telecom sector
Image Source: https://bit.ly/2BJapJy

This article has been written by Uma Shankar Mishra.

Introduction

The Indian telecom sector has come a long way since 1991 from the Monopoly of state-run BSNL, MTNL to the launch of Reliance -Jio Infocomm in the year 2016. Within a year of the launch of JIO Data prices have gone down drastically Its Tariff – plans and Predatory pricing led to a Domino effect of Mergers among the companies

https://lawsikho.com/course/diploma-m-a-institutional-finance-investment-laws

Vodafone – Idea merger

One of the prominent mergers which occurred as part of a major consolidation was that of between Vodafone Plc. and Idea Cellular limited, Bharati Airtel Limited and Tata Docomo where Tatas gave the company to Airtel for a negligible amount. It also led to the closure of other major telecoms such as Reliance Communication and Aircel. Among these various transactions the most important event was the Formation of Vodafone – Idea limited and it became the largest player by Market share. However, its financial position deteriorated after the merger from a stock price of Rs. 60 per share it has now crashed to Rs. 5.60 per share. The merger which was undertaken to solve the problem has further aggravated the problem and has the potential to affect the Indian Telecom Industry. The problem lied in the assumption that merger leads to synergy. This assumption cannot work always. As Vodafone and Idea were Competitors for about 20 years, each of them had towers and other equipment’s in the vicinity. Therefore, it is taking time, effort and cost for the merged entity to look for synergies i.e. for de-duplication and redeployment of the equipment, segregating equipment’s of different manufacturers which is taking a toll on its performance and subscribers are migrating to Rival telecom providers. The situation is like that of a vicious cycle of debt i.e. to fund operating losses the promoter company takes debt which leads to interest outgo, to fund the interest outgo it takes further debt which leads to more debt[1]

The most important aim of a merger between two companies is cost-cutting due to synergy in the operations which as of now has not been achieved by the merger. Instead, the company has been losing market share and has plunged into crisis. While Airtel which was under stress of heavy debt was able to make a comeback due to its Consumer Focussed initiatives the Merger blues and Network – Integration issues. While the Rights issue by the Promoters to Raise   Rs25,000 crore may provide some stability but is not enough to suit the needs of the sector. The Company which viewed the merger as an attempt to save the promoters from Financial onslaught but now itself is reeling under Huge Debt burden. The merger was agreed between the two companies due to the Reliance Jio’s arrival as well as their inherit strengths of the network in India as Vodafone was primarily strong in Urban areas and Idea Cellular strong in Rural Markets[2] which at least in theory would have been a strong player to reckon with. The actual scenario is quite different as both the Telecos suffer from Human Resource integration issues as Vodafone being a Multinational Corporation had a work -culture different from Idea cellular which was Conservative in its spending which causes Friction among the employees and further hampers performance and profitability[3]

But why would an average Consumer in general worry about a telecom Company in the sector. It is due the fact that the Company has a debt of around 1.2 lakh crore majority of which are spectrum liabilities to Union Government and around 15,000 jobs. If the Company fails the sector would be reduced to a Duopoly (As BSNL and MTNL have negligible Market Share) which could lead to an escalation of tariffs and burden on an average consumer which has become more dependent on Consumption of Mobile data after 2016. Moreover, the closure of Vodafone Idea limited would lead to a Domino effect of closure of allied jobs and discourage foreign investment which is urgently required to Jump start the economy affected by slowdown.

