Telecom Bankruptcy | Learning by Proxy

A lot of value stands to be destroyed in the coming months in the telecom industry.

Telecom was the ticket to great wealth for governments around the world. Governments were hiring game theorists to determine how to sell air - quite literally. In the case of India, things did not really turn out the way the government had imagined. This hot potato was a creation of the previous BJP government and the current one is left to deal with its consequences.

Surviving Odds

About a decade ago, if you had wanted a mobile connection, you had almost a dozen operators to choose from. The Indian telecom landscape resembled the Indian political landscape with several regional operators such as Aircel and the competition was good for the customer. Tata Docomo brought the prices down to 60p per minute billed every second at 1p per second.

Then followed the 2G scam which saw the withdrawal of 2G licenses to some of the players. Along with that, the prices had fallen so low that it was no longer possible for many of the players to sustain their operations.

Normally when a company caters to B2B as well as B2C customers; the former is meant to bring in the top line (increase revenue figures) and the latter is meant to bolster the bottom line (profits). An individual has little in the form of negotiation power to bring the price down. Curiously, the telecom industry in India was operating in reverse. The consumer business was barely breakeven.

Several mergers followed and Reliance Communications went into bankruptcy.

When the 2G licenses were being auctioned, the government had agreed to defer the cost of the license by taking a percentage of the income that was generated by the companies to whom the licenses were being issued. This was back in 2000 under the Vajpayee government. That became an issue in 2008 when the government decided that it had claims on all kinds of revenue that a telecom company generated including rent and interest. This resulted in ballooning costs. Further, as the case dragged on through the courts for a decade, the amount kept rising and finally, the supreme court sided with the government.

Vodafone was born in India in 2007 through the acquisition of Essar's Hutch. It was billed as one of the biggest deals in its times. Priced at $19 Billion (greater than WhatsApp) it really was! The Indian government slapped Vodafone with a $1.2 Billion tax for the acquisition retrospectively.

Vodafone grew in India and as the consolidation continued, it eventually became Vodafone-Idea. Two loss-making companies merged into one enormously loss-making company.

The loss at the Supreme Court meant that this new enormously loss-making company owed close to 96,000 Crores ($12 Billion) to the government. While the company wants this figure to be looked at again by the Supreme Court, the court has refused. When a company which is valued at $3 Billion is expected to pay $12 Billion in fees, what do they do?

Vodafone Plc, which owns a 45% stake in the debt-laden Vodafone Idea Limited (VIL), has proposed to offer its stake for free to lenders/financial institutions or to the state-run Bharat Sanchar Nigam Limited (BSNL), on the condition that they take over the ailing telco, Business Standard reported citing banking sources familiar with the matter.

Lenders told the publication if BSNL takes over the company, the dues paid by the merged BSNL-Vi entity would be a book entry.

The development comes less than two months after Aditya Birla Group (ABG) chairman Kumar Mangalam Birla offered to hand over the group’s 27.66% stake in Vi to any public sector or domestic financial institution that can keep the cash-strapped telco afloat.

Source: Economic Times

For the Birlas as well as for Vodafone, this pursuit is starting to resemble a bonfire made out of money. Both have refused to infuse any further capital into Vi which is the name of the combined entity. Even if they infuse money, there is no hope for the entity for the next 20 years. They are offering to give the company away for free to anyone who wants to take it. FREE! FREE! FREE!

It is worth noting that lenders have an exposure of Rs 25,000 crore to Vi. Besides this, the beleaguered telco owes the government Rs 96,270 crore in spectrum payment dues and Rs 58,254 crore in AGR liabilities, of which Rs 7,854 crore has been paid.

Source: Economic Times

Who are the lenders? The very same banks that lent to Kingfisher Airlines and Jet Airways. In my post two weeks ago, I had explained how big the haircut was which the lenders had to take in the Bankruptcy proceedings of Jet Airways. Over 90%. One can expect more of the same if Vodafone and Birla were to step away. The lenders, the government and quite possibly the employees - all of them would be screwed.

To drive the point home, Kumaramangalam Birla resigned from the Board of the company last week.

