It was decided that MTNL be made a subsidiary of BSNL by transferring government shareholding of MTNL to BSNL to derive synergy in network operations and sales till the merger was completed.
A government-appointed consultant has suggested that 2G and 4G spectrums should be allocated to BSNL in Delhi and Mumbai, so that the company starts providing pan-India services, before state-owned operator MTNL is merged with it. Currently, while BSNL provides services in 20 telecom circles, MTNL is present in the remaining two, Delhi and Mumbai. The telecom circles are contiguous with states.
The consultant feels that subsidiarisation followed by merger or immediate merger between the two may lead to an outstanding debt of over Rs 45,000 cr for the new entity, which will be unsustainable or unserviceable.
The Union Cabinet in October last year had approved a Rs 70,000-crore revival package for BSNL and MTNL and also accorded an in-principle approval for merger of the two firms. It was decided that MTNL be made a subsidiary of BSNL by transferring government shareholding of MTNL to BSNL to derive synergy in network operations and sales till the merger was completed.
The government, however, identified certain key challenges that needed to be addressed before the merger.
Deloitte Haskins & Sells LLP was then mandated by the government to suggest various feasible options for implementing the Cabinet decision along with the challenges and suggestions for maintaining viability or business sustainability of the merged entity. In its report submitted to the government, Deloitte has recommended some options that can be utilised before the merger, like allocating 2G and 4G spectrums to BSNL, monetisation of MTNL’s real estate assets, delisting of MTNL, etc.
The outstanding debt liability of MTNL for financial year 2018-19 was about Rs 20,000 crore, its finance cost was Rs 1,703.18 crore. BSNL, too, has similar amount of outstanding debt and financing cost. Thus, the event of subsidiarisation, followed by merger, would make the combined debt burden of over Rs 45,000 crore, which will be unserviceable and unsustainable.
MTNL’s networth is reported to have been fully eroded with Rs (-) 11,776.85 crore as on September 30, 2019. MTNL had reported a net loss of Rs 949.80 crore for the second quarter of FY 2019-20 with `369.23 crore revenue from services.
Also, pay scales in MTNL are one level higher and the average pay drawn by the officials in MTNL is also higher by 10%-15%. This would need to be addressed before merger to avoid additional cost of nearly `1,000 crore per annum on BSNL, as well as pressure for upgrading the pay scale in BSNL on a par with MTNL.
Further, the issue of reconciliation and settlement of unreconciled inter-company balances of MTNL/BSNL also needs to be addressed.
After considering the challenges, Deloitte suggested that subsidiarisation followed by merger or immediate merger may lead the combined outstanding debt unsustainable or unserviceable due to the overall economic scenario post-Covid-19 and the already stressed liquidity of both the companies.
“The stamp duty cost on transfer of real estate to merged entity on immediate merger is also very high and, therefore, monetisation of real estate to pare debt of MTNL should be priority along with delisting of MTNL before merger,” Deloitte said.
The consultant said merger should be deferred for the time being and meanwhile government allocates 2G and 4G spectrum to BSNL for Delhi and Mumbai so that the company is able to provide pan-India 4G services. “Since MTNL’s 2G licence has already expired, MTNL can surrender its 3G spectrum and with the surrendered proceeds, it can reduce its outstanding debt to some extent,” the report said.
Deloitte has suggested that after rolling out 4G services across the country, BSNL may take on lease MTNL’s network by following “arm’s length” principle so that MTNL gets revenue stream in the form of lease rental.
Meanwhile, MTNL continues its efforts to monetise land assets so as to pare the outstanding debt. “Possibility of hiving off certain select real estate assets of MTNL alongwith debt to a SPV after MTNL gets delisted can also be explored,” Deloitte said.