For 15 years, telecom service providers, including Airtel and Vodafone-Idea, resorted to the familiar tactics of leading corporates (like ITC) not to pay promptly the taxes demanded and bided for time by resorting to litigation. The Supreme Court had directed the companies to pay around Rs 92,000 crore within three months. Surprisingly, neither the statutory auditors nor the eleven banks that are owed today around Rs 230,000 crore had insisted on the companies providing for the contingent liability in their accounts!
Two developments in end October will have a severe impact on the Indian telecom sector. The first one of these was the Supreme Court judgment that upheld the Department of Telecom’s claim to recover an estimated Rs 92,000 crore from the telecom service providers. The second one was on the plan to merge MTNL with BSNL backed by a Rs 69,000 crore funding to set these on paths of growth and profits.
The service providers’ interpretation of the adjusted gross revenue was not accepted by the department. Service providers delayed payments by resorting to litigation at different levels.
In this, they seem not to factor the interest and stiff penalties getting added over the long years.
Clear definition of gross revenue and the penalties…
The judgment pointed to the precise definition of the gross revenue and how the adjusted gross revenue (AGR) was to be arrived at: the AGR to include installation charges and different fees received like late fees, sale proceeds of handsets and other terminal equipment, revenue on account of interest, dividend, value-added services, access and interconnection charges, revenue from sharing infrastructure…
The court pointed to the sector reaping the fruits of Centre’s liberalised payment mode. The court described the conduct of the licensees that had long reaped the fruits of Centre’s liberalised mode of payment under the revenue sharing regime as highly unfair to the sector.
The industry is already reeling under the burden of massive debt estimated to total around Rs 400,000 crore with the top three players Vodafone-Idea, Bharti Airtel, and Reliance Infocomm accounting for close to Rs 300,000 crore. The top two telecom companies, Airtel and Vodafone-Idea, have been the most hit.
The sector that boomed
Telecom has been among the sectors that had been recording dramatic expansion on profitable lines. The reforms started even during the regime of licensing. Government-owned monopoly, Bharat Sanchar Nigam Ltd (BSNL), was utilising the surpluses generated in the metros to extend telephone services to rural areas.
The first significant change came in 1986 when the Mahanagar Telephone Nigam Ltd (MTNL) was set up in the public sector to take care of the business in Mumbai and Delhi. MTNL turned out to be extremely profitable, with net profits around 25 per cent of gross revenue.
Under the guidance of Sam Pitroda, BSNL succeeded in providing telephone access to rural areas. The New Telecom Policy of 1999 opened up the sector to private players. The spectacular transformation of technology post-2000 helped in explosive growth. In less than two decades, the number of telephone connections expanded from 40 million to 1200 million. The coverage is over 90 per cent of the population.
Understandably, there was the rush of a large number of new players. Airtel emerged the leader, making excellent use of technological developments and managerial expertise, not just in India but in several other countries. Today Airtel accounts for 29.2 per cent of the total number of subscribers. The sector became so profitable that it attracted investments from several players. Telenor, Etisalat, S-Tel, Virgin Mobile India, T24 Mobile, Aircel… The most prominent of these was Vodafone of the UK that entered India with huge investments.
The consumer benefited by intense competition through improved quality of services at low tariffs.
The going was too good to sustain. Too much prosperity attracting newer entrants without experience or expertise led to humongous corruption, scandals and pressures to bend policies. Apart from weak players, the ormance of BSNL and MTNL also declined and these turned sick. BSNL incurred loss of around Rs 14,000 cr; MTNL’s consolidated loss is about Rs 3388 cr for FY 19.
Shake out and consolidation
There was also the inevitable shakeout with dozen-odd companies moving out and the two large players, Vodafone and Idea merged to withstand competition.
Apart from the bolt from the blue of the Supreme Court judgment, the intense competition offered by Reliance Jio was another major factor for the decline of Airtel and Vodafone. The aggressive marketing thrust of Jio with offers of low entry tariff, helped the company win a handsome revenue share of close to 31 per cent of the total market. Its predatory pricing policies ended the era of fat margins and severely impacted the profitability of the sector as a whole. It also helped in a welcome consolidation of the industry, limiting action to three large players in the private sector and BSNL-MTNL in the public sector. With the considerable tax burden arising out of the Supreme Court judgment, Vodafone-Idea is on the brink of bankruptcy and Airtel struggles with a massive debt and losses. With deep pockets, Jio would continue to grow; as the late entrant, it is free from the burden of old baggage.
Airtel and Vodafone, the most hit
The precarious financial conditions are evident from the financial results announced for the second quarter of FY 20: Bharti Airtel posted a net loss of Rs 22,830 crore on total revenues for the quarter ended 30 September 2019. This was due to the provision of Rs 28,450 crore as an additional amount for licence fee resulting from the recent Supreme Court judgment, which directed the telecom operators to pay their statutory dues within three months.
