SBI's notice to MTNL presents an opportunity for ownership change

With mounting debts and dwindling market share, the need for a decisive government strategy is urgent

Last week, Mahanagar Telephone Nigam Limited (MTNL) was in the news. India’s largest bank, State Bank of India (SBI), informed MTNL that its loan account, with a total debt of Rs 325 crore, had become a non-performing asset (NPA). Both the instalment repayment and interest payment under this account had become overdue after June 30 this year. Since the overdue amount remained uncleared for more than 90 days, SBI classified the loan account as sub-standard. It also warned MTNL that failure to make immediate payment of the overdue sums would lead to the levy of a penal interest rate on the outstanding balance.

Set up in 1986 as a public sector undertaking (PSU), MTNL began its operations in Delhi and Mumbai, providing telecommunication services in these two large metropolises. In 1997, it became a Navaratna company (among a dozen-odd large PSUs enjoying relative investment freedom), followed by its disinvestment (which over time would reduce the government’s equity in it to 56 per cent) and listing on stock exchanges in India in 1998 and on the New York Stock Exchange in 2001. However, this was also the time when India’s telecom sector was thrown open to competition from the private sector. A state-controlled enterprise failed to withstand that competition and began losing market share to the new private sector players. With the growth in mobile telephony far surpassing that of landline connections and MTNL failing to ramp up its mobile services, its market share in both wireless and landline services dropped to less than half a per cent and seven per cent, respectively, by the end of 2023.

Over the last few years, MTNL has been a recipient of government support by way of financial packages to support its manpower rationalisation plan, allotment of spectrum on special terms to help it launch mobile services using the latest technology, and monetisation of its assets, such as land and buildings, to help it meet its financial obligations. However, its financial health and business operations in this period deteriorated at a rapid pace. Its net sales from operations in 2023-24 more than halved to Rs 728 crore compared to what they were in 2019-20. Yet, net losses stayed at Rs 3,300 crore last year, just about Rs 400 crore less than what was incurred in 2019-20. The last year in which it earned a net profit was 2013-14. Its gains from a major manpower rationalisation a few years ago were substantial, with total employee cost seeing an annual decline of 80 per cent to Rs 413 crore in 2020-21. But three years later, even the cost of employees went up by over 38 per cent, neutralising a part of that advantage.

Reflecting a deeper problem was MTNL’s debt, which rose to about Rs 32,000 crore by the end of August 2024, of which over Rs 7,800 crore was on account of loans from banks and financial institutions. In the last 10 years, the telephone company raised over Rs 36,000 crore in bonds to meet its financial liabilities, principally to service such instruments. Note that these bonds are guaranteed by the Indian government. In case MTNL defaults in paying the principal and interest on the bonds, the sovereign guarantee on them will be invoked by the debenture trustee and the Centre will be obliged to make the payment to MTNL. What, therefore, must have caused some concern to the Union government was when, at the end of September 2024, MTNL informed the stock exchange of its inability to transfer the obligatory semi-annual interest to an escrow account to service its Bond Series V.

Against the backdrop of all these disturbing developments came the notice from SBI last week. It must have caused no surprise, given that it followed similar notices from a few other banks. On August 21, Union Bank of India froze all accounts of MTNL over non-payment of loans, which by the middle of that month had become sub-standard or an NPA. Earlier in August, MTNL had also informed the stock exchanges that it failed to honour its loan repayment obligations with respect to bank loans, including those of over Rs 40 crore each from Bank of India, Punjab & Sind Bank and Punjab National Bank.

The SBI notice was significant for another reason. The bank had sought from MTNL details on when and how the government would pay the telephone company’s dues, as reported in the media. It was anguished that the bank had received no information on the cash flow that MTNL was expecting from its land monetisation plan.  MTNL had reportedly identified 158 properties in prime locations across Mumbai and Delhi for outright sale, with an additional 137 vacant properties available for rent — 103 in Mumbai and 34 in Delhi.

SBI had also asked MTNL to indicate whether the proceeds from its project in collaboration with the National Buildings Construction Corporation to develop residential and commercial real estate would be used to liquidate its outstanding loans. And then came a veiled threat. It told the telephone company that if the outstanding dues were not immediately cleared, it would “institute legal proceedings for the recovery of the said entire loan along with interest and take such other steps as may be available to the bank, including enforcement of securities without any further reference to you (MTNL) in the matter.”

What SBI was perhaps referring to in that warning was its intention to seek recourse to the Insolvency and Bankruptcy Code, if these dues were not cleared immediately. But it is also likely that the government would step in with some financial support for MTNL before SBI seeks such legal recourse. After all, the government and the MTNL board have been working on various proposals to revive the telephone company. Last August, the MTNL board approved an agreement that would allow state-owned telecommunication company Bharat Sanchar Nigam Limited (BSNL) to manage MTNL’s operations for 10 years, without a merger between the two. The merger plan was dropped because of its complexities and the challenges it posed. The board decision also allowed MTNL to sell its shares in some of its subsidiaries and even close one of them.

But the SBI notice on legal action to recover its dues from MTNL should make the government rethink its options for reviving the telephone company, instead of relying on stopgap measures such as a 10-year service agreement with BSNL. The fact is that MTNL’s financial obligations are so huge (reminding one of the problems faced by Air India until it was privatised) and the market reality is so challenging that asking BSNL to manage its operations would be a sub-optimal solution. If BSNL cannot take over MTNL, it is better to find an outright buyer for it from the market.

MTNL’s stock price reflects the obvious weaknesses of the company, with a market capitalisation of just about Rs 3,000 crore. Given the rapid market share loss and the asset sale programme gaining momentum, its market valuation could see a further decline. If the privatisation route, as was finalised for Air India in 2022, is considered inappropriate for whatever reasons, SBI’s notice threatening legal action to recover its dues from MTNL could be an opportunity. Lenders could use the Insolvency and Bankruptcy Code to get a new purpose-oriented management in place, recover their dues, and help find a new buyer for MTNL. It could also test the efficacy of the Code before it is sent for an overhaul.