Market hopes Vodafone Idea will be saved and these are the rescue options

Market hopes Vodafone Idea will be saved and these are the rescue options
Vodafone Idea needs more than just a helping hand to surviveBCCL
  • Shares of Vodafone Idea have spiked nearly 18% in the last two days on hopes of a bailout from the government.
  • There were three demands made by the company’s billionaire promoter Kumar Mangalam Birla.
  • According to experts, the most viable option at this stage is to put a floor price on tariff, one that would apply to all three major players including Bharti Airtel and Reliance Jio.
  • Check out the latest news and updates on Business Insider.
Vodafone Idea and its management have been sending out SOS to the government. The market seems to believe that a rescue package may be coming after promoter Kumar Mangalam Birla has written to the Prime Minister Narendra Modi and met the newly-appointed Minister for Communications, Ashwani Vaishnaw.

The shares of Vodafone Idea surged over 10% on September 2 and another 7% yet again today (Sept. 3). The most viable option, according to experts, at this stage, is to have a floor price for telecom services for all operators including Bharti Airtel and Reliance Jio.

Floor price refers to a minimum price for voice and data services, which means telecom operators will not be able to offer rates lower than the floor price.

Market hopes Vodafone Idea will be saved and these are the rescue options
Vodafone Idea share price over the last two monthsBSE / Business Insider India / Flourish

The market seems to believe that Vodafone Idea may be rescued but experts believe it may be easier said than done.

There were 3 demands from Birla, in his letter to the Prime Minister dated June 7: to reduce the payment of regulatory dues after the Supreme Court allowed the recalculation of revenue in earlier years (also called adjusted gross revenue or AGR), to defer payment for spectrum licences, and to set a minimum level of tariffs for mobile phone operators.

Sanjay Kapoor, the former chief executive officer of Bharti Airtel, believes if Vodafone Idea gets any of these measures as a bail out, others, including Reliance Jio, will also demand the same and it will only be fair.

“I think it will be parochial to read Mr. Birla's letter as wanting to sell his stake. I think it is metaphoric and symbolic in nature,” Kapoor said, explaining that Birla underlined his concerns with the Indian telecom industry slipping back to a duopoly, and that his company and Vodafone Plc., haven’t been able to generate returns out of their multi-billion dollar investment in the telco.

On the other hand, R Chandrashekhar, former secretary, Telecom and information technology (IT), told Business Insider that not all of these requests are viable.

Like Kapoor, Chandrashekhar also said that the moratorium on spectrum payments would require changing the terms agreed to by the operators, and offering support only to one telco is impossible.

The government may find it difficult to let go of revenue, especially from for-profit private companies, at a time when the pandemic has stretched its finances.

In the case of AGR dues, the Supreme Court order leaves no room for the government to make exceptions even for a company like Vodafone Idea that seems to be bleeding to death, fast.

That leaves us with a floor pricing regime that will define the minimum cost of service that operators can charge. This is a request that Telecom Regulatory Authority of India (TRAI) had earlier rejected but, according to reports, the proposal is back on the table for the Department of Telecom to consider.

The government, too, finds itself between a rock and a hard place. It can’t be seen as saving a private company owned by a billionaire like Birla, with an estimated net worth of $14.3 billion as per Forbes, in partnership with a multinational giant like Vodafone.

It may be a tough call to offer sops to other billionaires like Mukesh Ambani (net worth estimated at $90.2 billion by Forbes and Sunil Bharti Mittal (estimated net worth $12.9 billion), in a bid to provide relief to Birla’s firm.

But letting Vodafone Idea die will turn Indian telecom into a duopoly, or a two player market, which may lead to an unpopular rise in the cost of services at a time when the government wants internet and digital technologies to be more widely accessible and adopted by people at large.

As Chandrashekhar put it, “it's a difficult problem at the outset, but the solution requires not only a brilliant plan or a design, but it requires a taker”.


What if Vodafone Idea dies?

Vodafone Idea shares spike after promoter Kumar Mangalam Birla's meeting with India's Telecom minister