There is absolutely no way that Vodafone Idea would be able to pay the government its ‘AGR dues’ of Rs 1128 crore quarter after quarter, for 40 quarters. This was clear in September 2020, when the Supreme Court agreed with the government’s view on how to calculate the adjusted gross revenue.
VODAFONE, TATA TELESERVICES, AIRTEL and a bunch of other telecom companies ended up having to pay chunky dues to the government. While players such as Airtel could manage to cough up the humungous dues, the beleaguered, UK-headquartered Vodafone, couldn’t.
Last month the government agreed to Vodafone’s (and Tata Tele’s) proposal for getting equity shares in lieu of its dues. Government of India will get 35.8 per cent stake in Vodafone India for its dues. Vodafone, in all probabilities, will rub its hands in relief and scram out of India.
The arrangement not only makes sense, but is an economic imperative. Today, if Vodafone disappears, then the Indian telecom market will become a duopoly, with only Bharti Airtel and Reliance Jio in the fray—all others are either dead or moribund.
Since the 1990s, multiple players started coming into the telecom sector. Many faded soon as competition hammered down telecom tariffs. Customers benefited hugely. Economist Ila Patnaik notes that the telecom tariffs in India, which are among the lowest in the world, gave a big pep to productivity—something which has not been adequately recognised.
Now, if there are only two players, this big advantage would disappear. The country needs not two, nor even three, but several more, for sustained competition in the telecom sector. As such, the government’s bailing out Vodafone will ensure its survival.
WHY VODAFONE NOW?
The big question is, why should the government take a big (even if minority) stake in Vodafone, at a time when its own telecom companies, BSNL and MTNL, are bleeding dry. The answer is that there is a significant difference between a government-owned BSNL and Vodafone that has the government as its principal shareholder: for now, Vodafone will continue to be run by its existing management. After all, the company’s problems are only financial. By removing the AGR millstone around its neck, Vodafone could cut into the market and flourish. When the government would sell its Vodafone shares, it could make a tidy profit – or at least that is the hope. So, there is no comparison between Vodafone and BSNL/MTNL.
Further, a government bailing out an important player in the market is not without precedent. One example is that of General Motors. The US and the Canadian governments pumped in money, bailed it out of the 2009 financial crisis, turned it around and exited.
With the government getting a 35.8 per cent stake in Vodafone Idea for the Rs 58,000 crore AGR dues, the holding of Vodafone UK will fall from 44 per cent to 28 per cent. (The government will also similarly get stakes in the two subsidiaries of Tata Teleservices—TTML and TTSL. It will get 9.5 per cent in TTML, while the holding in the unlisted TTSL is not clear.)
THE FLIPSIDE
However, there is a flipside to the tale. With 35.8 per cent stake, it would be too tempting for the government to start running the company, or at least meddle with the management. The government has said it would not, but there is no knowing when there might be a change of heart. Even if this government does not, a future government might. The government should bring in a water-tight law that would disallow a future government from taking part in the management.
Indeed, the government can go a step further and hand over the management of BSNL and MTNL to a professional. This again is not without precedents. For a while, Hindustan Photofilms [HPF] Ltd was run by M K Raju, a reputed professional manager. HPF turned around (though it died later, with Raju quitting and the digital era coming).
If this ‘Vodafone experiment’ turns out to be successful, as it is likely to be, then it would provide a good template for other systemically-important companies. After all, a provision for the government taking over exists for banks under the FRDI Bill. The logic might be extended outside the financial sector too. Vodafone might prove to be an excellent guide post. -Thungabhadran
