With telecom operators exhausting options to prevent a payout of spectrum usage charges and licence fee accrued over 14 years amounting to Rs 1.47 lakh crore, a further strain on the highly leveraged telecom sector could result in an erosion of value and further consolidation of a three-player industry. This could, in turn, lead to companies further shying away from investing in operational infrastructure, which could further worsen quality of services for consumers.
Incidentally, the development comes on a day when official data released by the Telecom Regulatory Authority of India (Trai) showed that Reliance Jio has pipped Vodafone Idea to become India’s biggest mobile company by subscriber market share.
According to the data, as of November 2019, Jio had 36.99 crore mobile subscribers, while Vodafone Idea had 33.63 crore users. Bharti Airtel had 32.73 crore.
In the wake of the Supreme Court ruling, the operators are evaluating a further course of action including curative petition to challenge Thursday’s review ruling and approaching the Department of Telecommunications (DoT) to seek a relief on the payment deadline. However, top executives at telecom companies said DoT was unlikely to provide any further relief.
Bharti Airtel said in a statement: “The money now required to pay punitive interest, penalty and interest on penalty which forms nearly 75 per cent of AGR (adjusted gross revenues) dues would have better served the digital mission of the country”.
Sector analysts have pegged that the payout of past penalties could result in further consolidation of a sector that has already been reduced from 10 telecom operators to three – with Vodafone Idea facing the most music.
According to a note by Goldman Sachs, Vodafone Group, which has invested more than $30 billion over the last 12 years has seen the market value of its stake in the existing Indian entities — Vodafone Idea and Indus Towers — reduced to $4 billion.
To settle the dues companies owe to the DoT, they have relied on funds raised from the market, proceeds from divestment of assets and a relief provided by the government in form of a two-year moratorium on past spectrum dues that would result in freeing up of cash flow for firms in the range of Rs 9,000-10,000 crore annually.
Notwithstanding the fact that the payout could result in a bumper gain for the exchequer days ahead of the Union Budget, it is believed that an even more consolidated sector could impact government’s revenues in the longer run. “We note that Vodafone Idea Ltd had a gross debt of $17 billion as of September 2019, including $13 billion directly payable to the government.
In addition, we note that a consolidated market is likely to be less conducive for future spectrum auctions – in recent years, supply of spectrum has been higher than demand, and as per latest available data, 30 per cent of total spectrum put up for auction remains unsold. Thus, a consolidated market could potentially put downward pressure on both spectrum demand and spectrum pricing, which would negatively impact the government’s revenues,” Goldman Sachs noted in a research report.
In a statement, the Cellular Operators Association of India (COAI) said that the Supreme Court’s dismissal of the review petition is the “last straw in contributing to financial distress and it remains to be seen whether the industry will be able to recover from this setback”.
Soon after the October judgment of the Supreme Court, operators started tapping the markets and putting assets on the block to raise funds — that traditionally businesses use to expand businesses or deleverage balance sheets — for paying off dues accumulated over 14 years within a period of three months.
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