There is no rhyme or reason in the government’s alleged threat of encashing bank guarantees of top telecom companies in case of non-payment of full revenue share dues because such an action will leave government finances even more vulnerable than those of the telecom operators.
So, while the government has been issuing veiled threats of encashment, it has also been simultaneously working out various scenarios to come up with a solution which suits both the sides.
The Prime Minister’s Office has been involved in parleys over the current telecom sector mess, along with the ministries of finance, telecom and law.
The three private telecom operators – Bharti Airtel, Vodafone Idea (VIL) and Tata Teleservices – together owe nearly ₹90,000 crore in past dues to the Department of Telecom (DoT) as revenue share amount.
After fighting a legal battle for nearly a decade and a half against making this payout, the telcos are now expected to shell out the outstanding dues almost immediately, thanks to a Supreme Court order.
The telcos had been disputing the method of calculating Adjusted Gross Revenue (AGR) over which a share has to be paid to the government, saying non-telecom activities should not be included. This is what the SC struck down recently while asking telcos to pay up the dues – which have now been multiplied several times the principal amount due to interest, penalties and interest on penalties over the years.
The government has now threatened to encash bank guarantees of telecom companies since none has paid the full amount due.
The three telecom companies have together paid only ₹14,000 crore and are talking of paying some more in the next few days.
In the given scenario, if simple calculations are done, it would be clear what the government stands to lose in the event of one telco shutting down if bank guarantees are encashed.
There have been enough indications that Vodafone Idea, which accounts for a whopping 300 million subscribers and more than a fourth of the revenue market share, could be shuttered in the event of bank guarantee encashment.
This remains a concern because:
1) The government would lose roughly ₹90,000 crore of spectrum dues VIL owes if the company were to shut down. This is in addition to the nearly ₹50,000 crore revenue share the company is expected to shell out amid the current fracas and another nearly ₹25,000 crore the company owes Indian banks.
2) If VIL were to go through the Insolvency & Bankruptcy Code (IBC) process, the spectrum trading rules (which transfer seller’s liability to the buyer) would become a hindrance since VIL’s liabilities far exceed the company’s value. As per its latest quarterly results, the company had a net debt of ₹1.14 lakh crore on December 31, 2019.
3) The government has envisaged a three-player market but if VIL were to exit, only two private players (Bharti Airtel and Reliance Jio Infocomm) would remain, raising concerns over a duopoly.
4) For subscribers, this would mean inevitable tariff hikes. Intense competition has kept tariffs rather low till now and India has been known as a telecom market with some of the cheapest rates anywhere in the world.
VIL is seen as the most vulnerable of the three private telecom companies since it is already overleveraged and the promoters have, in the past, expressed their inability to shoulder the responsibility of the huge AGR payout.
The promoters of the company have already written off billions of euros in the last decade and have pledged not to invest more money into the loss-making Telecom Company.
VIL has said repeatedly in the past that it would have no option but to file for bankruptcy unless the government offers relief in payment of AGR dues. To perhaps seek a moratorium on this payment, VIL Chairman, Kumar Mangalam Birla, met Telecom Secretary Anshu Prakash, along with senior officials of his company on Tuesday (February 18) but made no comments after emerging from this meeting.
However, senior counsel for VIL, Mukul Rohatgi, told TV channels earlier this week that if the DoT does carry out its threat of encashing bank guarantees of telecom companies for failing to fully pay AGR dues, VIL will have to shut shop.
“This would make 10,000 people jobless and cause inconvenience to 30 crore subscribers,” Rohatgi added.
Analysts at Goldman Sacs said in a note that Vodafone Idea’s cash balance stands at just $1.8 billion (₹11,440 crore) against an AGR liability of $6.3 billion and that the company’s revenue market share could see a sharp decline in the coming quarters in case of no government relief.
Another analyst at a Mumbai based brokerage had said last month that even the 25% tariff hike VIL implemented in December 2019 was insufficient to fund its annual capex.
Without the tariff hike, this company hardly had any cash to support itself over the next 2-3 quarters, even when the sword of AGR payout was not hanging on its head.
Brokerage IIFL has suggested a number of options the government could use to collect AGR dues while also helping the company survive. These include setting off GST credits of ₹7000-8000 crore for VIL and similar amounts for the others; government accepting AGR payouts be telcos based on their self-assessment instead of the larger amounts it says are due from each telco as per its own calculation; lowering GST rate from current 18% and cutting other levies like the spectrum usage charge.