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Vodafone – Shut up, or Shut down

The Vodafone CEO promptly retracted his statements saying that they had been distorted and did not give the correct impression

India’s telecom sector has been struggling amidst an acute financial and business crisis, which has been further aggravated by the recent Supreme Court decision, which foisted a liability of over Rs.1.3 lac cores, towards license fees and spectrum user charges on the telcos. The reported quarterly loss of Vodafone Idea, of Rs.50922 crores, the biggest ever quarterly net loss reported by an Indian entity for September 2019, comes as no surprise. This loss comes after providing for Rs.25680 crores that Vodafone has to pay to the DoT pursuant to the Supreme Court order. Vodafone said in a statement that its ability to continue as a going concern is dependent on obtaining relief from the government and a positive outcome of its proposed legal remedy. Apart from the huge financial liability inflicted on Vodafone by the Supreme Court order, it is worth noting that it has been consistently reporting huge quarterly losses and that its subscriber base has fallen from 322 mn to 303 mn. The company’s CEO pertinently mentioned that the company is highly focused on a rapid expansion of its 4G network, seeking to quell fears that its liquidation was imminent, as had been hinted in London by its global CEO Nick Read.

While the Indian telecom sector has been struggling due to cut-throat competition, high spectrum costs and policy flipflops by the government, the sector’s woes have been aggravated by the recent Supreme Court order, which laid rest to a 16 year controversy and held that telecom operators must pay license fees and spectrum user charges on the basis of the AGR ie. aggregate gross revenue, which includes other income such as from rent, dividend, interest, etc. and not just on the basis of user tariff charges. Among the worst sufferers due to this judgment is Vodafone Idea, which is required to pay about Rs.40000 crores, a huge and alarming figure, which is now partly reflected in the record quarterly loss declared by VIL. This judgment comes at a time when Vodafone has been consistently incurring losses and it has a debt of Rs.99000 crores. This loss erodes more than 50% of the net worth of VIL and requires an additional infusion of promoter’s capital, which has been refused by its two promoters viz. Vodafone UK and the Aditya Birla Group, who together have pumped in over Rs.1.70 lac crores in the company so far.

The Supreme Court’s order has raised alarm bells for VIL. Its local partner the Aditya Birla Group approached the government for relief and said that in such a situation the telecom business in India is clearly unviable and unsustainable and it ruled out any further investment in the company. Its global CEO Nick Read said in London that unsupportive legislation and excess tax has reduced the value of its India investments to zero. He said that Vodafone UK will not infuse any further equity into India and said that if the government does not give relief VIL could go into liquidation. That statement alarmed the vendors to VIL, including Nokia, Ericsson, etc. to whom it owes over Rs.8000 crores and also the other shareholders of VIL. The top government babus expressed disappointment over the tone and tenor of Nick Read’s remarks, prompting the Telecom Minister, Shri Ravi Shankar Prasad to speak to Kumar Mangalam Birla, the Chairman of VIL. The Vodafone CEO promptly retracted his statements saying that they had been distorted and did not give the correct impression. He expressed confidence in the India story and said that Vodafone intends to remain here.

As per the Supreme Court order, the DoT has directed the telecom companies to pay their dues within a period of three months. The DoT has not sent a demand notice but has asked the telcos to do a self-assessment of their liability and pay up. The embattled telecom industry is in no shape to pay such huge amounts and has asked the government to work out a relief package. A committee of secretaries has been set up to consider the demand and save the industry and the likely reliefs are a moratorium of two years to pay, a waiver of interest and penalty and perhaps a cut in license fees/spectrum user fees from 8% to 5% which would be a substantial relief. With such relief measures, liquidation of Vodafone as said by Nick Read, it’s global CEO is ruled out. The government itself cannot afford the failure of a large foreign investor like Vodafone in India and the enormous bad press it would attract in the world market,  at a time when the PM is desperate to attract foreign investors to India. But in these flipflops, the question that remains unanswered is as to why did Nick Read behave like an Indian politician and retract his statements, saying that they had been distorted by the Indian media.

 

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