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The Indian telecom sector, once a booming and highly competitive industry, is now running the risk of slipping into a duopoly dominated by only two firms, Bharti Airtel and Reliance Jio. This, after Vodafone Idea Limited (VIL) chairman Kumar Mangalam Birla resigned from his position after writing a letter to the government offering them his stake in the company. VIL is currently debt-ridden and runs the risk of shutting up shop if it doesn’t get some relief from the government.

Earlier this month, the Aditya Birla Group Chairman penned a letter to Cabinet Secretary Rajiv Gauba explaining that he was willing to transfer his stake in VIL  to “any public sector/government/domestic financial entity, or any other the government may consider worthy, – to keep (VIL) going”. He explained at VILs financial condition has sharply deteriorated and that the company was on the verge of going bust unless it got immediate support from the government. He believes it is his duty to the 270 million VIL customers to transfer ownership of his shares.

He further stated that any potential investors would only do so if they were able “to see clear government intent to have a three-player telecom market… through positive actions on long-standing requests, such as clarity on AGR liability, adequate moratorium on spectrum payments and, most importantly, a floor pricing regime above the cost of service”.

Moneycontrol, Aug 4, 2021

The day after the letter was published, VILs stocks crashed by 12%, on a day which saw record gains for both the Nifty and Sensex indices. The company’s financial situation as of today is that it is in debt in excess of 1.5 lakh crore. It owes just over Rs. 50,000 crore to the Department of Telecommunication (DoT) in Adjusted Gross Revenue (AGR) dues, Rs. 96,270 crore in deferred spectrum obligations, and Rs. 23,000 crore to banks and financial institutions.

The government has not yet responded to Mr. Birla’s letter and as such has not accepted his offer of transfer of shares. Birla has stepped down as chairman but VIL is still being run by the Aditya Birla Group (ABG). Himanshu Kapania and Sushil Agarwal, both veterans of ABG have taken over the reigns.

With respect to what the government can do, the DoT has the right to take over VIL since the telecom sector is a strategic sector and it would be in the public’s interest to do so. The government would have to convert its debt with VIL into equity, which would significantly dilute the shares of the company following which it would have to be merged with Bharat Sanchar Nigam Limited (BSNL). 

It would then have to set clear commercial goals for the newly formed entity to achieve. The issue, however, is that such a merger is not currently on the government’s agenda. They have been trying to offload a number of public sector enterprises with little thus far and as a result, may not be as keen to bring an additional private enterprise under its control.

How did the situation get to be so dire for VIL? It all started with the Supreme Court’s 2019 ruling of the correct definition of AGR. In 1999, the government decided to abolish the existing license fee which was very steep in favour of a revenue sharing fee model. What this meant was that telecom operators would be required to share a percentage of their AGR with the government which would make up their license fee and spectrum usage charges. 

The issue was how a company’s AGR ought to be calculated. The government was of the opinion that AGR includes all revenues from both telecom and non-telecom services. The operators, however, believed that AGR should only include revenue from core operations and revenue from dividends, interest income, and profit on sale of any investment or fixed assets should be outside the purview of AGR.

 In 2005, Cellular Operators Association of India (COAI), sided with the telecom operators, and in 2015, the Telecom Disputes Settlement and Appellate Tribunal (TDSAT) backed the COAI. The government then decided to take the matter to the Supreme Court where in 2019, they decided that the correct definition is that of the government. This ruling has had massive financial consequences for the operators, and is one of the main reasons as to why VIL is in the situation that it is in today. More than ⅓ of its debt is in the form of AGR dues.

This ruling largely seems to be responsible for the transformation of the telecom sector into a duopoly. This is bad for the consumer as competition is very low which will lead to fewer choices and higher tariffs. Only Reliance Jio has managed to have a successful period since the ruling as even Bharti Airtel has suffered and has had to give up market space to the former.

It is in the public’s interest for the government to rethink its approach to this sector as a duopoly consisting of Jio and Airtel will be bad for the consumer in the long run.

For feedback, write to pavan@bclindia.in

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