Look at the cost of the sin for delay of around 15 years by resorting to litigation and not bothering to provide for the contingent liability in successive financial reports: of the provision of Rs 34,260 crore, the principal amount was hardly 25 per cent, viz. Rs 8747 crore. The balance was made up of interest (Rs 15,446 crore), penalty (Rs 3760 crore) and interest on penalty (Rs 6307 crore).
The plight of Vodafone is worse. The company, even while entering India, started with a massive dispute over the tax demand on its acquisition of an existing company. It waged a long battle contesting the claim of the tax department. It did record continuous and handsome increases in revenue and profits and consolidated its No.2 position by joining hands with Aditya Birla’s Idea Cellular Ltd to form Vodafone-Idea Ltd.
Like Airtel, Vodafone-Idea didn’t provide for the contingent liability on the possibility of an adverse ruling by the court. The result is the company reporting a humongous loss of Rs 50,922 crore for the quarter ended 30 September 2019. This, despite the operations quite profitable: gross revenue recorded a growth of 41.5 per cent to Rs 10,844 crore during the quarter over the corresponding period of the previous year. EBITDA over these two periods registered a more than seven-fold increase to Rs 3347 crore.
The company has accounted for the estimated liability of Rs 27,610 crore and Rs 16,540 crore related to spectrum usage charges up to 30 September 2019. This includes interest on penalty of Rs 33,010 crore.
If the losses of Reliance Communications and other telecom companies were added, the total telecom losses would exceed Rs 100,000 crore.
Severe impact on banks
The outstanding licence fee of the 14 telecom companies, many of which have folded up, exceed Rs 100,000 crore. In the absence of any quick solution to this crisis, over Rs, 100,000 crores, lent by 11 commercial banks, will turn into NPAs. SBI will lead the pack with an exposure of around Rs 37,300 crore followed by HDFC Bank (Rs 24,500 crore) and Axis Bank (Rs 17,100 crore).
Surprisingly, neither the statutory auditors nor the banks raised the issue of liabilities nor provided for in the financial statements. There has been (blind) optimism that the government would agree to handsome waivers of interests and penalties.
Clamour for relief…
A high power committee of secretaries has been given the task of finding a solution. Both the promoters of Vodafone-Idea, viz.. Vodafone UK and the
Aditya Birla Group, have ruled out the possibility of investing further. Thus the possible option in case of no relief is a resort to bankruptcy; naturally, this will impact the banks, other lenders severely and, more importantly, the telecom sector’s development plans.
The sector has been recording a strident growth. The frenetic pace of technological developments has brought about dramatic changes in the way the economy evolved. Telecom has been at the base of this change, not just facilitating voice communication but the whole gamut of e-governance, data utilisation and management, banking… India can take credit for the explosive growth and her evolving as the second largest telecom user with the spread of the internet.
Yet, India has not grown much beyond 3G technology.
Not grown much beyond 3g
Even while China and several European countries and the US are fiercely involved in entering the 5G technology, India has not fully established even 4G. Massive investments are required to strengthen the telecom infrastructure to leapfrog into new technologies in a quik time.
Thus at this crucial juncture, the country cannot afford to lose the two leaders, Airtel and Vodafone. There were expectations of getting relief through a waiver of penalties and possibly lower spectrum fees and deferred payment of dues. Having tasted years of uninhibited growth and making humongous profits, telcos will pitch their demands high. With the highly divisive polity, there will be a flood of recriminations and litigations. The late entrant and one who built rapidly through disruptive techniques, Reliance Jio can be expected to protest.
Relief for spectrum dues
The government has provided a breather for spectrum payment dues. Finance Minister Nirmala Sitharaman said: “owing to current financial stress faced by major telecom service providers (TSP) and in accordance with the recommendations of the Committee, it is decided to defer receipts of spectrum payments due from the TSP for the years 2020-21 and 2021-2022.”
The deferred amounts must be paid in installments equally spread over two years. Also, the bank guarantee is a mandatory document to be submitted by telco companies opting for a two year deferred payment.
Higher tariffs from 1 decemberAirtel, Jio, Vodofone-Idea and BSNL are increasing the tariff starting 1 December 2019.
The cost of judicial delays…
Along with the corporates, the legal system should take a fair share of the blame. There is an urgency to decide on such vital cases in a quick time. Also the facile resort to litigation by the corporate sector and the government should be put to an end.
With inputs from V Pattabhi Ram & Dr K Narayanan.
Welcome focus on BSNL
The telecom sector’s growth has been one of the most spectacular success stories of
India’s economic evolution. It began in the 1980s when Rajiv Gandhi persuaded Sam Pitroda to junk his US citizenship and return to India. I remember Sam Pitroda outlining the dream to economic editors in the late 1980s, of making telecom affordable by every Indian. The sector was opened by importing techno-
logy from global leaders like Ericsson, Alcatel… In just a couple of years, the country witnessed a revolution: public call offices (PCOs) became ubiquitous even in remote parts of the country, providing connectivity to every part of India. The business model that permitted public to set up such PCOs proved a big hit.
