Vodafone Idea: Industry experts analyse the co’s next steps

Two telecom industry veterans share their views on the government’s involvement in Vodafone Idea.

Sanjay Kapoor, erstwhile CEO of Bharti Airtel India and South Asia and chairman of Micromax:

“First, let’s look at the issue as an abnormal circumstance for the telecom industry as well as the country. India was facing a situation where an oligopoly in telecommunications was getting decimated to a duopoly. That’s the time the industry sought government help. Therefore, all these bailout packages were a net result of the government acting as a saviour for the industry and trying to retain the oligopoly structure which is good for consumers, industry, and the nation.

Now, under those circumstances, the government did what it did. The fact of the matter is, everybody at that stage knew that government action alone will not be enough for Vodafone Idea Ltd. to be sustainable and competitive in the future. The choice that VIL is making today of wanting to convert their interest levies etc. into government equity, at the end of the period, is basically spelling out two things. First, it spells out the fact that a lot of capital is required to stay afloat, and to be competitive and fund the 4G to 5G transformation, and that additional capital is not easy to come by. The company is left with little choice but to move toward converting the interest dues to government equity.

I don’t imagine this can be a preferred route for any private-sector operator, where that private sector operator hands over a significant stake to the Government of India. On the other side, for the Government of India to accept it… well that’s a bailout promise it had made, so the government is just honouring that. The government has been pretty clear that it should not be in the business of doing business, which is a fairly well-stated position. The government is doing so only under exceptional circumstances it is faced with.

Nature of government as shareholder
If the government tries to run Vodafone Idea being the largest shareholder, then we return to the basic question of asking – does it have a track record of running such businesses successfully? Where BSNL and MTNL are today is a good enough reason for the government to refrain from getting into telecom businesses. I am sure the government will think through this and is aware of its handicaps in running telecom operations and being competitive against the private sector operators like Reliance Jio Infocomm Ltd. and Bharti Airtel Ltd.

If the government ends up acquiring this stake eventually, they should try and sell their stake to someone who can amass the requisites to sustain this business and make it competitive.

The government will have to think out-of-the-box. There are still a couple of years before the equity conversion happens and the government policies during this period can spruce up the attractiveness of the third operator. Converting government debt to equity is an out-of-the-ordinary situation that is clearly nobody’s choice – neither the government’s nor Vodafone Idea’s. But the situation is such that the amount of capital required to be competitive is just not available given VIL’s current balance sheet and business.

Also, being an active shareholder cannot be the government’s preferred route and it has expressed so. But, tomorrow, if the existing promoters don’t want to run the company anymore, somebody has to catch the can. Who does so at that time is a matter of debate. The government knows that running this is not its skill and will find a via-media where it should either induct professional management or sell its stake to maybe a private equity entity or a strategic investor. The government trying to run it, even by default, may not be a good outcome.

Packaging the stake for future investors
We cannot reach the destination and then find a via-media to suddenly eject. That may be haphazard and knee-jerk. There is a road to be travelled from now till the debt-to-equity conversion date.

What the government does on policies around telecommunications — the price of 5G spectrum, the right-of-way norms, the fiberisation of the nation, Bharat Broadband Network Ltd.’s role in unbundling fiber and giving it to private players, decisions on adjusted gross revenue, and spectrum usage charge — may become pivotal to the final outcome.

Good decisions by the government during this period can be catalysts to attract investment for VIL and raise the probability of the government selling their equity to someone capable of making VIL’s business sustainable. Of course, VIL will have to raise prices and lift up the ARPUs. I hope the Vodafone Idea promoters and management steer the ship well till then!”

R Chandrashekhar, former Union Telecom Secretary and past President of NASSCOM:

“A few things have changed recently in India’s telecom sector. There has been a readjustment of tariffs and that has certainly changed the prognosis for companies like Vodafone Idea Ltd., apart from the others. With the moratorium and conversion of dues to the government into equity, the company has a fighting chance of nursing itself back to financial health. In which case, the government does get to retain the net present value of its dues. Having said that, it is not as if this is a panacea and that the problems are over for VIL or the government.

