The stepping down of Kumar Mangalam Birla as chairman of Vodafone India on August 4, following a letter to Cabinet Secretary Rajiv Gauba, sent on June 7, 2021, is, perhaps, the final chapter in the Birla group’s painful tryst with telecom, and also makes it the second-oldest conglomerate to exit the business after the Tatas. It is an unfortunate twist to a combine that was once known as Batata (Birla Group, AT&T and Tata Group). In 2006, after a fractious alliance, the Birla group bought out the Tatas’ 48.14% stake in Idea Cellular for Rs 4,406 crore. Later in 2017, Vodafone merged its operations with Idea in a $23-billion deal. But the fortunes of the company only kept nosediving as Jio’s aggression made life tough in the three-player market.

With Rs 1.86 lakh crore in debt [including interest accrued but not due and adjusted gross revenue (AGR) liability], the country’s third-largest telecom operator, Vodafone Idea, is now teetering on the brink of bankruptcy with the owners -- Birla with 27%, and Vodafone with 44% -- unwilling to pump in more money. With a loss of Rs 44,233 crore in FY21, the company now has a negative net worth of Rs 38,228 crore. Incidentally, Rs 7,500 crore of non-convertible debentures (NCDs) are due for repayment beginning September 2021 to February 2022, with just one tranche (Rs 1,500 crore) due in September 2023. The rating agencies, CARE and Brickworks, have not yet downgraded the NCDs to junk category.

Birla has stated in the letter that he is willing to hand over his entire stake to the government to keep the company as going concern with its 27 crore users. On the other hand, the UK-based Vodafone Plc has made it clear that it is no longer going to infuse equity into the company. Vodafone CEO Nick Read, in an investor conference call on July 23, had said, “We as a group try to provide them as much practical support as we can, but I want to make it very clear, we are not putting any additional equity into India.” Birla in the letter has mentioned that potential investors were hesitant to invest in the absence of clarity on the AGR liability, adequate moratorium on spectrum payments and, most importantly, a floor pricing regime above the cost of service.

As per a Supreme Court (SC) ruling, telecom operators had to make the payment of 10% of the total dues by March 2021 and, thereafter, pay in annual instalments till March 2031. Since the cumulative amount paid by Vodafone exceeds 10% of the total liability, the next instalment is payable only by March 2022. Vodafone’s AGR liability is Rs 58,254 crore, of which it has paid Rs 7,854.37 crore and over Rs 50,000 crore is outstanding. However, Vodafone has written to the Department of Telecommunications (DoT) for deferment of the Rs 8,212-crore instalment due in 2022.

With the SC refusing to entertain the pleas of telcos on recomputing the dues, Birla has lobbed the ball back in the DoT’s court.

In the whole episode, the exchequer is going to be the ultimate loser besides Birla group and Vodafone. The DoT will lose its AGR dues and the lenders will have to write-off their loans. In doing so, the government will ultimately bear the burden of the loss.

Any solution that DoT or the government puts forth will need to have the approval of the SC as it has been steadfast on its stance in the case. Neither the government nor the DoT can show any leniency as it will amount to contempt of the SC and will also be unfair to the other telecom player Bharti Airtel and the two other telecom players which went bust, RCom and Aircel.

With the DoT staking claim to the ownership of the spectrum, effectively the lenders were short changed by its own parent. In 2016, the DoT had issued a notification allowing the operators to mortgage the spectrum as collateral to raise funds from banks and financial institutions. But in the Aircel bankruptcy case, the National Company Law Appellate Tribunal plugged a “loophole” that would have let operators avoid paying the dues. The initiation of insolvency proceedings would have rendered the DoT as an operational creditor. To prevent this, the tribunal ruled that only after the statutory dues were cleared, could the spectrum rights held by defunct companies be used and traded. That was a body blow to the lenders. “The public sector banks are now caught in a mess as they were given the comfort of lending against the spectrum after entering into a tripartite agreement,” said a banker on the condition of anonymity. The ruling effectively made the telcos mere shell companies in the absence of spectrum.

So, what option does the government have now?

The government cannot convert the AGR dues into equity and become an owner of Vodafone as that being the case, the question would arise as to why was it not done in the case of Aircel and Reliance Communications (RCom)? Conversion of lenders’ due into equity is also no solution, as neither can run the management nor ensure the recovery of dues. Given that MTNL is already bankrupt, can BSNL play the white knight with Rs 7,300 crore in cash and equivalents and networth of Rs 54,142 crore, despite a Rs 15,592-crore loss in FY20?

But again the question would be: what makes Vodafone unique and not RCom or Aircel?

Had DoT not queered the pitch with its right over spectrum, possibly the lenders could have made some headway with a new buyer coming in. But being an arm of the government comes with its own perquisites.

By insisting on clearing the dues, the government is also interfering with the very bankruptcy code that it had created. The question remains what is the Centre going to gain anyways if Vodafone collapses versus what it would have got through the resolution process?

The only rabbit in the hat is a bailout by BSNL. But whether that will materially change the fortunes of the lenders or the industry is a different story.

Whatever is the outcome, it looks like the era of low tariffs will be over and telecom will, effectively, remain a duopoly market with Sunil Mittal and Mukesh Ambani emerging as the lords of the ring.

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