Vodafone-Idea AGR Crisis: India’s crony capitalism now visible in full view

10 min readFeb 17, 2020

A few months ago, even before the AGR verdict came through, I had analysed Vodafone-Idea’s financials to determine that the company is headed down a dangerous path of bankruptcy. Immediate internal reforms, as well as external support, were needed to save it from this downward spiral.

After Jio’s entry in 2016, all major telecom operators were embroiled in a deadly battle. Jio reduced bandwidth rates exponentially, making India’s the most affordable country for Internet connectivity. However, telcos kept on bleeding money due to discounted rates and today only three players are active: Reliance Jio, Bharti Airtel, and Vodafone-Idea (a merged entity).

Keeping aside the AGR dues, VIL (Vodafone-Idea) has more than INR 1 lakh crore of debt. These loans were used to sustain the company in the last few years, deploy pan India 4G, and pay for spectrum. Thankfully, the government extended a two-year moratorium on spectrum payments to all operators, collectively providing relief of INR 42,000 crore. But this was just the first iceberg, VIL needs to get past a much bigger hurdle, and the odds are not in their favour.

The latest challenge: clearing AGR dues on-time

AGR (Adjusted Gross Revenue) is a way of determining an operator’s revenue. As part of the National Telecom Policy, 1994, licenses were handed out to telecom companies in return for a fixed license fee. Operators complained that these license fees are too high and the industry shifted to a revenue-sharing model.
The problem arises with the definition of AGR. DoT (Department of Telecommunication) says that the sum includes all revenues, from both telecom and non-telecom services.
Telcos, on the other hand, want the AGR to comprise of revenue accrued from core services and not on anything else, be it a dividend, interest, income or profit from the sale of any fixed assets.
In 2005, industry association COAI (Cellular Operators Association of India) challenged the government’s definition of AGR and TDSAT (Telecom Disputes Settlement and Appellate Tribunal) ruled in favour of the telcos in 2015.
In a dramatic turn of events, the Supreme Court upheld DoT’s definition of AGR and asked telcos to pay the remaining sum, along with interest accrued over the last one and a half-decade. Following the verdict, GoI (Government of India) is expecting a combined sum of INR 92,641 crore. This includes an interest levy of INR 41,650 crore, a penalty of INR 10,923 crore, and interest on the penalty sum of INR 16,878 crore.

In a nutshell, the central government is hoping it’ll get a one-time package of money amid a slowdown. And there’s nothing wrong with that. These companies do owe the government and can’t cry about high taxation after being active in the market for well over two decades. They understand the Indian market better than anyone and were caught napping when Jio entered.

But, it’s fishy how the central government is suddenly in a hurry to collect their dues. The Supreme Court has been clear. It wants these companies to pay within the prescribed dates since they’ve lost the case and owe the central exchequer for a long time. In line with the court’s verdict, “You are hereby directed to make the payment of outstanding dues of licence fee and spectrum usage charges by 11.59 pm on 14 February positively,” a DoT letter said.

The government has also withdrawn its January 23 order asking officers to not take coercive action against non-payment of dues. Airtel owes INR 35,586 crore and VIL almost crosses the INR 50,000 crore mark. According to this report, Jio has already settled its dues on time.

If VIL doesn’t make the payment on time, it’s safe to say the company shall end up in the bankruptcy court. New sources of raising capital are bleak, Vodafone UK is no longer interested in pumping more money, and while Idea merged in the first place to have stability.

UPDATE: The Supreme Court on Monday (17/02/2020) rejected telecom firm Vodafone-Idea’s proposal to pay INR 2,500 crore by the end of the day and Rs 1,000 crore by Friday against AGR dues, while also refusing its plea that no coercive action be taken against it. On the other hand, Airtel has paid INR 10,000 to DoT. The company said that it will make the rest of the payment before 17 March as it needs time to complete the exercise of calculating dues across 22 circles.

