Indian Telecom Sector Financial crisis: Is Vodafone Idea in troubled waters?

Telecom Sector Financial Battle

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It was not so long ago when the Indian Telecom Sector was one of the healthiest sectors in the country with high growth potential given that India has the 2nd highest subscriber base in the world but everything has seemingly gone downhill in the past couple of months with Vodafone Idea facing economic difficulties during the past 2 years with their fate hanging in the balance.

To understand this crisis better we need to have a look at what caused it in the first place and which companies seem to be hit most by this crisis. Here’s a look at the various factors at play here.

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Increased competition

Since late 2014, we have seen the entry of Reliance Industries in the Telecom Sector with their brand Jio which has been able to offer their services at very cheap prices to millions of new users across India. This has led to a massive drop in Average Revenue Per Unit (ARPU) which is the measure for the average revenue generated per user across the industry.

For instance, before 2014 most telecom companies had an ARPU of around Rs. 250 which has dropped to Rs. 130 by around mid-2019. This has led to a whole host of telecom companies going bust as they cannot survive with these shrinking margins.

Also adding to that is the competition from digital channels like Whatsapp and Facebook Messenger who are providing their calling and video chat facilities for free on their platforms and have already been able to hurt the revenues of the telcos in the calling and SMS businesses. This has also caused the telecom sector to terminate roaming charges altogether causing the margins to dwindle significantly.

Vodafone Idea could be forced into bankruptcy due to spectrum fees and fines.

Poor Customer Service

Most major players in the telecom sector have been facing the issue of being unable to provide quick and personalized customer service to most of their customers. The delayed response to customer queries leads to a drop in customer satisfaction and they often want to port their service to another service provider.

Hence, it is imperative for these companies to be able to provide a quick and emphatic response to customers’ queries and be able to resolve these queries in a timely manner to ensure a long and healthy relationship with their customer base.

Spectrum payment and licensing fees

The major issue here lies in the difference of interpretation of how the spectrum and licensing fees are calculated between the Department of Telecommunications (DoT) and telecom companies(telcos) which has led to a long drawn courtroom battle with the telecom companies being left rattled when the Supreme Court ordered the telcos to pay close $13 billion in licensing fees to the DoT.

The long-standing row between the government and the telcos is due to the difference in the way they perceive how the Adjusted Gross Revenue is calculated, with the telcos arguing that the fees should be calculated based on the revenue from their core telecom businesses while the DoT arguing that the fees should be calculated from the total revenue of all the business earnings including investments and other non-core business dealings.

This has led to widespread fear among the telecom sector with Vodafone Idea being hit the hardest with around $1.3 billion in spectrum and licensing fees to be paid to DoT by April 2022 which has been compounded by its shrinking subscriber base post-pandemic leaving the company in troubled waters.

Consequences of this crisis

Needless to say that the Telecom sector has been a pillar for the economic growth of our country and losing one of the biggest strongholds of this sector in Vodafone Idea would be a huge blow to the economy which is already reeling under the effects of the pandemic.

Vodafone Idea employs around 13000 people in India and has a subscriber base of approximately 290 million who will be left lurking in the wake of this crisis which can be devastating for its employees and will effectively create a duopoly of Bharti Airtel and Reliance Jio who are well-positioned to benefit from this crisis.

However, it is not just the telecom sector that will be adversely affected, as the banking sector also has huge exposure to the telecom sector with around $4billion in loans outstanding with Vodafone Idea alone which makes it highly vulnerable to huge losses in the near future if the company indeed is declared bankrupt.

The bankruptcy of any sort will create a duopoly in the market with Reliance Jio and Bharti Airtel the only options for India 1 billion strong subscriber base which can ultimately lead to these companies increasing tariffs which is not in the best interests of the subscribers with Airtel’s chairman Mr. Sunil Mittal routinely asking for a rise in tariffs to widen the profit margins in the telecom sector. 

This can also affect the government’s 5G spectrum allocation plan which could be implemented on a smaller scale as most of the telcos are not in a good financial state to participate in the auction.

5G Spectrum auctions have seen low enthusiasm from the Telecom Sector.

Read up on similar crisis in the Banking Sector

What is the way forward? 

In order to save the stressed telecom sector, DoT has directed all government departments to not take any action against telecom operators if they failed to clear AGR-related dues as per the Supreme Court’s order. While there was no change in the amount they had to pay, it did buy them time as they hoped for relief from the Supreme Court. There is a need for a complete reform to save the telecom sector from this crisis in this context.

The government should give up demanding AGR as a lump-sum amount, rather, it can be broken into installments to be paid over the period and get rid of the revenue sharing model that is currently in place.

Also, penalty and interest on penalty can be waived, as the Supreme Court recognizes that there was no willful defiance of the law that is an essential ingredient to attract the levy of penalty.

As this is a commercial matter, the government and telcos should also explore the Alternative Dispute Resolution (ADR) mechanism.

Since the telecom industry is crucial to India’s next wave of growth through digitalization, the government should not be blinded by short-term revenue considerations that imperil long-term prospects.

In this light, the Government should consider accepting the Telecom Disputes Settlement and Appellate Tribunal (TDSAT) ruling of 2015 on AGR.

Further, the government needs to actively facilitate shared infrastructure with policies and legislation. One way is through consortiums for network development and management, charging for usage by authorized operators.

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