Telecom Regulatory Authority of India chief Rahul Khullar last week spoke some home truths about India?s mobile services industry. The major telecom operators?about six of them?have a cumulative debt exposure of close to R2,00,000 crore. They would probably add another R1,50,000 crore of debt after the forthcoming auction of licences by the government, post the Supreme Court directive on 2G spectrum.
So, the question posed by Khullar is whether companies, already steeped in debt, have the stomach to raise another R1,50,000 crore of debt. The debt-to-equity ratios could go out of whack. Besides, to be able to access that much debt, they will have to raise at least a third that amount in equity, going by the normal 2:1 debt equity norm. One is not sure whether current equity market conditions will be able to absorb fresh equity issues of that scale.
Even without raising additional debt, some are facing the prospect of bankruptcy. So, Khullar?s contention is this is the most serious problem the sector faces today. Any amount of policy tweak cannot fix this fundamental problem. Khullar is making this argument in the context of the telecom operators? contention that a higher reserve price of R18,000 crore for 5 MHz of spectrum will force telcos to raise per minute tariffs substantially, thereby making the industry more unviable.
Khullar makes two counter-arguments. One, that the reserve price of R18,000 crore will not raise tariff by more than 7 paise per minute because the cost of spectrum, at less than 12% of the total project cost, is incurred over 20 years. It is, therefore, a minuscule proportion of annual revenues, if the spectrum cost is divided over 20 years. So, this is not the core issue.
The core issue really is how most of the telcos made a big mistake in projecting the trajectory of their costs and profitability over a longer period. While it is fashionable to make the government a favourite whipping boy for every problem faced by businesses, the truth is that industry must accept its share of blame for the current state of affairs. And mind you, its share is not inconsiderable.
It is now clear as daylight that even if the government kept the reserve price for new auctions at half the level suggested by Trai, the balance sheets of many debt-ridden telcos will continue to bleed badly. One must recognise this huge debt accumulation was the direct result of the hyper enthusiasm of telecom companies during the boom period of 2003-2008, when nothing could seem to go wrong and everyone was drunk on the elixir of valuations. Telecom towers were seen as future gold mines. Today, they seem like worthless relics of what was once seen as the great telecom revolution. Is the government to blame for this?
If bitter truth be told, the history of telecom over the past 17 years is actually the history of industry getting such a long rope that it is about to hang itself. Of course, there were enough policy and regulatory muddles along the way. There is no denying that. But, eventually, it was the telecom industry which largely guided government policy right from the mid-nineties when the first auction of licences were conducted.
One still remembers how the CII worked closely with the Prime Minister?s Office (PMO) and provided the blueprint for a shift from the high fixed licence fee regime to a more easy revenue-share arrangement which brought relief for the telcos. The then economic affairs secretary in the PMO, NK Singh, was instrumental in creating the new revenue-sharing framework. Such was the anxiety to bail out the sector that the annual fees which the telcos had committed to pay over their full licence periods were waived off once the telcos made the payments for just a few years! This had never happened before.
So the point is the telecom industry was always treated with kid gloves as it was a nascent sector that had shown promise. In the following years, after a shift to revenue share, the sector kept getting positive policy push, whether by the NDA or the UPA regime.
So, overall policy, warts and all, gave the private sector the necessary boost. This also showed results as telecom penetration was unprecedented after 2004. In this period, the telecom policy showed the necessary balance between consumer surplus, producer profits and government revenues. The government actually ended up getting far more through the revenue share arrangement than it would have got even from the high licence fee regime which was junked at the instance of the industry.
The problems for the telecom sector actually began after 2006 when the unprecedented surge in the mobile subscriber base?which grew from some 100 million in 2004 to 800 million in 2009?created a different kind of greed and rapaciousness. The unhealthy debt accumulation and valuation game began at this stage. The broad consensus among the various telecom players also broke down after 2006 as the valuation game consumed most of them and government policy started getting distorted as per the weight of political influence wielded by different players. A bitter war between incumbents, new players and newer players became ugly and produced the 2G scam. Today, telecom valuations have collapsed. Markets are down. There is huge economic uncertainty. There is no way that some of the big telcos can grow their business in such conditions.
In my view, much more than the quibble over the cost of spectrum, what is relevant today is a policy that aids mergers and acquisitions. This will bring the telecom industry back to health. If balance sheets need fresh infusion of cash, it seems obvious that many foreign telcos who have not entered India and have massive cash in their balance sheet may be interested in buying these assets and see if they can be turned around. In fact, this is true for other debt-ridden infrastructure sectors too. India needs massive cash infusion through M&As. Cash-rich global and domestic companies are natural candidates to provide fresh equity.
mk.venu@expressindia.com