Practically, GoI will not get its payment on time. VIL’s share is at INR 3.5, just a couple more rupees away from being worthless. If VIL manages to make the payment, it’ll go out of business. If it can’t, it’ll still go out of business.

Who will be the ultimate loser? The Indian economy.

Now, let’s get to the crux of the story. I’ve been tracking India’s telecom and aviation sector for a long time now and the two have one thing in common: the government treats them like their cash cow. India’s spectrum rates are insanely high and yet companies are expected to provide services at dirt cheap rates. The government messed up 2G allocation and the ripple waves were felt by investors for years to come. Even in the aviation industry, a bare minimum necessity like ATF (Aviation Turbine Fuel) is highly taxed. Not to forget all the additional CUTE and Airport Development Fees.
For a moment, GoI needs to start treating these industries like critical ones. How long are you going to leech them for revenue? It’s obvious that India Inc is under immense stress, credit line’s aren’t easily available, and GDP growth is declining. Amid a slowdown, can we afford to let a big player like Vodafone-Idea go down? How do you instil confidence in foreign investors when a telco with hundreds of millions of subscribers just goes out of business overnight?
Even though the court is adamant about the pending dues, one door for a smooth turnaround is still available. DoT can back-off and provide another moratorium, or go easy on the overhead charges like interest and penalties.
I’m not defending the telcos. They’ve been extremely naive to have never considered a possibility of losing the AGR case and piling up dues in an instant. VIL deserves to be penalised, but is now the right time? As I said, payment is not coming. Do you want to save a company on the side or let it crash for nothing?
Our economy is already in turmoil, and thousands rely on VIL for jobs. I understand business needs to make a profit to survive and VIL is a colossal corporate failure. But, the telecom sector has space for more than three players and it is in the interest of consumers to have more choices.
And, if the government is willing to spend more than INR 70,000 crore to bailout PSUs (Public Sector Units) like BSNL and MTNL, why can’t it extend a similar helping hand to VIL? Keep in mind, BSNL is planning to launch 4G services in March 2020. A feat that was completed by the private sector more than four years ago.
Domestic investors are also tired of seeing companies fall like a stack of cards every other quarter. India’s ILFS Crisis was just the tipping point, followed by DHFL, Jet Airways, and more. As of January 16, the total exposure of mutual funds stood at INR 4,466- 3,389 crores in debt and Rs 1076 crore in equity.

The Modi government has a history of being soft on “acquaintances”

The rise of Jio has been a disaster for India’s internet growth because none of those figures are organic. It’s preferred to have a press release stating that “India has the cheapest data” but it doesn’t account for the predatory nature of the pricing.
If the government wants to provide easy internet access to citizens, it could do it via PSUs like BSNL and MTNL. Ideally, that’s how it works in India. An indirect mechanism of socialism, these PSUs have often carried the responsibility of subsidising resources to make them seamlessly accessible.
In the telecom department, GoI completely shifted this responsibility to Jio. It didn’t say a word against the operator when it offered free data for months and months to acquire new users. Even when it started charging, the tariff was next to nothing. ARPU (Average Revenue per User) for VIL was just INR 108, lowest in the whole world.
Even though it’s clearly visible that companies are not able to make a profit with the current tariff, DoT has reiterated that it won’t be stepping in to control it.
It doesn’t take a genius to figure that Jio wants to drain out the competition it can. Backed by a war chest of Reliance Industries, Jio can continue diluting tariff for years to come. Airtel and VIL, cannot sustain a tariff war anymore. With the VIL Crisis, the Indian telecom market is staring at a duopoly. Imagine, the country with the most affordable data and 1.15 billion subscribers, has just two telecom operators left.
At the same time, the government has been quite vocal against foreign companies like Amazon and Flipkart. Their discounts are called “predatory” and the recently drafted e-commerce policy bars them from offering deep discounts and even interferes with their internal strategy of pricing a product. The government specifically says it’s doing this to curb discounts being offered by foreign-funded companies. That money comes from private individuals/entities and those companies are taking a calculated risk while operating. Why is the government interfering here to save domestic businesses, but didn’t say a single word against Jio’s blitzkrieg? Does it mean to say a monopoly is acceptable as long as the company is “Indian”? Interestingly, after the unveiling of the draft policy, Reliance was quick to announce its plan of entering India’s e-commerce/retail segment. If Amazon and Flipkart are capped by law, who benefits the most?

