- India’s second-largest mobile service provider owes government US$4 billion and is saddled with a debt overhang of US$14 billion
- A crisis meeting to find a way to keep the company afloat through a relief package or penalty waiver failed to reach a solution
1 Mar, 2020 SCMP
India’s second-largest mobile service provider, Vodafone Idea, is at the brink of collapse, threatening a staggering blow not just to the country’s telecoms sector but also to the country’s sluggish economy.
What was once a high-flying operator, the joint venture between the UK’s Vodafone Group and India’s Idea Cellular was brought to its knees when India’s Supreme Court ruled in October that the company owed the government billions of dollars in usage charges and licence fees. The court gave Vodafone Idea 90 days to pay, with the deadline later extended to March 17.
Following a period of intense negotiations, the financially stressed telecoms operator sent a letter to the government on Wednesday seeking a series of relief measures including deferred and reduced payments of its overdue levies.
Vodafone Idea’s 300 million subscribers remain on tenterhooks waiting to see if the company can weather the storm. It has lost over 100 million customers since 2016, and more than 36 million subscribers switched from Vodafone Idea in November alone.
Vodafone Idea owes US$4 billion to the government in additional revenues, on top of an overall debt of US$14 billion accumulated through short-sighted strategies, a bleeding balance sheet and continuing operational losses – making it one of India’s most indebted companies.
The Digital Communications Commission – the highest decision-making body under India’s Ministry of Communications – held a crisis meeting on Friday, where top government officials were expected to discuss how to resolve the situation, but the meeting ended with no credible outcome.THIS WEEK IN ASIA NEWSLETTERGet updates direct to your inboxSUBSCRIBEBy registering, you agree to our T&C and Privacy Policy
For a country embarking on an ambitious digital journey, the troubles bubbling up in the telecoms sector – the heart of India’s digital future – weigh heavy on the country’s financial outlook. Some analysts say the collapse of Vodafone Idea will increase the country’s fiscal deficit by 40 basis points, which could translate into a revenue loss of up to US$14 billion for the exchequer.
“We Indians are always optimistic for something to happen when in a desperate time, but we’ve not seen anything tangible [from the government] so far” on fixing the telecoms industry’s problems, said Rajiv Sharma, head of research at SBICAP Securities and an expert on the sector.
Bharti Airtel, the country’s third-largest telecoms with 28.4 per market share in terms of subscribers, owes the government US$5 billion in statutory dues but is in a better position to make the payment due to recent capital-raising measures. Still, the payment will make Bharti Airtel reticent to make any investments in its infrastructure or in the imminent 5G roll-out.
If Vodafone Idea closes down, a domino effect on banks and collateral services intertwined with the telecoms sector are expected to be seen, with thousands of employees in the telecoms and banking sectors potentially losing their jobs and tens of thousands of other, indirectly related jobs impacted.
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“There will be job losses and tariffs will go up further” if Vodafone collapses, Sharma said. “There will be pressure on Airtel on its cost structure since it shares infrastructure with Vodafone Idea.
“The way things stand it’s either going to be an immediate shutdown or a slow and certain death,” he added.
Several options – including a relief package or penalty waiver, a revised payment plan or a merger with a government entity, BSNL – were apparently discussed at Friday’s meeting. There is also an option of setting up a state-backed entity to offer funds at concessional rates to telcos is under consideration.
TELECOMS MESS
In total, Indian telecoms companies owe the government US$13 billion in additional revenues – a sum disputed by operators – for spectrum allocation and licensing fees.The Indian telecoms sector was battered by the stormy arrival in 2016 of Reliance Jio, which is owned by Asia’s wealthiest person, Mukesh Ambani, and which offered a long list of freebies to subscribers when setting up shop in the country.Since then, the telecoms landscape has radically changed, leaving other operators to either crumble or merge. The total number of operators has dropped from more than a dozen to just three – Vodafone Idea, Bharti Airtel and Jio.
With the imminent collapse of Vodafone Idea, and Airtel struggling with mounting losses, Jio is expected to emerge as the undisputed leader in the sector, leaving no real challenger to check its aggressive growth or business model.
“With Vodafone on the verge of collapse, the consumers and customers could be the biggest losers, as selling power remains highly concentrated,” said Neil Shah, partner and vice-president at the technology market research firm Counterpoint.
Intense competition in the telecoms market had once ensured that Indian customers received the best deals for their money, but that may soon no longer be the case.
A man rides past a shop advertising telecoms company Vodafone in Mumbai. Photo: AFP
“If Vodafone Idea exits, the 300 million-plus subscribers will be left in the dark almost overnight, which could cause nationwide panic not only for consumers but also for the incumbent to take them on to their networks,” Shah warned. “Airtel or Jio might not have enough spectrum or capacity to on-board and accommodate hundreds of millions of subs in a short span of time.”
Amid a countrywide economic slowdown, India’s government appears unwilling to let Vodafone Idea fail, fearing that potential repercussions on the economy would send a negative signal to foreign investors about India’s business climate.
The government, though, still has no clear road map for resolving the matter.
Communications Ministry officials and telecoms company representatives contacted by the South China Morning Post declined to comment on ongoing developments in the matter.This article appeared in the South China Morning Post print edition as: Fall of telecoms giant would be blow to economy