emergency call

<pre><pre>Who is (not) a citizen?

When the former Reliance Infocomm started its pioneering service with the slogan "Kar lo duniya mutthi mein" in December 2002, many described it as a revolution in the Indian telecommunications sector. Mobile phones were made affordable for the first time, unlocking the potential to connect Indians regardless of where they live or work. Fourteen years later, when Reliance Jio, led by Mukesh Ambani, started its 4G service with VoLTE technology (Voice-over-Long-Term Evolution) in September 2016, the focus was on data with high-speed video downloads and Live streaming of news. Sports and entertainment are becoming the new normal. However, Jio's entry also rocked the huge established companies – Vodafone, Idea and Bharti Airtel – and uprooted Reliance Communications (which became known as Reliance Infocomm and ironically belonged to Mukesh's brother Anil), which was fraught with huge debts and outdated CDMA technology was easy , With its competitors in the doldrums, Jio has the Indian telecommunications sector under control – but this has also raised serious questions for consumers. How will customers assert themselves in a monopolistic or duopolistic situation with only one or two telecommunications companies? Will they be vulnerable to price increases? Is this the end of low tariffs that were mainly responsible for the widespread use of value-added services such as data?

Consumers are not the only ones facing uncertainty. Although most players in the telecommunications sector have been under stress for some time, no one has been prepared for the recent Supreme Court shock. On October 24, when the court approved a Department of Telecommunications (DoT) directive on a new method of calculating royalties and frequency fees, Telcos was suddenly faced with combined liability of 1.33 billion rupees (including interest), which was to be paid within this period was three months. This would have been a debilitating blow, just like in the course of fierce competition from Reliance Jio, which with its aggressive tariffs had put a heavy strain on its competitors' profit margins.

Vodafone Idea and Bharti Airtel, who released their second quarter results for this fiscal year, reported record losses after making provisions for government fees under the new gross adjusted income (AGR) calculation. The former posted losses of approximately Rs 50,922 crore, while the latter's losses for the July-September quarter were Rs 23,045 crore. Vodafone Idea has set aside Rs 25,680 crore for its EGR liability, while Bharti Airtel has set aside Rs 28,450 crore for this.

As a direct result of the court order, Reliance Jio, Vodafone Idea and Bharti Airtel announced tariff increases – the first in five years for the latter two. While Bharti Airtel and Vodafone Idea will increase prepaid plan rates by up to 42 percent from December 3, Jio has announced plans to introduce all-in-one plans that cost 40 percent more than previous plans. These tariff changes are expected to affect around 900 million telecommunications customers. "Jio has been a leader in aggressive pricing in this sector, resulting in weaker market failures and increasing financial strain on Bharti Airtel and Vodafone Idea," said a study by Axis Capital. & # 39; The price increase is likely to be the basis for an improvement in the financial situation of telecommunications companies and incumbents [announcing] a price increase (without the risk of losing subscribers). & # 39; The increase will help increase the average revenue of telecommunications companies per user, which can be reinforced by the operational leverage.

"Subscribers can expect their bills to increase," Bhagyashree C. Bhati, research analyst at Care Ratings, said in a note. "To offset the impact, some could reduce their data usage and move from 2 GB data plans to 1.5 GB data plans and from 3 GB data plans to 2 GB data plans."

An SOS call

While consumers are wrongly affected by these price increases, telecommunications companies are likely to feel the same way about EGR. In their disagreement with the DoT, telecommunications companies had argued that fees should be calculated based on the core business that they do with their assigned spectrum. The DoT had claimed that the definition of AGR included other items such as dividends, interest, capital gains from gains on the sale of assets and securities, and gains from exchange rate fluctuations.

