This note is a follow-up to my earlier writings on this topic. The first one is titled — “The Collateral Damage of VI going out of business”, and the second one is — “Does VI deserve a bailout? If yes, why?”. In this note, I plan to list all the challenges that the GOI will face while it tries to bail out VI from its current financial mess and the possible solutions.
Diluting DoT’s Spectrum & AGR Dues
We all know most of VI’s debt emanates from its obligation to make deferred payments for all the spectrum that it won in past auctions (since 2012). The unpaid value of this debt today stands at approximately Rs 1.32 Lakh Cr (Breakup — Figure 1 of the first Article). Similarly, other operators like Bharti and RJIO also have accumulated such debts.
Bharti’s Spectrum & AGR Debts
The details of Bharti’s pending obligations are listed in its annual report (page 365), reproduced as under.
Note, the data listed in the annual report shows outstanding as on 31st Mar 2022 and does not include data of the last auction (2nd Aug 2022) — which is approximately Rs 40 K Cr. Hence, if you add this to the number listed in the above table, then the total outstanding on the spectrum auction for Bharti stands at more than Rs 80 K Cr. Also, note that compared to VI’s AGR outstanding of Rs 68 K Cr, Bharti’s outstanding linked with this item stands at approximately Rs 30 K Cr. So the total outstanding for Bharti (spectrum +AGR) is approximately Rs 1.1 Lakh Crs (80K + 30 K).
Now, on AGR, the following is the snapshot of the DoT’s original demand. This is based on DoT’s application for modification filed before Supreme Court on 16th March 2020.
Note — Bharti has already paid Rs 18 K Cr on AGR to DoT, and the increased outstanding (from the original due) for both Bharti and VI is on account of the accumulated interest over the years.
RJIO’s Spectrum & AGR Debts
The details can be found in RIL’s annual report (FY22 — page 426). The snapshot of the relevant table is reproduced under.
Now if you add on this liability the RJIO’s new deferred payment obligation in the recent auction of approximately Rs 80 K Cr, this translates to a total value of Rs 1.2 Lakh Cr.
Form the above discussion, one can clearly see that any direct bailout to VI on their spectrum & AGR dues will severely impair the GOI’s ability to collect the remaining dues from Bharti and RJIO, thereby making the past auctions totally defunct. Also, if VI is only singled for a bailout, then it will translate into a legal issue — motivating Bharti and RJIO to force GOI to give them the same benefits as VI.
Also, in my view, the legal challenge will also get extended to the dues already paid by these companies as upfront payments (Like Bharti’s Rs 18 K Cr on AGR, and both Bharti and RJIO of spectrum upfront payments), thereby triggering these companies to seek a refund from the GOI (with interest).
DoT’s Inability to Collect Dues for Extended Period
In case GOI decides to extend the moratorium period which is currently going to expire on Sept 2025, then DoT will be compelled to extend the same facility to both Bharti and RJIO to prevent getting into a legal challenge. This shall mean that GOI will not be able to collect the remaining dues (past spectrum auctions & AGR judgment) for an extended period of time.
Note, that such an extension of the moratorium period will carry an interest that will be on WA of more than 9%. Now VI will have no option but to accept the arrangement, and by doing so its overall debt burden will keep increasing at that rate. And if the deferment period is assumed to be 5 years from now, the VI’s GOI outstanding will stand (at the end of that period) at 3.2 Lakh Cr, thereby compelling it to pay Rs 32 K Cr/year on interest payment alone (after the end of the 5 year period).
The implications will be similar for others as well. Hence, it will be difficult for us to judge how Bharti and RJIO will react to the moratorium extension that too when all its long-term loans are at a lower interest rate. See extract from page 365 of Bharti’s Annual Report FY22.
From the above discussion, it is clear that the extension of the moratorium period of debt is also not without challenges as it will keep pushing the outstanding value exponentially, thereby making it impossible for VI to pay. In other words, this remedy is tantamount to pushing the eventuality to a future date only.
Also, it will severely impact DoT’s collections from the sector and dilute the GOI Non-Tax Revenues. Already, this revenue is on a shrinking path.
DoT’s challenges with the provisions of the new Bill
In my view, DoT has already seen the writing on the wall, and it is trying to arm itself with sufficient provisions in the forthcoming telecom bill. The details are listed under.
