The options to survive seem to be running out for India's third-largest service provider, Vodafone Idea Limited.
While it was already struggling with a massive debt of INR1800 billion ($24.19 billion) and a limited cash reserve of just INR3500 million ($47 million), the recent denial of its appeal to recalculate Adjusted Gross Revenue (AGR) dues has put Vodafone Idea in a sticky position.
This massive debt is primarily because of a Supreme Court judgment levied in 2019 in the 15-year old AGR case. The judgment favored the government, which believed that non-telecom service revenue should be part of the AGR calculations.
As a result, Vodafone Idea needs to pay $7.8 billion as AGR dues and late fees to the government. Out of this, the service provider was supposed to clear payments of $3 billion between December 2020 and April 2021. The company has been scouting for an investor for some time now, but it hasn't been successful.
Vodafone Idea's efforts to get a breather in the payment timelines or to appeal for recalculation of the amount that needs to be paid as AGR have been denied by the court.
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Recently, Kumar Mangalam Birla, chairman of Aditya Birla Group (ABG), stepped down after writing to the Department of Telecommunications (DoT) that he is ready to give up his stake in the company to ensure that it continues to operate. Birla's letter and subsequent departure led to a massive drop in the company's shares.
The UK-based Vodafone Group owns 44%, while ABG holds a 26% stake in the company. Both the major promoters have decided not to infuse more funds in the company.
Vodafone Idea has more than 250 million subscribers in the country. Further, its assets include significant enterprise business, a data center, and a fiber network of around 165,000 km. While Vodafone has been present in India since 2007, it merged with Idea Cellular, part of ABG Group, in 2017 because both the companies were struggling to sustain in the wake of crippling price war after Reliance Jio launched 4G services in 2016.
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Limited options
With limited options, it is a possibility that the government takes over Vodafone Idea and merges it with ailing state-owned Bharat Sanchar Nigam Limited (BSNL).
BSNL operates in all circles (service areas) in India except in Delhi and Mumbai. However, the telco has been struggling to compete with private telcos because it is yet to start offering 4G. BSNL also struggles with legacy network infrastructure and a bureaucratic way of functioning.
"BSNL and Vodafone Idea merger [if it happens] helps both the companies. BSNL, which is yet to launch 4G services, can leapfrog with Vodafone Idea's network. It will also benefit from Vodafone Idea's processes and way of functioning. On the other hand, Vodafone Idea escapes bankruptcy. However, the merger will work only if it is handled properly," said Neil Shah, partner and vice president – Research at Counterpoint Research.
"This also helps the government because this way it is able to revive BSNL and also prevents India from becoming a duopoly. Moreover, the government can also use this opportunity to build a nationwide 5G network, like Malaysia, which is in line with its vision to bridge the digital divide and ensure data sovereignty," added Shah.
In this option, the enterprise business of Vodafone Idea can be merged with BSNL or may exist as a mobile virtual network operator (MVNO).
Another possibility is that the government brings in an investor, foreign or domestic, to take over Vodafone Idea. "This is a long drawn-out process, and the danger is that the uncertainty may drive a significant chunk of subscribers out of Vodafone Idea's network," said Shah. It is also an option that the company reduces its pan-India presence to few service areas.
In case Vodafone Idea is forced to exit, India will become a duopoly with Bharti Airtel and Reliance Jio dominating the market.
It is intriguing that India is the world's second-largest telecom market, but Vodafone Idea, a player with a robust infrastructure and subscriber base, is unable to find an investor. The uncertain regulatory environment coupled with no policy roadmap is the key reason for this.
** Update. After this story was published, news emerged that the Indian government has rejected the Birla Group’s offer of its stake for free. And Kumar Mangalam Birla has resigned. Analysts at New Street Research suspect that bankruptcy of Vodafone Idea is imminent.