At the intersection of Telecom and Aviation, everything is the same

Heard of Spicejet? It was miraculously saved in 2014 from bankruptcy when GoI stepped in and offered a line of credit. Ajay Singh started the airline and sold his stake to Sun Group in 2010. Within a few years, the airline was bleeding and its planes were grounded for a few hours. In December 2014, its net worth was a negative INR 1,329 crore, short-term liabilities of over INR 2,000 crore, and it ended 2014–15 with a loss of INR 687 crore. In a historic feat, Singh reached out to MoCA (Ministry of Civil Aviation) and decided to take back control of the airline. According to reports, he bought the airline for INR 2 and covered the debt liabilities.
India’s aviation segment is often called a “grey area” in the community. Laws, rules, and notifications are given out at whims, files stay stuck in process for months, and DGCA acts only when there’s media pressure. How was a bureaucratic ministry like this able to work so fast? What was their motivation to get Spicejet back in the sky?
Ajay Singh is the answer. He’s publicly known to be a close aide of the current government, helped it during the 2014 Elections, and coined the infamous phrase “Abki baar Modi sarkaar”. He’s also said to have played an important role in BJP’s marketing and advertising efforts.
Within no time, Spicejet had changed hands and was on its way to recovery. MoCA exempted the new owners from having to make an open offer to public shareholders as required by law, usually. Within no time, oil companies had restored fuel supply to Spicejet and a short term working capital loan of INR 600 crore was provided by banks.

Whatever MoCA or GoI did to save Spicejet was exemplary. At the end of the day, a loss-making business was turned around with minimal increase in exposure. The government worked closely with industrialists to keep aside bureaucracy and get actual work done.

But, why was the enthusiasm to save a company missing for Jet Airways?

Jet Airways Crisis was brewing for over a year. We knew well in advance that the airline is low on liquid cash and has mounting debt liabilities. We also knew Naresh Goyal, the lead promoter, was trying to find new sources of investment. The whole crisis lasted for well over six months and we saw a plane getting grounded by lessors every other day. And yet, MoCA or GoI didn’t step in.
The SBI-led consortium was supposed to provide interim funding but that kept on getting delayed until they finally rescinded the complete offer. At the end of the day, an airline with 100+ aircraft, thousands of employees, and valuable assets like slots, was left to die. The interim funding option was just being used to instil hope amid a closeby General Election. GoI portrayed that Jet Airways is just temporarily down and will be back up soon. Once the elections were done, the government didn’t give two hoots. Delaying the outburst to cash-in on votes.
Mysteriously, as soon as Jet shut down operations, it’s aircraft started changing hands. The spicy airline (Spice Jet) was all set to swift through the carcass of a dead full-service carrier. Ancient laws required lessors to fly the plane to its home base, and then return it to India when changing hands. The rule was exempted for Spicejet. All the crew swiftly changed hands as well and within no time, Jet became Spicejet. This is a brand new form of a hostile takeover.

In all honesty, Jet Airways was a bad business. It had its own set of challenges that pushed it to bankruptcy. But, the government showed no signs of trying to make a difference. Now that we look at the complete chain of incidents, the ease with which Spicejet swooped in is questionable.

The same goes for VIL. GoI shows no sign of trying to help. VIL is a bad business, but its demise will have long term repercussions on the country. Today it’s VIL, tomorrow it could be Airtel. How long will we turn a blind eye to Jio’s anti-competitive strategy?

Words by Shivam Vahia

Originally published at https://warpcore.live on February 17, 2020.