We have just witnessed another episode in the evolving saga of the telecommunications sector in India. The board of Vodafone Idea (Vi) has approved the conversion of part of their liability owed to the government into equity. Thus, roughly Rs 16,000 crore of the interest on the deferred spectrum and adjusted gross revenue (AGR) liabilities will now be converted to government equity, making it the single-largest stakeholder, owning 35.8 per cent of the entity. If the conversion of debt to equity goes through the complicated processes of the Department of Telecommunications (DoT), it will dilute the shareholding of promoters Vodafone Group and Aditya Birla Group to 28.5 per cent and 17.8 per cent respectively. Chances are it will because this is part of the relief package proposed by the government itself in October 2021 to save the beleaguered operator from exiting and thus protect competition in a market rapidly hurtling towards an effective duopoly between Jio and a stressed Airtel.
To be gracious, one can see the Indian telecom glass as half full or half empty. There have been seminal achievements interspersed with colossal mistakes. While optimists like us would like to focus on the glass half-full, it would be prudent to devote some mind space to the mistakes to draw lessons from that experience. For, perhaps the best policy advice that one can volunteer is what not to do, rather than the other way round.
Telecom in India, much more than elsewhere, is not a business for the faint-hearted. The stakes are huge, running into billions of dollars and perennial litigation has been a drain on resources, used as much if not more for strategic manoeuvring as for seeking justice. Every stakeholder including the government has sought the courts’ intervention at some point or the other and not always to correct a perceived wrong. Vodafone entered the Indian market purchasing Hutch in an offshore deal in 2007 that was compliant with the prevailing law. Fairness would demand amending the law — if it was being abused — prospectively and not retrospectively. The retroactive amendment was a body blow, with Vodafone receiving a standing count.
The government has also often used the telecom sector for much-needed cash. It is relevant to ask whether the sequence of adverse events have irreversibly crippled the goose that laid golden eggs. In the Bollywood blockbuster Deewar, Amitabh Bachchan saves his own life by pointing out the fallacy of tearing into the entrails of the bird to extract all the eggs in one swoop, he being the metaphorical goose. Bachchan’s advice has been largely ignored outside the film. To cite a few examples, constituents of AGR include non-telecom revenues under the licence and part of the Rs 16,000 crore cited above is the erstwhile disputed amount and accumulated interest and penalty on the unpaid licence fee. The idea of a licence fee based on AGR is an artefact of an era when there were no spectrum auctions. Having introduced highly lucrative spectrum auctions, the government could have eschewed other forms of licence fee from operators that bid for spectrum, including the spectrum usage charge (SUC). A nominal administrative fee could have been charged to administer licences. In addition, allowing “back door entry” into the mobile sector in 2003, the noxious spectrum assignment by the “first come first served” (FCFS) method of 2008 and looking the other way when a deep-pocketed Jio aggressively entered the market in 2016 are instances of inequity that have had a debilitating impact on competition in the sector.
Vodafone Idea, Airtel and Jio are all professionally managed companies with arguably equal access to technology, network services, financial and marketing skills. One would expect competition to thrive in such a scenario that could well have become the envy of the world. But access to government, seemingly is unequal (at least in outcomes) and that is the enduring lesson from the two decades or more of previous experience. The system ought to correct this failing and should not only be fair but also be perceived to be fair to all entities. Sometimes in India, inertia results in decisions that favour one over the other operator not because there is bad intent, but because the system is such that the status quo is the dominant response. That should also be studiously avoided to the extent possible by summoning high-level intervention.
Back to the present and the fortuitous opportunity of the moment. In the last few years, the government has been struggling to bail out a heavily indebted industry, the proximate reasons for which, (a few also stated above), are an intense and debilitating price war, an unreasonable definition of AGR, an extractive spectrum auction regime and, of course, the march of technology impacting the revenue streams of operators straddled with legacy networks adversely. The implementation of this relief package means the Government of India will own stakes in two out of four major telecom operators in the country, namely BSNL (100 per cent) and Vi (35.8 per cent). With the exception of China, no other country in the world has wholly-owned government entities in the telecom sector. And in recent times, even the Chinese government has been encouraging private sector participation to boost competition in a market that has thus far witnessed monopolistic and unfair competition. In France and Germany, the government has diluted its stakes in erstwhile public sector entities to a minimum. Telecom almost everywhere is the domain of private enterprise.
Another aspect worthy of consideration is that the current licencing conditions prohibit any company/legal person either directly or through its associates from having substantial equity holding (defined as equity of 10 per cent or more) in more than one licencee company in the same area for the same service. In order to comply, the government may have to dilute its share or explore the option of merging BSNL and Vi. The latter is attractive for multiple reasons. BSNL could use Vi’s 4G equipment to use its government allotted 4G spectrum. Vi has a good radio network but lacks the backhaul, to offset which it can make use of BSNL’s pan India optical fibre network. A merger between BSNL and Vi could help kill two birds with one stone. On the one hand, it can help revive Vi and on the other resurrect a flailing BSNL through a synergy of professional management and public sector assets. Vodafone and Idea Cellular agreed to merge in 2017 and create “Vi” to protect against an aggressive entrant like Jio. Therefore, a merger between these two entities may once again help protect the interests of both BSNL and Vi, and also ensure that the Indian telecom sector continues to have at least three strong players in the market, which is a minimum threshold to ensure fair competition within the sector. A win-win for telecom, if ever there was one.
This column first appeared in the print edition on January 13, 2022 under the title ‘Taking the fair call’. Kathuria is Dean, School of Humanities and Social Sciences at Shiv Nadar University, and Suri is Senior Researcher at, The Centre for Internet & Society (CIS)