Can govt's stake breathe new life into dying Vodafone Idea?

A government with an avowed desire to move out of the business of doing business has once again entered the corporate arena. It has converted the interest due on the spectrum auction and adjusted gross revenue (AGR) into equity stakes in Vodafone Idea (Vi) and Tata Teleservices. The government shareholding is now as high as 35.8 per cent while that of Vi itself has fallen from 44.39 to 28.5 per cent. In the case of Tata Teleservices, the government equity stake is much lower at 9.2 per cent. Despite an initial negative reaction , the stock market has renewed its faith in the deal and Vi share prices have risen again.

The decision to opt for government equity has clearly been taken in a bid for survival right now by Vi. The company has been struggling to pay the Rs 58254 crores of interest due on various arrears. It has paid Rs 7854 crore so far. The offer to convert the interest into equity was made last October by the Department of Telecom in order to provide relief to telcos left with a huge burden of dues for spectrum auction instalment and adjusted gross revenue (AGR) arrears.

The option of converting the interest to equity had been offered to all the telcos. But Airtel declined despite its dues of Rs 43980 crores. It has already paid Rs 18004 crores and is confident of making the remaining payment as well.

The question is, how has a situation arisen in which a government which has declared that it does not want to be in the business of doing business, has gone back to investing in private industry. The story began way back in 2008 when the then UPA government sought to extract the maximum revenue from the sale of spectrum to the telcos. It extracted its pound of flesh, but the telcos had to invest heavily in setting up 3G infrastructure subsequently. In addition, they had to face the second auction of 2G spectrum after the Supreme Court cancelled the earlier auction in 2012.

Stiff competition in the market with the entry of Reliance Jio in the 4G space and its rock bottom rates came as another blow. The final straw was the long drawn dispute over payment of statutory dues by the telcos which was taken to the Supreme Court. The net result was that the burden of payments impacted the financial viability of Vodafone which had by then merged with Idea Cellular of Aditya Birla group. The package of relief measures announced last year was largely formulated with Vodafone Idea in view to ensure there was a viable third option for consumers in the telecom market. In its new avatar, Vi's shareholding pattern has altered significantly with the government having the majority stake. While Vodafone's share has fallen, that of the Aditya Birla group has also dipped to 9.2 per cent. Concerns are now being voiced over whether the government will abide by its stated commitment to the promoters of keeping a hands off policy towards the company.

It can only be hoped that this assurance is met given the fact that government has not met with much success in managing public enterprises in the telecom sector. BSNL and MTNL have run up enormous losses estimated at over Rs 47000 crores. It would thus be unwise for the equity stake to be used to impose controls either through the political or bureaucratic route over the company.

Unfortunately past experience has shown that neither political leaders nor bureaucrats can refrain from meddling in the affairs of government-owned companies. For instance, the downfall of Air India was the decision to merge it with the relatively profitable domestic carrier, Indian Airlines. The merger was an abject failure owing to the clash of cultures between the two airlines. In addition, the losses of one airline had to be borne by the more profitable entity. To compound the issue, the government decided to purchase a large number of new aircraft for which the airline struggled to make payments.

Similarly, in the case of MTNL, little effort was made to bring the company into the modern era after cellular phones began to rule the telecom sector. The huge excess manpower was sought to be reduced by offering golden handshakes but it also led to personnel literally downing tools as they waited for their tenures to be over. The company could have remained a significant player in the fixed landline segment while pivoting to also offering cellular services. But little thought was taken towards upgrading or reviving the company which has now become a white elephant that needs to be divested or wound up.

In this backdrop, it cannot be over-emphasised that the role of the government needs to be simply that of an investor in Vi. The telecom department has been seeking to underline that it would remain in that capacity alone and statements by company spokespersons to this effect have cheered the markets.

At the same time, it must be noted that the decision to provide relief to Vi was a welcome though belated one. In case the company had to close down, there would have been many repercussions. It would have created ripples in the financial sector which is in the process of recovery. It would also create enormous hardship by creating job losses for lakhs, not just due to direct but also indirect employment in ancillary organisations. And finally, it would lead to the creation of a duopoly in the telecom sector, giving two companies dominance at the cost of consumers' welfare.

For the time being, therefore, the telecom sector looks in better shape to meet consumer needs. But much will depend on whether Vi is able to lure fresh investments and emerge as a healthy and profitable player in the market in the long run.