Merger between Bharati Airtel limited and  Tata teleservices limited

Another issue which is of great concern came to light during the acquisition of Tata – Docomo by Bharati Airtel Ltd. Though the Parties first made Public their merger in October 2017 and Tata’s agreed to give the mobile telephony business  to Airtel in a Debt- free Cash – free merger, it came into force only on July 2019, by the time most of the Docomo subscribers had exited the telecom and Airtel lost a Chunk Of subscribers who would virtually have been part Of its network . Though the Scheme of arrangement for merger was sanctioned by NCLT Ahmedabad bench(Ahmedabad being registered office of Idea cellular limited)  in January 2018 , the merger was effective only from August 31, 2018 The delay primarily arose due to demand of  Rs.8,00,00,000  from airtel by DoT (Department Of  Telecommunication) as one time spectrum charges(OTSC)  as a precursor to merger[4]. The Telecom Dispute Settlement and Appellate Tribunal ruled in favour of Airtel waiving off the demand of OTSC from Department Of telecommunication. The DoT has still not approved the deal and may challenge the order in the Supreme Court.  The Telecos are already reeling under high debt and imposing further charges on them would derail the telecom sector. The Telecom regulator TRAI and Department of Telecommunication (DoT) should exercise restraint and not be eager to bridge the revenue shortfall by meeting their Tax – collection targets.

Participation of Huawei in Indian 5 G Infrastructure

Another issue which is causing debate among the various stakeholders of the telecommunication industry is about the Fate of Chinese Telecom Gear makers Huawei and ZTE. Though the US has urged its allies to stop using their equipment’s and even banned them in its territory, India cannot afford to do it because of financial and diplomatic implications. The cost -escalation which occurs due to the ban on Huawei and ZTE from Indian 5G gear Market could raise cost by 15- 20% in an already stressed industry marked by debts and Closures. We also need to be aware of the fact that out of three major telecom  Only Vodafone Idea  and Airtel use Huawei equipment’s whereas JIO sources only  from Samsung[5] which means that in an event of a Ban the Major losers would be struggling telecoms  Vodafone Idea Limited and Bharti Airtel Limited and the Biggest gainer would be Reliance Jio Infocom and would give Jio further leeway and an added competitive advantage which does not augur well for the sector as a whole. With – respect to an escalation in costs, the telecos would have no choice due to their stressed Financial situation but to pass of it as tariff to consumers which could be avoided by permitting Huawei and ZTE. India also runs a Risk of alienating Chinese Investments due to banning of Huawei and other Chinese gear Makers as it is one of the Largest Investors in Country and as opposed to the US has invested in Labour – Intensive industries of manufacturing of electronic items such as Mobile phones, Television Etc. It is also a fact that India is Heavily reliant on China for Its Goods and there exists a trade – deficit between them amounting to  57.4 billion dollars.

The Chinese Threat Of putting reverse sanctions on Indian Companies operating Out of China cannot in an event of ban on Huawei cannot be ruled out[6] Though Officials at Various levels of US government have categorically stated that the United States has given this advice only to protect allies and friends from subsequent security risk due to adoption of Huawei’s Technology . The pertinent question which arises here is Whether security Risks can be eliminated due to the banning of Huawei. Can we be sure that there won’t be any security Risk arising from Equipment of other 5 G gear makers and manufacturers?  There is no clarity on this matter that other gear makers would not indulge in activities which we are accusing Huawei of. Therefore, we should allow Huawei and other Chinese makers to take part in building India’s 5G infrastructure by keeping appropriate Checks and Inspections. It would be beneficial for India if Huawei signs a No – Spy agreement with Indian Government as well as telecom service providers such as Airtel and Vodafone Idea which can act as a safeguard against any future attempt related to data – sharing which could compromise National Security. Bharati Airtel Chairman Sunil Bharati Mittal speaking at World Economic Forum at New Delhi has made a Comparison among Nokia, Ericsson and Huawei’s 4G equipment and has stated that the efficiency and affordability of Huawei equipments is far more superior to Nokia as well as Ericsson[7] and he can make a genuine decision as his company uses all the three equipment’s.