For VIL to prosper or even survive, it is not just a question of tiding over the current issues and constraints which it faces, but also how well it positions itself for the future. That would depend on how much investment it makes on 5G, how much preparation it does for the inevitable 6G, and so on. All of these impending developments will require significant additional investment — in spectrum, equipment upgrade, etc. — which VIL will need to do to retain and add new subscribers, particularly the premium category of corporate customers and others. It is not clear to me that the current business dynamic enables the company to generate that kind of money. The question will still remain whether the company will be able to raise additional resources based on this reprieve, whether it can mobilise additional money for future growth and expansion with this altered and enhanced equity base. That will be closely related to the continued and sustained viability of the operations of Vodafone Idea.

Government’s objectives as shareholder
On the conversion into equity, the government has to take a call on whether it is preference equity or common equity. So far, indications are the government will be issued common equity. The company has also clarified that the government has not yet sought a board seat or any management rights. Which would mean that the promoters would still effectively exercise management control and decision-making. Since the government equity would be more than 26%, it does give certain rights provided to major shareholders under company law.

Does this transfer the problem to the government? This is one way in which the government is attempting to protect its revenue without imposing a crushing cash outflow burden on a telecom operator that cannot afford or sustain that at this point.

This whole arrangement has been offered by the government with three intentions in mind. The first is to safeguard revenues that are owed to the government that would have otherwise vanished if the company went under. That is the clear objective and immediate provocation — if not an immediate inflow, then to safeguard the NPV and at some appropriate time in the future to be able to encash it if it so decided. The second objective is to offer a reprieve to Vodafone Idea which was struggling financially and to enable the company to stay afloat. Third, which is related to the second, is the government’s stated intention of sustaining a three-private-player market, apart from BSNL and MTNL, which as everybody knows, are not in a position to offer a good commercial fight.

Having said that, the government’s role as a shareholder would be to support the company’s efforts to nurse itself back to financial health. Given that the owners have not demonstrated any self-destructive tendencies and have shown that they want to do everything possible to keep the company afloat, while at the same time expressing their inability to invest further, their position is clear. These are the parameters within which the revival has to be done and to that extent, the government would play a supportive role, not a very proactive one because that is not its forte. I don’t expect such a contingency to arise.

The government would want to ensure VIL’s financial health remains safeguarded and that it is on the path to financial recovery. I expect the government to just keep a watchful eye on the management to that extent. Beyond that, I don’t think there will be any attempt to do any back-seat driving or try to manage the operations. There are already a pair of government companies, and the government has its hands full — it has no need or desire to get another government company in the telecom space.

Pathway for government to extract value
The government has already indicated its intention to do this conversion via the Specified Undertaking of the Unit Trust of India. In that sense, the pathway also stands established. The equity is with the government and SUUTI is an instrumentality to hold that equity. At any point when the financial health of Vodafone Idea is seen as adequate, be that one month from now or 10 years, SUUTI could start putting the stake into the open market in a staggered manner, as has been done with other SUUTI private-sector holdings. That’s the pathway that seems a possibility at some time in the future where the government would have got its revenue.

Shift in market dynamics
The single most important factor in this situation would be the market conditions in the telecom sector. For a long time, the conditions were not conducive to raising tariffs. Now, that has happened in December 2019 and then again very recently. Many argue this has significantly altered the profitability and viability of the operators.

Also important is that the government has declared its intention of trying to strike a balance in the future between getting revenue and ensuring that the benefits of the telecom revolution are passed on to people, with greater use of 5G, smartphones, broadband, etc. That could mark a shift by the government from an emphasis on getting direct revenues here and now at various points—whether that is spectrum auction, licensing, etc.—to a more calibrated approach where the effort is to balance between direct revenues and indirect booster effects on the economy which will again translate into revenue buoyancy as well. That is a better strategy for the government to adopt. It is a mistake, in my opinion, to treat telecom as more important for direct revenue rather than trying to maximise the economic multiplier impact it can have — and the bounce in revenue from such impact. If that hard-to-find balance can be reached—there are all kinds of regulatory and other issues involved—it augurs well… not just for the telecom sector but Vodafone Idea in particular.” BloombergQuint