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AGR dues: Who hurts if Vodafone Idea goes down?

Telecom sector stares at big disruption in a duopoly market of Reliance Jio and Airtel with a depleted BSNL. It will surely raise telecom cost for the consumer

twitter-logoManu Kaushik | February 19, 2020 | Updated 15:46 IST
AGR dues: Who hurts if Vodafone Idea goes down?
Vodafone Idea is looking at an AGR outgo of RS 53,000 crore

The Supreme Court dismissal of modification plea of the mobile operators Bharti Airtel and Vodafone Idea last week has opened a pandora's box for the telecom sector. Through the rejection of the plea, through which telcos were seeking easier payment terms with the DoT (department of telecom), the sector is slowly inching towards a duopoly market.

In case Vodafone Idea-hit the hardest after AGR (adjusted gross revenues) ruling with a Rs 53,000 crore demand-is dealt another blow by the DoT by revoking its bank guarantees, it may shut operations in India, says the company's lawyer Mukul Rohatgi.

Meanwhile, there are reports suggesting that government is mulling over framing a new regulation to modify the definition of AGR to keep non-telecom revenues out of its purview. When that happens, the telcos and non-telecom entities would be substantially relieved from the AGR burden.

But that's going to take some time. So far, telcos like Vodafone Idea and Tata Tele have made partial payments to their overall dues, while Airtel has paid Rs 10,000 crore with the remaining amount to be paid before March 17.

Telecom sector has started assessing the impact of the closure of one or more telcos. There will be tangible and intangible effect. Intangible impact would be on the reputation of India as an investment destination which is expected to be tarnished severely.

ALSO READ:Infographic: How Vodafone Idea, Airtel got into trouble

But the biggest tangible impact of such an eventuality would be felt by consumers, banks, telecom companies, employees, tower companies, equipment makers, and the government. How?

Let's assume that if the Vodafone Idea goes down, its user base of 336.25 million would have to migrate to either of the remaining telcos - Airtel, Reliance Jio or BSNL/MTNL. It's unlikely that the network of these operators can serve additional 336 million subs. In a recent report, Bank of America Merrill Lynch has said that the the telcos networks of Bharti and Jio may not withstand load of 300 million users. These operators would require additional investment in network expansion, and more spectrum almost immediately. Of course, there will be some SIM consolidation (which means multi-SIM subs would discard some SIMs), but the remaining telcos cannot deny new customers, and in the absence of fresh investments, the overall quality of telecom services would deteriorate for everyone.

While the government has plans to hold spectrum auctions this year, it's highly unlikely that remaining telcos would be able to buy spectrum as much as Vodafone Idea currently holds. Vodafone Idea has 923 MHz (megahertz) of spectrum, the highest amongst all operators, to serve its large subscriber base. Experts say that Jio's 553 MHz and Airtel's 866 MHz of spectrum holding would be insufficient to cater to extra (over) 300 million subs. "It's also clear that Airtel, which is also reeling under the Rs 35,586-crore AGR burden, cannot further invest in network expansion to serve the acquired subs. It would be financially and operationally challenging for the remaining operators to put up more towers in a short span of time," says a telecom consultant.

ALSO READ:Vodafone Idea's lawyer warns 10,000 will be jobless if AGR dues kill company

Besides subscribers, the other big losers would be the government and banks. At the moment, Vodafone Idea owes Rs 88,530 crore to the DoT for the spectrum that it has bought in the previous auctions. This is in addition to the AGR liability of Rs 53,039 crore. The government will be impacted to the tune of Rs 1.41 lakh crore in case Vodafone Idea decides to shut shop - a point made by Aditya Birla Group chairman Kumar Mangalam Birla in December.

As per the third quarter 2019/20 results, Vodafone Idea's gross debt, excluding deferred spectrum payment liabilities of Rs 88,530 crore (above), stood at Rs 27,320 crore, with cash and cash equivalents of Rs 12,530 crore. Banks have a total exposure of Rs 1,15,850 crore towards Vodafone Idea which is substantial enough to shake up the banking system, and hurt investors' confidence.

A Goldman Sachs' report in January pointed out that banks like State Bank of India (Rs 11,200 crore), IndusInd Bank (Rs 3,995 crore), IDFC First Bank (Rs 2,500 crore), ICICI Bank (Rs 1,725 crore) and Punjab National Bank (Rs 1,027.7 crore) have a sizeable exposure to Vodafone Idea. "The banks have huge exposure to Vodafone Idea's debt and there may be a cascading effect," said the BoA Merrill Lynch report mentioned above.

The other big losers are going to be tower companies, and equipment makers. Currently, Airtel has a joint venture tower company with Vodafone Idea called Indus Tower. It's the largest towerco in the country with 125,649 towers where Bharti Infratel, Vodafone India and Vodafone Idea hold 42 per cent, 42 per cent and 11.15 per cent, respectively.

ALSO READ:AGR dues: Vodafone share price falls 15%; Bharti Airtel flat post partial payment to DoT

Airtel and Vodafone Idea are currently in the process of merging Bharti Infratel (53.51 per cent owned by Airtel) with Indus Towers. Airtel hopes to monetize the assets of Indus Towers-Bharti Infratel joint entity at some point in future. If Airtel remains the only player using the tower assets of this joint entity, the attractiveness of this entity to investors would be substantially low. Remember that tower companies make money from telcos by renting out their towers.

More operators would always generate better revenues for tower companies.

And last but not the least; there will be enormous job losses and economic impact on the GDP. Vodafone Idea provided direct employment to 13,520 people as on March 31, 2019. The number of indirect employment would be at least 6 times higher. In the past two years, telecom sector has seen shutdown of large operators such as Reliance Communications, Telenor, MTS, and Aircel. Some employees of these defunct telcos are still looking for jobs. It's hard to imagine the impact on the job market if more people join this pool of unemployed (trained) workforce.

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