Govt Swaps Debt With Stakes In Vodafone, Netizens Raise Questions On Disinvesting In BSNL

Previously debt-ridden, Vodafone Idea emerged as the biggest benefactor of the relief schemes announced by the government this month. The Board of the third-largest Telecom operator approved the government's proposal of converting its dues of Adjusted Gross Revenue (AGR) to equity, thus making the government its largest shareholder. The implied cost of the conversion stood at ten-rupee per share, thus providing a 32 per cent discount from the closing price on January 10.

The government would now hold a 35.8 per cent stake in the company. The other promoters of the firm, Vodafone Plc., and Aditya Birla Group would have the remaining 28.5 per cent and 17.5 per cent stake. Until now, the duo held 44.39 per cent and 27.66 per cent, respectively.

The company's shares fell by 19 per cent today in the National Stock Exchange (NSE). After the confirmation from the Department of Telecommunication, the company said that the net present value of the interest is expected to be 16,000 crores. This reform from the government's end would provide an option to monetize the interest portion of AGR, and the spectrum for four years was targeted for Vodafone Idea, given the company is facing such a cash crunch situation. After the government announced a Telecom relief package in September last year, it included a spectrum moratorium and reduced bank guarantees.

Backdrop Of Vodafone Idea's Financial Health

The total debt for Vodafone Idea stood at ₹1.9 lakh crores, and the total AGR dues amounted to be ₹58,254 crores. The Indian government and several telecom operators have been at loggerheads for over a decade about calculating gross revenue. The government had mandated that the operators pay the license and the spectrum fees. On the other hand, the telecom companies argued that only core income accrued from the spectrum should be considered to calculate the adjusted gross revenue.

In 2017, Vodafone India and Idea Cellular announced that they received a go-ahead for a prospective merger. Individually, the two companies' market share was meagre compared to the Bharti Airtel and Reliance Jio after the latter took the market by storm. The newly merged company rapidly gained a market share of 400 million subscribers, a market share of 35 per cent and a revenue share of 40 percent, MoneyControl reported.

The companies in the Telecom sector suffered a significant loss in the customer base after Reliance Jio Infocomm Ltd. sparked a deadly price war in 2016 by offering sim cards with free calling and messaging service. Reliance quickly spiralled upwards in the market with the backing of 400 million subscribers. Therefore, the rescue plan from the government's end was necessary since the emergence of Jio forced several operators to either shut down, merge with rivals or file bankruptcy. Vodafone has not filed its annual profits since 2017.

Mergers and acquisitions have proved to be effective for corporates aiming to restructure their activities. While the telecom sector has always been the most rapidly advancing industry, it poses a significant challenge for the network plans to allure their customers into staying with them. The Indian telecommunications industry is the world's second-largest telecommunication industry. It has a subscriber base of 1183.51 million users, an internet subscriber base of 604.21 million, and the revenue generated by the telecom sector is around Rs 185,291 crore.

Relooking At BSNL's Situation

However, in the larger picture, if one assesses the feasibility of owning the maximum share in Vodafone Idea, the government's decision might not seem the best for the national interest. Government-owned BSNL and MTNL have had a tough time competing against the mammoth private players in the Telecom sector. BSNL sought a relief package of 40,000 crores from the government. In 2019, the government was pondering a permanent closure of the public sector undertaking (PSU). The move was severely criticized by the former director of finance for BSNL, who said that the company had given unexpected returns to the government from 2000 to 2008.

Massive red-tapism and prolonged decision making from BSNL's end often made it a slow contender in the race of the telecom sector. There is no questioning that BSNL has been the most reliable company for providing fixed-line services, but it has not been able to match up with its agile competitors. The company bore a high maintenance cost of its employees, and heightened competition and lower tariffs from other emerging players further worsened the situation.

Like several other companies in the industry, the move by Mukesh Ambani-led Reliance Jio was a significant setback to BSNL. Moreover, other service providers like Airtel and Vodafone, amongst several others, faced a similar situation. While Airtel still managed to stay afloat, Vodafone and Idea merged to counterbalance their losses, and other small service network providers just vanished off the radar completely.

Telecom Market Risks

Amongst the significant telecom partners in the country, BSNL is struggling with a meagre 16.67 million user base, making the telecom market riskier for the average Indian consumer. However, one must question if the government's investment in Vodafone Idea is a signal for the total nationalization of the company in the coming years. If yes, then do we rely upon it or stick to our network providers and make an informed decision when the dilemma arises.

On the one hand, BSNL delayed the salaries of its employees last year, thus justifying the virtual disappearance from the company. Is it just a matter of time for Vodafone Idea to suffer a similar fate as that of BSNL? Even though the company's share sustained a loss on the announcement, investors and customers might feel that Vodafone Idea would eventually bounce back after receiving the government's support.

Until now, people have started questioning the capability of the government to revive the debt-ridden company after it failed miserably to hold a significant market share in the already well-established telecom provider.

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