The Draft Telecom Bill
The following provisions have been included in the draft [Clause 20(3)] reproduced under.
“In the event, the licensee, or assignee that has become subject to an insolvency proceeding, fails to comply with the sub-section (2) [payment of dues], then the spectrum, if any, assigned to such entity shall revert to the control of the Central Government, and the Central Government may take such further actions as may be prescribed, which may include allowing such licensee or assignee to continue to use spectrum, subject to placing the revenue of such entity in a separate designated account with the license fee and charges applicable being paid first in priority during such period”
The draft bill also empowers the central government to transfer control of the insolvent company to any person or entity, and for such period as may be notified in this regard — all in the national interest and protect the interest of the consumers [Clause 20(5)].
The draft bill goes further with provisions (Clause 21) reproduced below.
a) Deferment of the payment of such amounts as part thereof.
b) Conversion of part or all of the amounts payable by the licensee, registered entity, or assignee, into shares in the licensee, registered entity, or assignee.
c) Write-off of such amounts or part thereof.
d) Relief from payment of such amounts or part thereof.
Impementation Challanges
Though the provisions of the new bill are aimed at allowing VI to continue to function, however, it does not lay out a clearly workable process that is legally immune to challenges. The new process should — a) Maintain the sanity of the spectrum auctions; b) Ensure fairness in the restructuring process; c) Lay out clearly defined criteria that will be invoked to trigger this process; d) Improve upon the existing code on Bankruptcy; e) Define how and who will get precedence on payment (DoT’s or the private lenders) when VI is in a cash crunch.
With this process, DoT will find itself in a catch-22 situation. In case it decides to push VI for paying its dues first (as soon as VI finds some resources), then VI will lose all its capability to invest in new networks and technology. But if DoT doesn’t push VI for the payments, then DoT will have to face allegations of lending undue favors to corporates and businesses.
In either situation, the promotors will lose interest as the company’s fate will hang in balance — neither it will be able to fully exit nor earn reasonable profits. In nutshell, the entity will virtually become a government-run entity and end up meeting the same fate as the existing loss-making PSUs.
Solution
In my view for any solution to work in this mess, it has to be clear, fair, transparent, principle-based, and legally defendable. Only then will the investor's confidence get strengthened. Any such plan will be not without losses. Only the magnitude of which shall vary — depending upon how quickly it is managed and implemented. The following are two principles on which this plan needs to anchor.
a) All options financial options offered to VI, must be open for others companies to choose in case they so desire.
b) The plan must be unambiguous and all steps of execution must be clearly laid out in advance.
Plan 1 — Reduce or waive interest on all DoT loans (AGR & Spectrum Payment). This will make the extension of the moratorium less painful for VI and others (as the option of moratorium has to be given to all interested). Yes, GOI will lose revenues, but the loss will be significantly less compared to collateral damage described in my earlier note titled — “The Collateral Damage of VI going out of business”
Plan 2 — Modify rules on roll-out obligation on the acquired spectrum, by allowing roll-out obligation to be met by a combined network based on a sharing or a business arrangement between commercial entities. This will ensure that spectrum resources held by companies get optimally and efficiently utilized, and nothing lies wasted. By doing so consumers will get better quality services.
Plan 3 — Layout clear rules for estimating reserve prices for future auctions. Such prices should totally disconnected from past auctions and must be based on ground-up models — linked to the economic potential of the circle/service area. Economic potential can be estimated by linking the GDP of that SA, or any other similar metric. This will motivate the bidders to bid responsibly, knowing well that prices might fall for the spectrum in the next round.
Plan 4 — Layout policies for reducing the transactional cost of the telecom industry. Like seamless RoW, tower leasing rules, active network sharing, etc. Telecom companies operating expenses will reduce, thereby increasing their profitability — making them healthy.
Plan 5 — If none of the above plans work, then VI should be allowed to go through the natural process of bankruptcy, even if it means for DoT to take a huge haircut. It should do so in the interest of preserving the health of the telecom industry in digital India is tightly anchored.
Summary
To summarize, VI needs investments. And for such investments to flow, the promotors need to see a clear workable plan which can drive VI toward a path to survival. For India to grow and prosper it needs its telecom sector to be healthy and profitable and therefore time is now to act so that we don’t drive ourselves into a situation of no return.
(Views expressed are my own and do not reflect that of my employer)
PS: Find the list of other relevant articles in the embedded link.
