Vodafone Idea threatens closure over $13 billion fine

Vodafone Idea has stated it will shut-down its business unless relief is offered by the Indian Government for the $13 billion demands which have been directed at the firm.

Speaking at a conference in New Delhi, Vodafone Idea Chairman Kumar Mangalam Birla has threatened to compromise the competitive landscape in India even further in light of the monstrous spectrum bills which have been handed to the telcos. This is an argument which has been on-going for more than a decade, though the penalties and interest fees may well cripple Vodafone Idea.

“If we are not getting anything then I think it is end of story for Vodafone Idea,” said Birla. “It does not make sense to put good money after bad. That would be end of story for us. We will shut shop.”

This dramatic statement from the Chairman specifically links back to a dispute concerning spectrum licence fee payments, as well as additional interest and penalties. Ultimately, the telcos could be liable for an eye-watering 1.47 Indian rupees, roughly $21 billion. Looking at the bigger picture, this is further evidence the Indian Government and the Telecom Regulatory Authority of India (TRAI) is unable to manage the market effectively.

Looking at the fine, the Indian Government has stated the licence for spectrum requires the telcos to had over a proportion of revenues during the period which the licence has been held. The debate is over how much is owed, as the telcos seem to believe it should only be revenue associated with the spectrum, while the Government does not.

The saga itself was elevated to the High Court, with the Judge ruling in favour of the Government. With the monstrous bill standing, both Vodafone Idea and Bharti Airtel have petitioned for relief. Reliance Jio is also facing the same fees, interest and penalties, but as it has only been operational since December 2016, the financial burden is significantly less.

For Vodafone Idea, despite the on-going potential for profits in India, it appears the financial stress is simply getting too much. The shifting dynamics of competition in India have already forced a merger between Vodafone India and Idea Cellular, and it will get to a point where the out-going cash makes it in tolerable to continue operating in the country. It seems the point of no-return is looming large on the horizon.

From a revenue perspective, you can see this is a market which is in trouble. There is significant potential for upshot as digital takes hold, though the telcos will have to weather the storm.

With tariffs set to increase between 15-40% over the coming months, the overall revenues in the Indian telecoms market will increase, though it might be a matter of too little, too late for Vodafone Idea. As you can see from the quarterly revenues, a significant chunk of cash has been taken out of the market through Reliance Jio’s aggressive pricing strategy, forcing consolidation and crippling competition.

Taking a view of the bigger picture, this is another example of the Indian authorities ineffectively managing the telecoms market. The Government and regulator have been attempting to drive India forward into the digital economy, but the aggressive pursuit and favour granted to market disruptor Reliance Jio is crippling the traditional telcos.

With Vodafone India and Idea Cellular merging, Telenor and Reliance Communications exiting, Tata being acquired by Bharti Airtel, the state-owned telcos only surviving because of Government hand-outs and Bharti facing similar financial burdens, it seems only Reliance Jio is in a healthy position. In pursuit of digital glories, authorities have placed India on a fast-track to a monopolised telecoms market, which is not healthy for anyone.