Apart from investors in both Vodafone Plc and Idea, the Government of India will be the biggest loser if Vodafone Idea shuts down as looks increasingly likely with the Supreme Court refusing to review its faulty ruling on the AGR dues of the telecom industry; apart from anything else, the fact that PSUs that earned Rs 35 crore in revenues need to pay Rs 172,655 crore of AGR dues should make it clear how faulty the judgment was. While Vodafone Plc invested around $30 bn in the India operations and will lose all of this now, the government stands to lose Rs 53,000 crore in AGR dues, Rs 5,700 crore in one-time-spectrum-charge (OTSC) dues and another Rs 157,750 crore of deferred payments for spectrum that Vodafone Idea bought in the past. In addition, banks are owed around Rs 49,000 crore and it is not clear how much of this is secured by assets, or how much banks will get once the company goes to the insolvency courts.
Theoretically, the government will lose only the AGR and OTSC dues since it can take back its spectrum once Vodafone Idea fails to pay and then re-auction this. Apart from it not being clear whether this can be done without going through the legal process, even if it can, it is unlikely the government will be able to resell the spectrum for anywhere near the same amount. For one, with the glory days of telecom behind us, its revenues fell from Rs 70,241 crore in FY17 to Rs 39,345 crore in FY19 as there were no auctions in 2017, 2018 or 2019; and with just two players left in the industry, the competitive intensity for auctions is also much lower.
If investors buy the government’s argument of commercial failure being an inherent risk in any business, the collapse of Vodafone Idea may not affect either local or foreign investors, though a telco with 336 million customers folding up would frighten most; more so given the $30bn investment by just one partner. If, however, as is likely, investors focus on the government inaction – and unfriendly policy – that led to this state of affairs, the impact will be even higher, and at a time when investment levels have been falling for several years anyway.
The AGR dues are essentially dues of license fee (LF) and spectrum usage charges (SUC); so if LF/SUC had been scrapped, the AGR dues would be much smaller than they are today. The question, then, is why LF/SUC should have been scrapped. In the past, India virtually gave away the spectrum free – there was an auction for the initial spectrum but the bulk was not charged for – and so, in return, the government charged telcos an LF/SUC as a share of their revenues. In 2010, however, following the A Raja scam and the SC cancelling the licenses he gave, spectrum was auctioned and, thanks to this being done in a faulty manner, telcos paid an arm and a leg for this. To use a parallel from the housing market, why should buyers be paying hefty EMIs when they have already paid the cost of the flat upfront? Ideally, this decision should have been taken by the Manmohan Singh government in 2010, but the Modi one was elected in 2014 and it did nothing either.
It gets worse. The SC verdict was incorrect because, till then, there was no clear verdict on AGR; indeed, AGR orders by the government were set aside by various courts in 2006, 2007, 2011 and 2015. So, if the SC verdict was a final one on what constituted AGR, there should have been penalties and interest on the basic AGR dues. The SC erred on this count – and others since AGR was never examined by any neutral tribunal/court before – but the government didn’t even go in appeal on even this; 75% of the AGR dues of telecom players are on account of penalty, interest and interest upon interest.
Indeed, apart from this colossal failure, even after the AGR ruling, the government had the option of scrapping LF/SUC; had even this been done, telcos would have found it easier to raise money to pay the dues. But, as in the past, the suit-boot-ki-sarkaar fear paralyzed the government.
Contrast this with what the Atal Bihari Vajpayee government did when faced with a similar situation where telcos were defaulting on tens of thousands of crore of license feed dues. It came up with NTP 1999 which converted the license fee to a revenue-share one, the industry boomed and, within a few years, the government had more than made up the license fee it had foregone.
Postscript: While many believe the Rs 2 lakh crore owed by PSUs like Gail and Powergrid is just a paper entry – one arm of the government paying another – even if the government reinjects the money into them by way of fresh equity later, they will have to raise the money within a week. This means either raising it from banks or from bond issues; both will take time and neither will be easy.