Conclusion

The Telecom industry apart from having an economic advantage also has a social obligation. In an era of Digital India where the government wants to take internet to the remote village of our Country, the government is examining the proposal to shut down state – Run BSNL and MTNL terming them as Sick PSU” s. These were the same PSU’s which we’re giving it a dividend of about Rs.5,00,000 Crores. It was due to utter – mismanagement of BSNL i.e. not providing 4G airwaves on time, political interference in decision making which have caused the Financial troubles at BSNL and MTNL. The private enterprises look for-profit and therefore would not cater to the village or ensure landline as well as mobile telephony services to remote corners to Country. Therefore, the government should continue its presence in a strategically important sector for Economic as well as internal security. It could restructure liabilities of BSNL, sell the surplus land which is available with them, pursue a VRS scheme where most of the employees above 50 could retire which will help the BSNL to lessen its salary bill which today accounts for 60% of its expenditure. It should also ask the government to Compensate it for serving the far-flung and remotest corners of the country where other operators are not interested to go due to the lack of profits.

The Indian telecom sector is going through a bad phase first time after the telecommunication sector was liberalised, which had the main objective to increase the competition leading to a decrease in prices. The fact is that exactly opposite to  what  outlined in the policy there is now lesser competition and exit of both private sector, as well as public sector operators, would lead to more harm than good of consumers in long run as history has been witness of the fact that monopoly or to an extent Duopoly will lead to erosion of profits of consumers. The Government should not solely look at revenues from Taxes as a way to enhance its coffers. It should look at the Financial health of the sector. It is a fact that the Union government is earning Crores of rupees as a spectrum charge from the Teleco’s. Hounding of Teleco’s for the purpose of earning taxes may lead to Collapse of Company itself which will lead to fewer Competitors’ fewer bids at Spectrum auction Ultimately leading to loss of Spectrum Charges as the Remaining will not bid for the Spectrum as aggressively, they used to bid when there was no Competition. The downfall of BSNL, MTNL and Air India was due to the attitude of the government treating them as a cash cow for revenues and not maintaining or taking care of overall health of the sector, the result is for every one of us to see. These public sector Companies are saddled with huge debts and the government is forced to either shut down these companies taking into account VRS and other requirements related to closure or forced to take large haircuts of debts in order to make the company attractive for a private investor. There is a chance of the same thing happening to the telecom sector if the government does not take steps to address the liquidity crunch in the telecommunication sector and suggest remedies. The government will be the sole loser if spectrum auctions yield less revenue in future than they used to in pasts as it is only the government which had not taken care earlier.

Endnotes

[1] https://prime.economictimes.indiatimes.com/news/70986022/media-and-communications/a-merger-without-a-plan-wasnt-a-good-idea-for-vodafone-heres-a-to-do-list-for-course-correction-

[2] https://economictimes.indiatimes.com/industry/telecom/telecom-news/vodafone-idea-focusing-on-merging-networks-to-offer-superior-4g-volte-in-india-km-birla/articleshow/66360218.cms

[3] https://telecom.economictimes.indiatimes.com/news/vodafone-ideas-biggest-challenge-culture-difference-and-managing-employee-moral-amid-huge-job-losses/69548135

[4] https://economictimes.indiatimes.com/industry/telecom/telecom-news/bharti-airtel-tata-tele-say-merger-complete-dot-yet-to-formally-clear/articleshow/70030734.cms?from=mdr

[5] https://economictimes.indiatimes.com/industry/telecom/telecom-news/got-enough-4g-equipment-for-a-year-says-huawei/articleshow/69420467.cms?from=mdr

[6] https://globalriskinsights.com/2019/09/china-subdue-possible-indian-ban-huawei/

[7] https://economictimes.indiatimes.com/industry/telecom/telecom-news/bharti-chairman-sunil-mittal-says-india-should-allow-huawei-in-5g/articleshow/71421798.cms


Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skill.

LawSikho has created a telegram group for exchanging legal knowledge, referrals and various opportunities. You can click on this link and join:

https://t.me/joinchat/J_0YrBa4IBSHdpuTfQO_sA

Follow us on Instagram and subscribe to our YouTube channel for more amazing legal content. 

LEAVE A REPLY

Please enter your comment!
Please enter your name here