If Voda can’t sustain itself as a going concern, the only option is for it to go under the IBC
With both promoters, Aditya Birla Group and Vodafone refusing to pump in additional equity, it is now clear that only a government bailout package will keep Vodafone Idea afloat, given that it has a weak balance sheet to service the ₹1.8-lakh-crore debt on its books.
What could be done?
There are three things that the government could do immediately to save the company. At the centre of Vodafone Idea’s woes is the ₹58,000 crore it owes the government in the form of Adjusted Gross Revenue (AGR) dues, of which, it has to pay ₹9,000 crore by March 2022. The Department of Telecom had earlier given a two-year moratorium on the annual payout for FY22. This can be extended by one more year for all operators, which will help Vodafone Idea get some time to put its operations in order.
At an industry-level, the Department of Telecom can amend its erroneous position on collecting revenue share on income generated from non-telecom services such as interest earned from bank deposits. This should be done prospectively through proper legislation in the light of the Supreme Court’s order on AGR.
This would also be the perfect time to bring down levies and taxes on telecom companies. The concept of revenue share was introduced in 1999, when the spectrum was given on subscriber-based criteria.
There is no justification to continue collecting spectrum usage charges when operators buy spectrum through an auction mechanism. But to avoid any revenue implications for the exchequer, the Centre can fix a minimum income benchmark, based on recent annual non-tax revenues earned from the telecom sector and adjust the licence fees accordingly.
Debt into equity
Experts have suggested that the government should convert Vodafone Idea’s debt into equity. This is a bad idea.
The government has been trying to divest its stake in many public sector companies, so taking control of a private company goes contrary to the stated policy. Besides, the government already has enough problems keeping BSNL and MTNL operational.
There has also been a proposal to fix a floor price for telecom tariffs. While this will improve cash flows for operators, tariffs have always been under forbearance in India and should continue to be so. It will also be politically difficult for the government to explain a 20-25 per cent tariff hike at a time when there has been an uptick in headline inflation.
But the key question for the policymakers is whether Vodafone Idea is worth saving and the benefit of doing so.
To be fair, some of the troubles being faced by Vodafone Idea are also due to its own mistakes in the past. Should the operator then be allowed to die a natural death as a consequence of its mistakes? If this is allowed to happen, then the telecom market will effectively become a duopoly. There is a genuine fear of consumers getting squeezed by two operators.
The biggest loser though will be the government because it will not only have to write-off most of the money owed by Vodafone Idea, but also lose out on future payments.
The best bet
It is clear that Vodafone Idea will not be able to sustain itself as a going concern without a bailout, and the only option then would be to go under the insolvency and bankruptcy process, where the debt recovery has been dismal in most cases.
The focus should be on making the sector thrive, not just survive.