The rise and fall of MTNL
MTNL was formed in 1986. The original expectation was to bring the four metros viz. Chennai, Delhi, Kolkata and Mumbai under MTNL. But the leftist government of Kolkata and an indifferent Tamil Nadu government let go the opportunity. Over the next decade and more, MTNL rapidly modernised the telecom sector of Mumbai and Delhi. Within a decade with 35 lakh lines, MTNL accounted for a fifth of the total telephone lines operating across India. The cash cows of the other two metro telecom systems, Chennai and Kolkata, generated humongous surpluses, which were ploughed back by BSNL to modernise and expand the network across India.
The then MTNL Chief Executive S Rajagopalan, in an address under the aegis of IE in 1998, provided a glimpse of the progress made by the company in 12 years: “the number of lines increased more than four’ fold to 35 lakh with 90 per cent of this digital. In 1986 the waiting list exceeded 15 years; by 1998, the service was made available on demand. MTNL was adding five lakh lines every year.” It also earned a profit exceeding Rs 1000 crore in 1997-98.
The company which was bluer than several blue-chip companies, could not meet the fierce competition that ensued with the new telecom policy. In less than two decades, the share of BSNL-MTNL dropped to just 6.2 per cent.
New Telecom Policy that unleashed the revolution
The opening up of the economy quickly followed by the New Telecom Policy (NTP) in 1999 paved the way for rapid, quantum growth. India leapfrogged technology, catching up with the wireless cell phone revolution. Combined with the expertise built by the country in information technology in the 1990s, the telecom sector caught up with state-of-the-art practices. The country was ready to adapt and grow on contemporary global technologies.
In less than two decades from 2000 the number of telephone connections zoomed from 40 million to 1200 million. Opening the sector attracted several players from the private sector who, in turn, collaborated with renowned global leaders. This, in turn, helped integrate communications with information technology. In a short time, India has been rapidly graduating to a digital economy.
In this Hanuman jump, understandably, there are winners and losers. In the initial wave, a large number of companies rushed to the sector. There was, of course, the abuse of the licensing policy. For instance, the real estate giant Unitech acquired the licence cheap and sold it off to Telenor at a huge profit. The regulation was weak and the licensing policy lent for corruption.
There were two distinct developments. The first is the consolidation, with many smaller players quitting. Even the Tatas who entered with great promise with Japanese Docomo and Anil Ambani’s Reliance Communications (RCom) incurred massive losses. While Tata Telecom exited, RCom is struggling to quit with no takers. RCom’s results for the half-year ended 30 September 2019 reveal a humongous loss of around Rs 33,000 crore. Aditya Birla’s Idea Cellular and Vodafone merged to Vodafone-Idea to meet competition from Reliance Jio. The field is today left with three large players – Airtel, Vodafone – Idea and Reliance Jio in the private sector and BSNL in the public sector.
Rs 69,000 crore to revamp BSNL
The plight of the public sector is not enviable. Until 2000, both BSNL and MTNL were money-spinners. The freedom they enjoyed in pricing and their monopoly ensured earning handsome profits. These were ploughed back to expand and modernise the services. However, the companies could not meet competition from the private wireless cellular phone operators. For several years now, the two have been incurring hefty losses. Payments to the huge workforce of 165,000 (BSNL) and 22,000 (MTNL) account for 87 per cent of MTNL’s and 77 per cent of BSNL’s revenues.
The companies have been reporting continuous fall in revenues and an increase in losses. In fact, the two companies are among the top loss-making public sector undertakings for several years. BSNL has been incurring losses since 2010 and MTNL has reported losses in nine out of the past ten years. The two have a debt burden of Rs 40,000 crore.
The NDA has been advocating a policy of phasing out loss-making PSUs or merging these to ensure viability. With this objective, the government has proposed a liberal financial package of Rs 69,000 crore to merge the two entities. This includes a voluntary retirement scheme designed to cut employment by half through government funding of Rs 17,160 crore, another Rs 12,768 crore towards retirement liability, Rs 20,140 crore for the purchase of 4G spectrum, Rs 3674 crore as GST for spectrum allocation and raising Rs 15,000 crore in debt. These measures at rationalisation and technology upgradation are designed to take the company to profitable growth after two years.
The two companies have significant assets spread across India. It should be possible to monetise a portion of these.
Why BSNL-MTNL not privatised…
The share of these PSUs has fallen precipitously to 4 per cent since the opening up of the sector for competition. But with the two lead players, Airtel and Vodafone-Idea, receiving a big hit, the field will open opportunities or BSNL-MTNL. BSNL has been serving strategic sectors like defence. Its services extend to the remotest parts of India. Once the workforce is rationalised and the balance sheet cleaned up, it could revert to its earlier days of growth and profits. Only it should scout for past leaders like Rajagopalan to lead.