By Mahesh Uppal
The government will soon become the largest shareholder of Vodafone Idea. This unlikely scenario spells relief as well as anxiety. While it demonstrates the government’s commitment to a competitive telecom market, it also shows how counterproductive it is to prioritise government revenues over economic growth.
Vodafone Idea, saddled with liabilities of nearly Rs 2 lakh crore, opted on January 12 to convert interest liability on its dues to the government into equity for the latter. The option was part of the government’s reform package, announced in September 2021, giving telcos four more years to pay their dues and convert the interest payable into equity. The package sought to mitigate the financial burden of nearly Rs 1.3 lakh crore on telecom companies following the Supreme Court’s ruling on the “AGR” matter relating to computation of levies due to the government. The new burden posed an existential threat to Vodafone Idea’s continuation in the market.
Despite its many serious lapses—such as not mitigating the risk of losing the AGR case in Supreme Court—the survival of Vodafone Idea is good news. The company is a significant competitor in India’s telecom market that has delivered almost nationwide access to affordable voice and data services. The competitive market has enhanced lives, livelihoods and productivity in the economy. The transformation in banking, direct benefit transfers, and the growth and success of startups owe much to India’s competitive telecom market. Vodafone Idea’s exit, therefore, would have led to a veritable duopoly of Jio and Airtel, given the precarious health of state-controlled players BSNL and MTNL.
Yet, in a sector where deregulation has been almost universally successful, the government’s new role is a step backwards. As the largest shareholder in two competing players in every service area, the government faces an unprecedented conflict of interest, both as a policymaker and a promoter. Experts have traditionally considered the government’s ownership of even one market player a potential conflict of interest. What will they make of its equity in two competing companies? The amount of spectrum a company can hold is currently related to its market shares. How will the regulator treat companies with substantial common ownership?
It would be hard to find a sector expert who does not advocate a clear (and legal) separation between entities responsible for policymaking, regulation and service provision. As someone who contributed to the process, I recall that the need for this separation was why the TRAI was created by statute and not lodged in a government ministry, and why BSNL was corporatised instead of the DoT continuing as a service provider.
The government has clarified that it does not intend to be involved in the operations of Vodafone Idea and does not see it as a PSU. It is fair to infer that it will seek to divest this equity as soon as possible. Will that make the valuation of Vodafone Idea a more significant concern than that of the ailing BSNL and MTNL? Similarly, it is difficult to imagine that major financial decisions, e.g., investment in the 5G spectrum, can be taken without inputs from a company’s largest shareholder. The current solution is untenable in the long run. We need a more sustainable one.
I had proposed a possible solution in this newspaper six months ago (bit.ly/3GT9vdO). The proposal, echoed by several other commentators since, advocated a strategic partnership between BSNL, MTNL and Vodafone Idea. Such a partnership offers a unique opportunity to expand access while protecting and strengthening competition in the sector. It offers a credible and inexpensive way to exploit the complementarities of the faltering BSNL and MTNL and the indebted Vodafone idea. For instance, BSNL and MTNL could start their much-delayed 4G services using Vodafone Idea’s infrastructure and the combined spectrum holdings. On the other hand, their extensive rights of way would be invaluable for Vodafone Idea.
Admittedly, combining resources is not trivial. The companies are not comparable legal entities and differ in their work culture. However, the current challenges are severe enough to justify mobilising the requisite political will and creativity.
However, the benefits of the proposed merger must not camouflage the roots of the present crisis in the telecom licensing regime and the formula for computing operator levies. Current rules created an incentive for bureaucrats to pursue government revenues at all costs. In the present case, the government had disputed the private players’ computation of dues to it. It had rejected advice from TRAI and rulings of the TDSAT and prevailed in the Supreme Court. Faced with imminent damage to the sector, the government has revised the rules. The rules now reflect what the operators wanted and experts advocated. A timely application of mind could have avoided the 15-year litigation and the resulting crisis.
The government cannot ignore that the treatment of telecom revenues has caused several debilitating disputes of the past. Few will quarrel with its charging a market price for a natural resource like the spectrum. However, other levies make little sense. A more straightforward way is to treat licences as mere permissions—as they indeed are—and recover the lost revenues by a slight tinkering of the central budget. Doing so will unleash innovation and ensure that the focus remains on economic growth instead of upfront revenues.
The author consults on regulatory issues in telecommunications and the internet