We have just witnessed another episode in the evolving saga of India’s telecommunications sector. The board of Vodafone Idea (Vi) has approved the conversion of part of their government debt into equity. So around Rs 16,000 crore of interest on Deferred Spectrum and Adjusted Gross Revenue (AGR) liabilities will now be converted into government shares, making it the largest player, holding 35.8% of the entity. If the debt-to-equity conversion goes through the complicated Department of Telecommunications (DoT) processes, it will dilute the stakes of promoters Vodafone Group and Aditya Birla Group to 28.5% and 17.8% respectively. Chances are it is, as it is part of the relief package offered by the government itself in October 2021 to prevent the beleaguered operator from pulling out and thereby protect competition in a rushing market. quickly towards an effective duopoly between Jio and a stressed Airtel.
To be gracious, one can see the glass of Indian telecoms as half full or half empty. There were landmark achievements interspersed with colossal mistakes. While optimists like us would like to focus on the glass half full, it would be prudent to dedicate some mental space to mistakes to learn from this experience. Because perhaps the best political advice one can give is what not to do, rather than the other way around.
Telecoms in India, more than anywhere else, is not a business for the faint-hearted. The stakes are enormous, running into the billions of dollars, and the perennial litigation has been a drain on resources, used as much if not more for strategic maneuvering as for seeking justice. Every stakeholder, including the government, has sought the intervention of the courts at one time or another and not always to correct a perceived error. Vodafone entered the Indian market by buying Hutch in an offshore deal in 2007 which complied with current law. Fairness would require changing the law – if there was abuse – prospectively, not retroactively. The retroactive amendment was a blow, with Vodafone receiving a permanent count.
The government has also often used the telecommunications sector to obtain much-needed cash. It is relevant to ask whether the sequence of adverse events irreversibly crippled the golden goose. In Bollywood blockbuster Deewar, Amitabh Bachchan saves his own life by pointing out the fallacy of ripping the bird’s innards out to extract all the eggs at once, he being the metaphorical goose. Bachchan’s advice was largely ignored outside of the film. To cite a few examples, the constituents of the AGR include non-telecom revenue under license and part of the Rs 16,000 crore quoted above is the formerly disputed amount and accrued interest and penalties on license fees unpaid. The idea of an AGR-based royalty is an artifact of a time when there was no spectrum auction. After introducing highly lucrative spectrum auctions, the government could have avoided other forms of licensing fees from operators bidding for spectrum, including spectrum usage fees (SUC). A nominal administrative fee could have been charged to administer the licenses. Furthermore, by allowing “backdoor entry” into the mobile sector in 2003, the harmful first-come, first-served (FCFS) spectrum allocation of 2008, and looking away 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 industry.
Vodafone Idea, Airtel and Jio are all professionally run businesses with arguably equal access to technology, network services, financial and marketing skills. One would expect the competition to thrive in such a scenario that might well have been the envy of the world. But access to government is seemingly unequal (at least in outcomes) and that’s the enduring lesson of two decades or more of previous experience. The system must correct this shortcoming and must not only be fair, but also be perceived as fair for all entities. Sometimes in India inertia results in decisions that favor one over the other operator not because there is a bad intention but because the system is such that status quo is the answer dominant. This should also be carefully avoided where possible by bringing in high-level intervention.
Back to the present and the fortuitous opportunity of the moment. In recent years the government has struggled to bail out a heavily indebted industry, the immediate reasons why (a few also mentioned above) are an intense and debilitating price war, an unreasonable definition of the ‘AGR, an extractive spectrum auction regime and, of course, the march of technology negatively impacting the revenue streams of operators straddling traditional networks. The implementation of this relief package means that the Indian government will hold stakes in two of the country’s four major telecom operators, namely BSNL (100%) and Vi (35.8%). With the exception of China, no other country in the world has 100% government-owned entities in the telecommunications sector. And lately, even the Chinese government has encouraged private sector participation to boost competition in a market that has so far seen monopolistic and unfair competition. In France and Germany, the government has diluted its holdings in former public sector entities to a minimum. Telecommunications are almost everywhere the domain of private enterprise.
Another noteworthy aspect is that current licensing conditions prohibit any corporation/legal entity, directly or through its associates, from holding a substantial equity interest (defined as an equity interest of 10% or more ) in more than one licensed company in the same area during the same performance. In order to comply, the government may have to dilute its share or explore the possibility of merging BSNL and Vi. The latter is attractive for several reasons. BSNL could use Vi’s 4G equipment to utilize its government-allocated 4G spectrum. Vi has a good radio network but lacks backhaul, to compensate that it can use BSNL’s pan-India fiber optic 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 hand, resuscitate a struggling 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 can again help protect the interests of BSNL and Vi, and also ensure that the Indian telecommunications sector continues to have at least three powerful players in the market, which is a threshold minimum to ensure fair competition. within the sector. A win-win for telecoms, if there is one.
This column first appeared in the January 13, 2022 print edition under the title “Taking the Fair Call.” Kathuria is Dean of the School of Humanities and Social Sciences at Shiv Nadar University and Suri is Senior Researcher at the Center for Internet and Society (CIS)