Brijendra K Syngal , Sr Principal , Dua Consulting

Telecom, bandied and toasted to be one of the success stories, post-independence, has also been roasted in the recent past, given soubriquet as one of the most litigious, and recently the most leveraged industry. These are serious contradictions. They must be addressed by all stakeholders, because the relevance of telecomm in its second Avatar has just about begun.

India is currently the second-largest telecommunications market in the world and the total mobile service market in India is expected to touch 2.3 lakh crore by 2017 end. The government's focus on digital infrastructure for social sector reforms requires a robust telecommunication network as a prerequisite. These new initiatives, therefore, have become the raison d'tre for the telecommunication infrastructure in the country. Transportation of data will be the next big infrastructural requirement after men and material.

However, the present situation of the telecommunication industry seems to seriously threaten the dream of Digital India. EBITDA (earnings before interest, tax, depreciation and amortization) for the
entire telecom industry is approximately 65,000 crore (annual) compared to 4–5 lakh crore debt of the industry, thus, making the sector's debt unsustainable in nature. Additionally, there are litigations and internecine wars all around amongst players, regulator, and the government of India.

Debt Conundrum: Telcos' Bad Decisions?

There is no particular reason for this malaise; everyone is blameworthy for the mess. The hot potato of massive debt bedevilling the telecom industry, accruing over the years, is partly because of the industry's ill business decisions, reflecting their lack of responsibility, and partly because of regulatory and policy infirmities.

Company-wise debt data would reveal that two companies, i.e., Airtel and Vodafone (soon to be Vodafone-Idea) stand out. As the graph (collated by BloombergQuint) suggests, Bharti Airtel has a total debt of 1 lakh crore, while cumulative debt of Idea Cellular and Vodafone India is another
1 lakh crore, thus attributing 60 percent of the total debt of the sector to just two companies.

Airtel's debt is a consequence of its quest to become a world player. It acquired telecom assets from Kuwait-based Zain in Africa
in 2010, in a highly leveraged deal of 486,000 crore, a business decision that seemed to have backfired. It was only in FY16-17 that Airtel reported a profit-before-tax of 39.6 crore first time as against the losses of 3700 crore it had faced a year ago in Africa. Analysis of Airtel's balance sheets will reveal that its net debt increased from 2547 crore to 59,951 crore (almost 2000%)between FY2010 and FY2011, the same year it bought Zain, and since then it has been consistently increasing, shooting to
83,883 crore in FY2016.

In the case of Vodafone, the accrual of debt has been partly due to acquisition of Indian assets and partly due to high price paid to circumvent FDI dispensation. While acquiring Hong Kong-based Hutchinson Essar, Vodafone made a highly leveraged deal of 4,95,000 crore. Vodafone paid the surrogacy cost of 30,000 crore to Ruia brothers, 1241 crore to Analjit Singh, and 8900 crore to Piramal Enterprises for holding Vodafone assets until 100 percent FDI was allowed in telecomm. Since Vodafone's entry in India, it has invested around 83,000 crore in India and its net debt, stood at 47,807 crore in FY15. The relative investment-to- debt ratio strongly suggests leveraged nature of Vodafone's Indian business.

Both Tata and Reliance have made a wrong business decision by getting into CDMA technology in 2003, building a debt of 30,000 crore and 46,000 crore respectively. Tata, despite an infusion of 19,000 crore by NTT-DoCoMO, could not convert its operations anywhere near profitability. Both were also beneficiaries of a flawed largesse by the regulator of Combination of Technology 2G spectrum in 2007.

These cases clearly highlight that massive debt of the companies has been, largely, due to bad business decisions. The industry cannot solely blame spectrum prices and government policies, a popular media narrative, for their burgeoning debt. It would be rather prudent to say that lackadaisical approach of both regulator and government has simply added fuel to massive fire of debt.

Bad Policies and a Silent Regulator

Graph

Irrational regulations have been a norm since 2003, when limited mobility was converted to full mobility, jolting the incumbents who had just about come out of flaws of NTP, addressed by NTP 1999. In 2007, some 10–12 players (Punters) per circle were allowed, while not auctioning 2G spectrum resulting in the infamous scam; while dual technology award was erroneously given to two telecomm players like Tata and Reliance Com, as a relief for having chosen wrong technology in 2003. This followed change in NIA conditions post the auction for usage of spectrum from only data to both voice and data in 2010. The beneficiary Reliance Jio made another backdoor entry.

In a recent case, unclear pre-commercial testing regulations provided Reliance Jio with an undue advantage. TRAI's 2002, 2003, and 2005 notifications excluded testing subscribers from existing subscribers, but did not mention any pre-commercial testing regulations. Pre-commercial testing, which is what Reliance Jio was doing for its LTE evolution, should have been completely non-commercial in nature. Instead, it tried to grab a market share under the garb of testing a new technology, releasing a host of promotional offers.

Despite clear breach of market norms, TRAI silently witnessed telecom companies going into a frenzied mode of M&As to sustain themselves. Hence, from almost 13 operators just a few years back, telecom industry has come down to just 4-5 giants. The basics of competition law tell us that such consolidation is a recipe for disaster, if handled with kid gloves.

The Role of Custodian of Industry – DoT

DoT has its own share of blame. Other than the problem of lack of clarity in regulations, the long overdue regulations on M&A, spectrum sharing and trading guidelines, definition of AGR, unified license, etc., are few of the numerous policy issues that plague the telecom industry.

Way Forward – Do Not Tax Industry in Perpetuity at Fixed Percentage

Government should start with providing some breathing space in taxes to the sector. An industry which continues to be taxed at 30 percent while generating an EBIT of
20 percent annually cannot service its debts, thus, making them in effect non-performing assets (NPAs). One might think that the government is perhaps waiting for this to happen so that it can bail out the big telcos of the industry.

In the longer run, the government should start by either introducing the concept of revenue neutrality – taxing companies relative to their growth or reduce taxes as they grow to leave more cash for investments. Thus, during periods of low growth, lower taxation would stimulate growth. By continuing to charge the industry at the same rates of taxation and fees in perpetuity, as is presently being done, it ensures that the industry is decimated in the long run for good performance. Government further needs to create well-defined laws and regulations for market functioning, setting a ceiling for revenues it expects from the telecom sector. It is also vital to ensure that the players do not exploit the existing loopholes to benefit themselves while endangering the market.

No Single Culprit

The industry can continue venting by being economical with the facts, due to the Yeh Dil Maange More attitude, but it is also imperative for them to take responsibility of their bad business decisions.

The regulator, the supposed conscience keeper, and DOT, the custodian of the sector, have mostly not acted at the required time, thus pushing the sector toward present situation. Light-touch-policy principle should not equal turning a blind eye to the flagrant violations of norms.

Moreover, the government needs to rationalize its exorbitant expectations of sectoral revenue by adopting revenue neutrality, and shift the burden of maintaining its fiscal limit to other sectors; engagement with stakeholders for a well thought-out plan instead of kneejerk reaction is necessary.

Piecemeal reductions or intermittent quick-fix solutions are not going to help. There exists an urgent need for a principled approach by all stakeholders to ensure that this vital infrastructure can flourish without bleeding the industry or leaving the consumers high and dry due to flawed policies and their implementation. Therefore, balanced consumer interest, adequate healthy competition, commercial interest of industry, with sound policies and regulation is the need of the hour.


 

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