Vodafone Idea & the Unease of Doing Business In India

The telecom revolution started sometime around late 90s. Idea Cellular & Bharti Airtel were two of the earliest entrants with both starting their cellular services by mid 90s. In the beginning, the government could not look at a possibility of mobile services being used by anybody less than an ultra HNI – which led them to make policies that made cellular an extremely expensive a service. Initially the license fee was fixed & was prohibitively high – with each passing year the annual license fee used to get almost doubled under the initial arrangement. The operators had an option to pay higher of either the license fee or the fixed per subscriber fee of INR 5000-6000, which would have taken a toll on working capital requirement as the maximum security-deposit from the subscriber was limited to INR 3000 only. There were also restrictions on the call charges. The handsets were also just as expensive. Technology was limited to being supportive of the voice calls only. The setting was not conducive enough for the industry to flourish.

But heavy capital investment, increasing working capital requirement, high license fee along with the interconnect charges, the spectrum usage fee & comparatively low ARPU (still it was around 8 times that of the current ARPU, but subscriber base was insignificant) led to financial break-down of the industry & almost 8-10 operators were in default of the government payment & a few of their creditors too. Things started changing somewhere around the beginning of the 21st century. 

The telecom ecosystem kept getting better post the establishment of the regulator TRAI. The upper caps on call charges were relaxed along with the fixed rental security – around the same time the license fee was also linked to the AGR. None of the telecom operators were too worried about the definition of AGR as it was expected that it obviously will cover only the revenue generated from those activities that were related to the telecom license - & hence all of them signed up for it without looking at the possibility of how the government would finally define the AGR. Later when the DOT defined AGR as revenue generated from any activity including treasury, interest income, dividend income, capital gains essentially anything & everything – the operators went to TDSAT. The TDSAT ruled in favour of operators. DOT followed up with going to the court. The supreme court advised the TDSAT to define AGR - TDSAT defined the AGR as the revenue attributable to the telecom license. DOT went to the court again. The case continued.......

VODAFONE HUTCH TAX CASE

In the meantime, Vodafone acquired Hutchison Whampoa’s stake in Hutch in 2007 for $11 billion. As both the Vodafone & the Hutchison Whampoa were based outside India – there was no tax incidence for the transaction. The UPA government still defying the existing tax laws raised the tax demand of INR 11000 Cr on Vodafone. Vodafone went to the supreme court – the supreme court ruled in favour of Vodafone saying that the current tax regime does not allow for such a transaction to be taxed. In response to the SC judgement the UPA government amended the IT act retrospectively & put the demand back to Vodafone. You could not have done any more damage to the “Ease of Doing Business” than with a move like this – essentially making it extremely difficult for the investor to decide upon an investment basis the existing regulations/rules – the government can make any changes anytime & force it retrospectively. 

The opposition, more specifically Late Mr. Arun Jaitley, opposed the retrospective tax imposition very strongly. But once he comes to the power & becomes the finance minister, he did nothing – yet another confirmation on how compromised the Indian “Ease of Doing Business” story has always been. The case is still lingering on with penalty & interest being charged even for the period that was prior to the earlier Supreme Court judgement in favour of Vodafone. Imposition of retrospective tax on Vodafone-Hutch deal will remain the biggest blot on our reputation of a reasonable investment destination – the faith in both the government & our justice system is compromised beyond repair with this. We announced to the global investor that you can’t trust us & that our justice system ultimately succumbs to the wishes of the government. 

CUT TO ENTRY OF JIO & AGR JUDGEMENT

Now coming back to the AGR issue – the supreme court ruled in 2012 that TDSAT is the final decision maker on what should be the AGR liability around 2012. The TDSAT ruled in favour of operators in 2015. Everything was sorted & the industry poised for some consolidation - ultimately leading to stable future ahead. In the meantime a company with net worth of 2.5 Cr buys ISP license for ~130000 Cr, worth almost 5000 times its net worth & the day it got the wireless broadband services licence it sold itself to Reliance Industries.

The DOT then followed up with - without looking at the possible impact of such a move - giving a unified service provider licence for just +1600 Cr, allowing it to offer voice services as well – here the Jio was born with 4 advantages; capex advantage, favorable regulator advantage, ability-to-burn-cash-until-competition-dies advantage & technology advantage. Jio's entry led to either closure or merger or bankruptcy of all the players leaving just three - Jio, Airtel & Vodafone- Idea.

Once the TDSAT defined AGR in 2015 - ideally the government should have dropped the matter there- but the DOT went back to the court again & out of nowhere the supreme court ruled in favour of the DOT in Oct'2019 – this happened at a time when the new entrant Jio has left the industry with just 3 players, brought the ARPU down to half of what it was, brought EBITDA down to almost half of what it was & put a question mark on the 2 lac crore telecom sector loan book of the banks. In such uncertain times the Supreme Court advised the telecom operators to pay the entire AGR dues asap. Some visible flaws in the judgement: 

# The telecom operators won the case in the Supreme Court where the court asked the TDSAT to define the AGR, which it did in 2015, but the DOT never gave the demands to the Telcos & continued their fight in the SC– how come an entity that has won the case all along need to pay the penalty & the interest charges on it & not just the principal – if at all the new definition is accepted

# How can a definition that leads to ONGC- that got just 35 Cr revenue from telecom- getting a bill of 1.8 Lac Crore, can be called just? 

Now its fairly clear that while Airtel may still survive – the Idea Vodafone with a market cap of under 10000 Cr & cash balance of under 6000 Cr (net-off spectrum fee due in Mar’20) is in no position to pay 53000 Cr AGR dues. If Idea fails – we are also looking at the future government receipts being compromised, banks losing almost 1 Lac crore & more than 40,000 people losing their jobs- who are employed directly or indirectly. Not to forget that the biggest loss would be the reputation loss for India as an investment destination.

The government has intervened in the Vodafone tax case by making the changes in the IT act & enforcing them retrospectively, when ideally it should never have, once the Supreme Court gave its judgement – this time around it is imperative for the government to intervene & correct the wrong -ensure that the players who have invested their 20 years in the market, have sustained injuries due to favorable treatment given to Jio & have just started getting into shape again - continue to exist to keep the industry healthy & competitive. The steps that government can take:

# Define AGR as the revenue generated from the telecom license. Waive-off the penalty or interest charges or both on the newly defined AGR & give them 6 months to pay-off the principal

# Redefine AGR, make the AGR payable over the next 15 years with 3 Year moratorium adjusted for 10 year bond yield to make it NPV neutral

# Take stake in the entity via BSNL by putting in 25000 Crore & make them pay the redefined AGR over 12 months

Accepting the AGR as defined by the TDSAT & closing the Vodafone case dispute is the first step towards redeeming the compromised reputation of India as an investment destination – we do need foreign capital at least for another 20 year ! Lets build a good case out of the case of Vodafone- Idea, which we can then use to propagate the "ease of doing business" in India. If this does not happen - this case may become the biggest hurdle before any investor decides to commit capital beyond a few million dollars !