For the Government

The state-run company, BSNL has one foot in the grave. Reliance has managed to take away most of the rural market from BSNL. If Vi fails, it would turn the telecom sector in India into a duopoly. Airtel and Reliance will be the only two left (apart from BSNL). This would be hugely devastating for customers who are bound to see prices rise. This is easy to pull off when there are only two players.

It will be even more devastating for the government. If Vi were to go into bankruptcy, the government might be able to recover only a very small percentage of the 1.5 Lac Crores that it has piled on as AGR on the company. They would be thankful if they get 10% of it.

But there is a bigger problem. 5G Auction.

The government auctions access to airwaves and they charge companies a fee to access the bandwidth. If there are more players, the value of those airwaves go up and so the government stands to benefit.

If the industry has only 2 players left, they can expect a precipitous drop in pricing of 5G airwaves and this would hurt them a lot in the long run.

Ultimately, the government has managed to land itself in an unenviable position in this case. There would be much to lose in every case. Write off AGR and fees to let Vi survive; Take the free equity and merge it with BSNL; Let the company go into bankruptcy; all options are bad options. Which is the least bad?

Bending

Cairn Energy was a poster child of the energy business in India 15 years ago. Today, they have sued India internationally and won a case.

India had made retrospective tax changes and slapped Cairn energy with a Billion dollar tax bill. Vodafone was also slapped with a similar tax bill retrospectively. Cairn Energy had not completely sold its shares in the Indian business to Vedanta so they were forced to cough up $1.2 Billion. Cairn sued, won and the contours of the judgement said,

Cairn Energy started the process of filing applications in various countries to enforce its award even as it held talks with the Indian government to come up with an amicable resolution.

In May, it filed an application in a US court seeking seizure of Air India’s assets, claiming it is the alter ego of the Indian government. It has filed similar applications in Singapore, Canada, Mauritius and the Netherlands.

However, earlier this month, it successfully managed to freeze residential real estate owned by the Indian government in Paris, impacting around 20 centrally located properties valued at more than $20 million. It was the first step in taking ownership of the properties and ensured that the proceeds of any sales would go to Cairn.

In a statement, Cairn Energy reiterated that it prefers an amicable settlement with the Indian government and has submitted a detailed series of proposals to the government since February 2021. “However, in the absence of such a settlement, Cairn must take all necessary legal actions to protect the interests of its international shareholders,” it said.

Source: The Print

Faced with the prospect of public shaming internationally, the government has woken up and decided to make some changes. Changes in legislation will allow it to settle these disputes.

The Indian government on Thursday proposed refunding companies involved in disputes over past tax payments, aiming to settle long-running litigation over sums totaling billions of dollars with companies including Vodafone (VOD.L) and Cairn Energy (CNE.L).

The amendment to the tax law, applicable after approval from both houses of parliament and president, could help settle at least 17 disputes over tax payments amounting to 500 billion rupees ($6.7 billion) or more, analysts said.

Source: Reuters

For a government that claimed to be making 'doing business in India' easier, its obstinate adherence to a bad decision made by the previous government and following through on the same to this point seems perplexing at best.

As they say, do not attribute to malice what can be easily explained by incompetence.

Fascism

Umberto Eco was a novelist who also wrote on many other topics. He wrote about fascism as well. Here are the 14 elements he said any fascist regime has -

  1. The cult of tradition.

  2. The rejection of modernism.

  3. The cult of action for action’s sake.

  4. Dissent is treason.

  5. Fear of diversity.

  6. Stoking the social reservoirs of frustration.

  7. The obsession with conspiracies.

  8. The enemy is both strong and weak.

  9. Life is a permanent state of war.

  10. Elitism in the reverse, or popular elitism.

  11. Everyone is a hero, and death is his reward.

  12. Machismo and misogyny.

  13. Selective populism.

  14. Newspeak is the new lingua franca.

Source: The Wire

Can you think of leaders who adhere to many of these elements?

Also

You just have to listen to this. And you can think of which roles in the list of 14 this adheres to.