With over a billion mobile subscribers, India is one of the world's largest telecom markets. However, the Indian telecom companies are in bad shape at the moment. Two of the biggest telecom firms - Vodafone Idea and Bharti Airtel - reported massive losses in the second quarter further deepening fears about the state of the industry.
Ever since the entry of Reliance Jio three years ago, the other telecom companies have seen their fortunes plummet.
To attract customers, Jio offered cheap data and talk time. This worked and forced rivals to follow in their footsteps to retain their customer bases. Therein came the rub.
The companies ended up making very little profit and in some cases, they even started making losses. As the majority of telecom companies were battling against the newcomer, yet another trouble - Adjusted Gross Revenue - came their way.
What is AGR?
The Adjusted Gross Revenue (AGR) calculation is what the government and telecom majors have had a disagreement over since 2005.
The telecom companies argued that AGR should include income only from telecom operations.
The government - Department of Telecommmunications (DoT) - disagreed and said it should also include non-telecom incomes such as the sale of assets, interest on deposits, rents, etc.
On October 24, the Supreme Court ruled in favour of the DoT, putting the telecom companies under tremendous pressure. In its judgment, the top court accepted the DoT's AGR definition and ordered the telecom companies to pay Rs 92000 crores to the government within three months.
Post verdict, DoT shot off notices asking them to self-assess pending dues, make payments and file requisite documents within the timeframe stipulated by the top court.
“It is the responsibility of licensees to pay licence fees and other dues after carrying out their own assessment as prescribed in the licence agreement. You are therefore directed to make the payment in accordance with the order of Supreme Court and submit requisite documents to ensure compliance within the stipulated timeframe,” the notice said.
How did the SC ruling affect the companies' results?
The apex court's ruling took a toll on the telcos' balance sheets.
Two of India’s only three remaining private sector telcos -- Vodafone Idea and Bharti Airtel - posted their highest-ever quarterly losses since inception.
While Vodafone reported a loss of Rs 50,921 crore for the September quarter, the highest loss reported ever for any Indian company, Bharti Airtel posted a loss of Rs 23,044 crore for the quarter as the company had to set aside Rs 28,450 crore towards AGR dues.
Vodafone to exit India?
After the ruling, the Vodafone Group chief executive officer Nick Read, was reported as saying that the future of its India business is uncertain due to unfriendly regulation, tax terrorism and expensive court rulings. The British telecom major also announced it has written down the value of Vodafone-Idea in its books to zero.
"Financially there's been a heavy burden through unsupportive regulation, excessive taxes and, on top of that, we got the negative Supreme Court decision," he was quoted as saying.
A day after Read made the statement, the government said it "has expressed displeasure and disapproves Vodafone CEO Nick Read's statement on the telecom sector in India," PTI quoted a senior telecom minister as saying.
It is learnt that Vodafone CEO had later written back to Prime Minister Narendra Modi promising that the company will remain in the country and blamed the media for distorting his remarks.
What will happen if Vodafone quits India?
The combined losses of Rs 74,300 crore for telecom majors Bharti Airtel and Vodafone Idea may have a significant impact on the economy and the banking sector. As it is, the economy is on a rocky road, and at a time like this, if Vodafone were to leave the country, that could hit investor sentiment further.
Should the customers be worried?
Just in case Vodafone decides to leave India, a new owner might take over and the customers can continue using the same network. In the worst case, you will be asked to migrate to some other network. However, you will be given ample time to do so. So, no need to worry about it right now. Whether you remain in the same network or change your service provider, there is no way you will lose your Vodafone phone number. Remember you will be asked to change only your network, not your number unless you wish to.
But there is one thing that we need to be worried about in the event of Vodafone's exit. If the company leaves, and its place is not taken by any other company, the market will eventually become a duopoly with just Jio and Airtel. This can be problematic because both MTNL and BSNL are also in no shape to compete with private players. Generally, monopolies or duopolies are not good for any market.
What is Finance Minister Nirmala Sitharaman saying
A day after two of the largest telcos – Vodafone Idea and home-grown Bharti Airtel - announced a combined loss of over Rs 74,300 crore for the second quarter, Finance Minister Nirmala Sitharaman said the Government is considering requests for financial relief for the beleaguered telecom sector. A panel of secretaries headed by Cabinet Secretary Rajiv Gauba is currently looking into measures to relieve stress in the sector, including possible relief from the AGR liability.
CEOs of both firms - Gopal Vittal of Bharti Airtel and Vodafone Idea Limited’s Ravinder Takkar - have said they remain hopeful of some relief from the government.