Jobs to foreign investment: What happens if Voda Idea shuts shop

The closedown of operations of Vodafone Idea, which is now a possibility, leading to a duopoly among private operators, could have consequences not only for consumers and employment generation but also for the exchequer. It will have an adverse impact on foreign companies looking at investing in the country, say analysts.

To get a perspective, the two shareholders of Vodafone India — Vodafone plc and the Aditya Birla group — together with public shareholders, have collectively invested more than Rs 1.9 trillion, of which Rs 1.65 trillion has been through foreign direct investment. If borrowings from banks and deferred spectrum liabilities are added, the investment is a staggering Rs 3 trillion. Yet the cumulative losses made by the company in the past 10 years were (till FY19) over Rs 55,175 crore and on account of the Supreme Court order, it has taken in losses of Rs 49,727 crore in the quarter of September FY20. 

Suddenly with the closure, even with the company filing for bankruptcy, a large part of this investment value might have to be written off by the shareholders and banks. 

This is over and above the substantial write-offs Vodafone plc has taken earlier on its books.

The government will be a huge loser. Since 2010 Vodafone Idea (the merged entity) has committed to pay Rs 1.4 trillion for spectrum they bought in auctions. Of this, if Vodafone Idea closes down, the government will lose Rs 89,180 crore in payments, which Vodafone Idea has to make, including interest accrued, till FY34 through deferred payment for spectrum (they have already paid Rs 54,467 crore). That apart it will also not be able to recover the Rs 44,150 crore, which is Vodafone Idea’s calculation of the payout it has to make due to the order on adjusted gross revenue (AGR). 

If it closes down, the government will not get either the licence fees or spectrum user charges, which constitute 13 per cent of AGR — an average of around Rs 13,500 crore annually. And the government would on average every year lose over Rs 13,600 crore as Vodafone India’s taxes such as goods and services tax, customs duty, and direct taxes.  

The closure would mean severe job losses — in a market where job creation is becoming an issue. According to Vodafone Idea’s estimates, the job loss in direct and indirect employment will be to the tune of 100,000. It has already during the merger pruned its employee count.

They are other challenges too. If Vodafone Idea were to shut down over 300 million customers would have to port out to either Bharti Airtel or Reliance Jio and some to BSNL. For the 200 million 2G customers of Vodafone Idea, their choice is even more restricted as Jio only has 4G service.  Yet with both the networks already working at peak capacity (which is reflected in call drops) most experts say that they obviously will not have enough spectrum or network to absorb all the customers so quickly. Even if one of the existing players were to bid in a Insolvency and Bankruptcy Code process or a new player show interest the process of acquisition could take 12-18 months. 

Says a senior executive in a leading telecom equipment maker: “Knowing the additional capacity available I would be surprised if the three together can accommodate more than 100 million additional customers especially with data use going through the roof. They will need more time, more spectrum, more towers to handle the sudden closure. What will ensure is chaos”  

Telcos point out that the solution lies with the government-the need is for a comprehensive change in policy which addresses the issues of high spectrum price, restrictions in mergers and acquisitions, the design of the auction as well as high license and SUC fees. 

Rajan Mathews, director general of the Cellular Operators Association of India, says that it will appeal to the government for a staggered payment scheme to pay the AGR dues as well as reduction in licence fee and SUC which constitutes for 13 per cent of AGR. “The government can bring it down (13 per cent) in such a way that it neutralises the impact of the court order on AGR, ensure the government does not lose revenue, and telcos are not overburdened.”  

What if they shut shop?

• It will result in an adverse impact on future FDI’s 

• Huge loss of revenue to the government of over Rs 133,000 cr and Rs 27,000 cr annually due to license fee, SUC and other taxes

• Loss of 100,000 direct and indirect jobs

• About 200 million Voda Idea customers could face difficulty in porting to competing telcos