take off. With all the associated inefficiencies of a PSU, BSNL is now pinning its hope on Rs 20,000 crore dues that DoT owes them since 2000. However, such a help to the existing private telecom companies would have gone a long way to sustaining competition in the market. This is another reason why the government must privatise BSNL, as it had done for Videsh Sanchar Nigam Ltd. many years ago.

As the situation stands right now, the telecom industry, especially VI needs hand-holding and hard support from the government to survive. It is in the interest of consumers and the economy that competition amongst the telecom companies is sustained.

Granted that there are no entry barriers, but since it needs deep pockets and the fact that many companies have exited the business, new entrants may not venture forth.

As India readies itself for 5G, a competitive telecom market would prove to be the foundation for its widespread adoption, reachability, affordability, and quality. Hence, as a country, we must strive for competition and excellence, and the government including the judiciary must do its part to protect competition in the marketplace, so that the economy and consumers benefit.

Pradeep S Mehta is Secretary General, CUTS International, a global public policy think tank. Kapil Gupta of CUTS contributed.

The views expressed here are those of the author, and do not necessarily represent the views of BloombergQuint or its editorial team.

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