For a sector with a debt surplus of 4 billion rupees, such a high fee, which had to be paid within three months, was a disaster. This could have only caused major problems for one of the main players in the fight – Reliance Jio – with Bharti Airtel and Vodafone Idea. When Vodafone boss Nick Read was asked about India business on November 12, he had predicted a bleak future. He allegedly said: "If you are not a serious company, you will find yourself in a liquidation scenario – it couldn't be clearer than that." This led to concerns that the UK company might consider winding up in India and falter Vodafone Idea's share price. Although Read later said that his comments were misread, it is no secret that given the debt burden of 98,000 rupees and declining attendance despite the merger with Idea Cellular in August 2018, the company struggled in India as well over 1 billion rupees of government royalties totaling 21,682.13 billion rupees. Reliance Communications, which had discontinued cellular operations due to rising debt, owed the US Treasury 16,456.47 rupees. (As the EGR dispute dates back to 2005, the total amount of interest and penalty claims that have since been raised has soared.)

& # 39; This decision [by the Supreme Court] It has come at a time when the sector is facing severe financial pressures and could further weaken the sector's profitability, ”Airtel said in a statement on October 24, adding that the government needed to find a way to alleviate the burden reduce the industry. The government intervened when the center announced a two-year moratorium on frequency payments on late November 20. Telecommunications companies must now make the next frequency payment in the 2022-23 financial year. This has given Vodafone Idea and Bharti Airtel space, but they still cut out their work to get out of the red area.

battle lines

At the end of October, the Cellular Operators Association of India picked up beating on behalf of the incumbent operator and wrote to Telecommunications Minister Ravi Shankar Prasad about the crisis in the industry and the possible negative impact of EGR charging on industry. However, this led to a verbal battle with Reliance Jio, in which his letter pointed out that competitors should not be brought out of their own “commercial failure and financial mismanagement”.

These disputes between telecommunications companies and the government (and between telecommunications companies themselves) illustrate the general turmoil in the industry. With the entry of Reliance Jio Infocomm in late 2016, the sector developed into a war zone after the notorious 2G scam, which was later not confirmed by the courts. As private sector players, Vodafone and Idea merged (which merged in 2018) and Bharti Airtel cut tariffs to match Jio's greatly reduced opening offerings. Large-scale public sector corporations, Bharat Sanchar Nigam Ltd (BSNL) and Mahanagar Telecom Nigam Ltd (MTNL), are also waiting for the government to be rescued. The high frequency fees that private players had to pay for the auction of radio waves did not help them either. A telecommunications company wishing to offer services in one of India's 22 telecommunication circles must acquire a license for unified access services in order to operate this circle through an auction. Telekom players have often made complaints about this. "On the one hand, we have the Prime Minister's vision of a digitally controlled India, which requires enormous investments, and on the other hand we keep the frequency prices very high. The license fees are high, the frequency fees are high and the GST is 18 percent, which is almost the highest tax bracket "said Sunil Mittal, chairman of Bharti Airtel, at an event in New Delhi last year. The pain is obvious: in August of this year, Airtel recorded its first quarterly loss in 14 years (in the June quarter), reaching a loss of 2866 billion rupees compared to the net profit of 97 billion rupees a year ago. Vodafone's losses also increased – Vodafone reported a net loss of 4,067 billion rupees in the quarter to June 2019, after a net loss of 2 758 billion rupees in the same period last year.

Other losses

The established companies have also lost customers. According to a report by TRAI (Telecom Regulatory Authority of India), Vodafone Idea lost 4.95 million subscribers in August this year, while Bharti Airtel lost 0.56 million. This happened at a time when the total number of mobile customers increased by 2.68 million to 1.17 billion in August. Her loss was Jio's profit – he has already overtaken Airtel among subscribers and is very close to Vodafone Idea. In August Vodafone Idea had 375 million subscribers, Jio 348.2 million and Airtel 327.9 million. Meanwhile, BSNL and MTNL lost 0.21 million and 6,701 subscribers in August, respectively.

