The Supreme Court ruling last Friday asked telecom firms, including Vodafone Idea Ltd and Bharti Airtel, to deposit an estimated Rs 1.47 lakh crore in past dues for spectrum and licenses by March 17.
Vodafone Idea, a joint venture between Britain’s Vodafone Group Plc and India’s Idea Cellular, owes roughly $3.9 billion in dues and the company has said that it would not be able to pay this amount right away if they wanted to survive.
The company’s chairman Kumar Mangalam Birla had in December said it would need some relief on the statutory dues to stay in business. “If we are not getting anything, then I think it is the end of the story for Vodafone Idea,” Birla had said. “It does not make sense to put good money after bad... We will shut shop.”
On Tuesday, he met Telecom Secretary Anshu Prakash as he looked for options to keep the company afloat. After the meeting, Birla said he “cannot say anything at the moment.“
Since the ruling, the company’s credit rating has been downgraded by two rating agencies.
On Tuesday, India Ratings and Research (Ind-Ra) has downgraded its rating on non-convertible debentures (NCDs) of Rs 3,500 crore “on account of severe stress on the company’s near-term liquidity after the Supreme Court’s ruling”.
A day earlier, Care Ratings had downgraded the company’s rating on its long-term bank facilities and non-convertible debentures on account of “significant erosion” in the overall risk profile of the company.
Vodafone’s share price
The Bombay Stock Exchange on Wednesday sought clarification from Vodafone Idea on the significant movement in price, “in order to ensure that investors have latest relevant information about the company and to inform the market so that the interest of the investors is safeguarded.”
Vodafone Idea’s shares closed at Rs 4.19 on Wednesday at the BSE, a jump of 38% against the previous day.
On the BSE, nearly 10.38 crore shares changed hands today compared to an average of 6.33 crore shares traded daily in the past two weeks, NDTV reported.
Vodafone’s stock has been on a losing spree for the past seven trading sessions on the BSE. It had plunged 43.9% since February 7. Since then, the company has lost more than Rs 5,800 crore in market capitalisation.
On Tuesday, at the BSE, the stock plunged 17.25% to trade at a low of Rs 2.83. It settled with a loss of 11.40% at Rs 3.03.
The scrip plummeted 17.64% to Rs 2.80 on the National Stock Exchange (NSE). It closed 10.29% lower at Rs 3.05.
What happens if Vodafone shuts down in India?
According to the Hindu BusinessLine, the biggest impact of a shutdown will be an increase in tariff levels by upto 25-30%.
Vodafone and Airtel had raised prices last quarter in the wake of massive losses.
Economist Vivek Kaul told the BBC increase in prices would be “a good thing, because that is the only way to have some competition in this market.”
Meanwhile, Reuters reports India will face a multi-billion-dollar hit to its economy and a tarnished reputation as a place for multinationals to invest if it cannot keep Vodafone Idea in business.
With 13,000 direct employees and loans from banks of about $3.8 billion, Vodafone Idea’s potential exit would send shockwaves through India’s economy, which is already growing at its slowest pace in 11 years.
“A default of such a large scale could increase India’s fiscal deficit by about 40 basis points,” Aliasgar Shakir, a research analyst at Motilal Oswal, told Reuters.
A 40 basis point increase in fiscal deficit roughly translates to a revenue loss of about Rs 1 trillion rupees ($14.01 billion) for the Narendra Modi’s government, when it is facing the country’s first fall in direct taxes in decades.
A shutdown could benefit Airtel and Jio as they could potentially absorb subscribers left behind by Vodafone and increase market share.
But it would essentially leave a duopoly between Bharti Airtel and Reliance Jio.
That could dampen interest in an auction of 5G airwaves expected before the end of March, Reuters says.
A former executive at Vodafone Idea, who asked not to be identified, told Reuters the risk of deterring investment was high.
“They have been beaten down by the environment here,” the executive said. ”(We’re sending investors) a very negative signal - it says the trust factor between the government and the industry doesn’t exist.”
The telcos still have some options, including filing a curative petition to the Supreme Court, although analysts see little chance of success, Reuters’ report said.
“The acceptance of a curative petition itself is an onerous task – and with the Supreme Court’s tough stance now, the merits of opting for this route may have diminished,” Morgan Stanley said in a note to clients.
How we got here
The company has said it cannot immediately pay the $3.9 billion it owes and its ability to survive was contingent on the government agreeing to a flexible payment schedule.
On Monday, Vodafone paid Rs 2,500 crore to Department of Telecommunications (DoT) and promised to pay another Rs 1,000 crore before the end of the week.
But the amount paid for now is less than 5% of the dues that the DoT estimates the company owes to the government.
The department ― which last week drew flak for ordering no coercive action even after telcos missed the January 23 payment deadline set by the Supreme Court ― is mulling the option of encashing bank guarantees given by firms when they got telecom licences, as none of the telcos have paid the full amount.
Encashing of the bank guarantees may sound the death knell for companies such as Vodafone which has been struggling to garner the dues.
A financial bank guarantee is equal to two quarters of licence fee and other dues. This amount could be in the range of Rs 5,000 crore for Vodafone Idea.
The Supreme Court last week rejected a plea by companies such as Bharti Airtel and Vodafone Idea for extension in the payment schedule and threatened to initiate contempt proceedings against top executives of these firms for non-payment.
With some telecom firms already struggling with mounting losses and debt, the additional liability has raised concerns of them defaulting on existing loans.
In its earnings statement for the third quarter of FY19-20, Vodafone said, “VIL is actively seeking various forms of relief from the Indian government to ensure that the rate and level of payments it makes to the Indian government is sustainable and it can meet its other commitments as they fall due.”
Union finance minister Nirmala Sitharaman has said she would talk to the telecom department to find out “what position it wants to take on matter”.
Vodafone has been struggling in India for a while now. Chief Executive Nick Read had said in November 2019 that in India, where Vodafone formed a joint venture with Idea Cellular in 2017, had been “a very challenging situation for a long time”, but Vodafone Idea still had 300 million customers, equating to a 30% share of the sizable market.
“Financially there’s been a heavy burden through unsupportive regulation, excessive taxes and on top of that we got the negative supreme court decision,” he had said.
Reuters had also pointed out in the report that Reliance Jio Infocomm’s arrival in 2016 added to Vodafone’s problems by sparking a brutal price war. Vodafone had already been at loggerheads with Indian authorities over tax and regulatory issues ever since it entered the country in 2007 with a $11-billion deal to buy 67% of Hutchison Essar.
(With PTI and Reuters)