IBC left alone, Supreme Court seals Vodafone Idea fate

Had SC stuck to its stand that the spectrum that telcos paid tens of thousands of crore rupees for—and which constituted the bulk of their capex—could not be sold, this would have meant the insolvency process would have been irreversibly damaged.

For the second time this week, the Supreme Court (SC) chose to step back and play it safe after suggesting the exact opposite course of action during a hearing. In the Prashant Bhushan matter, after seeming to suggest he would have to pay a big fine or even be jailed for contempt of court, SC chose to settle for a token one-rupee fine, although it couched it by saying Bhushan would face a 3-month jail term if the fine wasn’t paid, along with a 3-year ban on practising in court.

And, in the AGR case, after seeming to suggest that the spectrum telcos had bought could not be sold as part of the insolvency process, SC wisely chose to leave the matter of the Insolvency and Bankruptcy Code (IBC) to the National Company Law Tribunal (NCLT) when it delivered its actual order. Had SC stuck to its stand that the spectrum that telcos paid tens of thousands of crore rupees for—and which constituted the bulk of their capex—could not be sold, this would have meant the insolvency process would have been irreversibly damaged. While it was spectrum today, it could have been a mining licence or a piece of land tomorrow. Such a judgment, in fact, would have gone against the law of the land and would have been against the stated policy of courts not interfering with policy decisions.

Sadly, SC chose not to extend this caution to its ruling on the period that telcos would be given to pay the AGR dues. Despite the fact that the Cabinet cleared a proposal to allow telcos 20 years to pay the dues, SC cut this down to 10 years. Apart from being a clear case of interfering in a policy decision, it makes it nearly impossible for Vodafone Idea to survive and, were that to happen, Indian telecom will be reduced to a duopoly for all practical purposes, with little to prevent RJio and Bharti Airtel from colluding to push up tariffs over time; tariffs rising in a competitive landscape are quite different from this happening with collusion.

To meet just its depreciation and amortisation needs along with financing costs, based on FY20 data, Vodafone Idea needs its Ebitda to treble from Rs 14,912 crore. And, once the moratorium of deferred spectrum payments ends in March 2022, the telco will need to pay another Rs 16,000 crore every year; and around Rs 5,500 crore for the AGR dues every year. To survive then, Vodafone Idea needs a massive infusion of cash—in the past, the telco’s chairman Kumar Mangalam Birla has gone public on not wanting to throw good money after bad—or an equally sharp jump in tariff levels. Without this, if Vodafone Idea is to survive, it will remain a weak competitor; in FY20, for instance, the shortage of funds meant that Vodafone Idea had a capex of just around Rs 10,000 crore, or half that of rival Bharti Airtel.

What is even odder is the SC’s insistence that the heads of telcos give personal undertakings that the payment will be made. If a firm goes into bankruptcy, how can the managing director/chairman—or ‘other authorised officer’—ensure that the payment will be made? This goes against the country’s legal structure, so ideally this is something the government itself should challenge sooner rather than later since the possibility of being sentenced for contempt—especially if you don’t have Prashant Bhushan’s stature—is chilling.

What makes the SC decision even more difficult to understand, given how concerned it was about telcos in bankruptcy courts not being able to pay their dues to the government, is that were Vodafone Idea to shut down, the government will be one of the biggest losers. As this newspaper has pointed out, as compared to the Rs 2.5 lakh crore that Vodafone Idea owes the government—Rs 1.8 lakh crore of this is on account of deferred spectrum dues—the value of that spectrum at today’s prices is around Rs 98,000 crore. And, this too could be on the higher side since it is based on the value that Trai had recommended for various spectrum bands; with the industry in deep financial trouble, telcos may not buy at these prices.

Since the massive tariff increases that Vodafone Idea needs may not be possible, another option is for the government to scrap licence fee (LF) and spectrum usage charges (SUC), but given that the government has not done that in the last six years, it is difficult to believe it will happen soon. Indeed, the high LF and SUC were first put in place when spectrum was handed out virtually free. So, when the government came to power in 2014, it should have scrapped both as spectrum had begun to be sold at market prices since 2010 itself; had this been done, there would hardly have been any AGR dues today, making it clear how big a price the country is paying for the government not being proactive in the last six years.

Were Vodafone Idea to shut down, it would be the end of a series of poor experiences it has had in the country. Apart from the regulatory environment in the telecom industry being hostile for decades—the A Raja case was the most high-profile of the arbitrary decision-making—Vodafone Idea was badly hit by the UPA’s retrospective tax. And, despite campaigning against this for years, when the Narendra Modi government came to power, it did nothing to repeal the law. If that wasn’t bad enough, the telco has now been hit by an AGR ruling that appears equally arbitrary. Investing in India clearly requires firms to have very deep pockets, apart from being very stoic.