Why has it gotten so bad for telecommunications companies? One reason for this is the exorbitant sums that companies had to pay for the spectrum. Another reason is the frequent changes in guidelines and regulations. For example, the spectrum is currently sold through auctions, so the costs are often prohibitively high. As a measure, the government earned 1.09 billion rupees in 2015 through frequency auctions. Another problem is the price war that started with the entry of the cash-rich Reliance Jio into the telecommunications market. For a start, Jio's goal was to carpet-bomb the cellular area that had become a potential focus for value-added services through the use of LTE technology, a form of high-speed wireless communication for cell phones and data terminals. Second, it would improve 4G technology (4th generation of cellular technology that enables high-speed data transfer), which at the time was mainly served by Bharti Airtel, Vodafone India and Idea Cellular, gaining 100 million customers in its first year of operation. After that, it would retain these customers and add more, striving to achieve what China's state-owned mobile operator China Mobile has to offer in recent years. (In China Mobile, 400 million users switched to LTE within 18 months of 2014, and sometimes 22 to 23 million subscribers to the new network were added in a single month.) According to media reports, Jio's entry saw an unprecedented increase in data consumption. The average user consumes 11 GB of data per month. Jio's journey has expanded, as analysts suspect, with growth at the expense of other telecommunications companies. Jio also benefited enormously from the government's efforts to make Aadhaar mandatory for various services – at one time, even for a secular mobile subscription. The Supreme Court later restricted such E-Aadhaar filings, but not before Jio made significant progress in the telecommunications area.

Bharti Airtels Sunil Mittal with Mukesh Ambani from Reliance Jio and Nick Read from Vodafone

Behemoth on the back foot

Vodafone Plc had big plans for India when it acquired a majority stake in Hutchison Essar in 2007. These plans didn't work. The company was burdened by fierce competition, high frequency fees and changes in government policies. The company got into a legal dispute with the government over retroactive taxation on the acquisition of a majority stake – it had to cough up 20,000 rupees, a matter that is currently the subject of arbitration. Another regulatory problem was the policy of the UPA to grant frequency licenses according to the principle of first-come-first-serve. Although this led to a price cut, it led to a legal dispute in which the Supreme Court laid down more than 100 licenses. Jio's market entry was another blow as the company offered free voice and cheap data on its more efficient 4G network, adding millions of subscribers every month. When Vodafone Idea tried to improve his network to take over Jio, his debt stack grew.

In the second quarter of fiscal 20, Vodafone Idea's average revenue per user decreased from 108 to 107 rupees. Despite the estimated annual synergies between Vodafone and Idea of ​​6,300 rupees a year, the gains from moving equipment at locations where both Vodafone and Idea had an infrastructure to increase coverage and services without sacrificing the EBITDA margin (Earnings before interest, taxes, depreciation and amortization) remained at 10 percent. The company's net debt rose quarterly from 99,300 rupees to 1.01 rupees. According to a Citibank report, Vodafone Idea faces "significant uncertainties" due to poor operational performance, high leverage and additional EGR liability.

A SBI Caps statement said the recent Supreme Court decision on EGR for Vodafone-Idea is associated with significant survival concerns [its] exhausted balance ". The note goes on to say: “Given this situation, we still find it extremely difficult to raise equity or debt. The ability to invest in networks, which was the main reason for the loss of subscribers to the company, is likely to take a back seat and customer losses could continue. & # 39; According to SBI Caps, Vodafone-Idea's problems are mainly related to its balance sheet and cash flows and incremental steps are unlikely to solve the problem. It is not only the number of players that is decisive, but also the ability of the players to invest.

A slim lifeline

Although the government eased the EGR payment terms, it left little leeway for indebted telecommunications companies. A revision of the M&A guidelines could help further consolidation to ensure that no frequency fees owed to the government by telecommunications companies are lost. The introduction of area tariffs for services could also improve the sector's cash flows and restructure the debt burden of telecommunications companies.

The sector is going through difficult times that may only be surpassed by the crisis after the 2G fraud. As already mentioned, the moratorium on EGR contributions will only bring temporary relief. And while technological disruption is inevitable, the sector can surely forego unpredictable policy changes that could literally get players out of business.