India Supreme Court rules against Vodafone Idea and Bharti Airtel

Competition in the Indian market might get a lot smaller as the Indian Supreme Court rules Vodafone Idea and Bharti Airtel will both have to pay Government estimates on spectrum fees.

On Monday, the Indian Supreme Court announced a decision on the repayment of spectrum usage fees, licence fees, interest and penalties, a dispute between the telecoms operators and the Indian Government which has been running for years.

In short, Bharti Airtel and Vodafone Idea owe the Indian Government ₹25,976 crore and ₹50,399 crore respectively. The two telcos had calculated lower assessments of monies owed, but these figures were rejected by the Supreme Court, siding with the higher estimates of the Indian Government, which could have severe consequences for competition in the market.

Vodafone Group CEO Nick Read has already suggested it would be ill-judged to continue to invest in the India market should the Government not be prepared to make concessions. This could be the straw which broke the camel’s back, just as those who believe the Government favours Reliance Jio ponder reports the disruptive telco is lobbying for early access to 5G spectrum.

Some might look on at the situation and wonder what the Government strategy actually is. Competition in the market has already been decimated, and while it should not bend the rules unfairly for individual companies (though some might suggest it already has for Reliance Jio), it has seemingly not appreciated the long-term ramifications from its stubborn stance.

India is an incredibly promising market, but Vodafone cannot continue to throw money at the horizon. Sometimes you have to pass on opportunities because of the pain which will be caused in the short- and mid-term. That might be the case with Vodafone’s India ambitions, potentially exiting the market because the table stakes are becoming commercially unfeasible.

The conflict between the telecoms industry and the Indian Government has been on-going for years and concerns the slice of profits which authorities are entitled to. As part of the spectrum licence, the telecoms operators have to pay a portion of profits to the Government. The telecoms operators believe this should be revenues directly attributed to the spectrum in question, while the Indian Government wants a slice of the wider profits.

Thanks to the length of this dispute, the telecoms operators have been missing payments, therefore accruing penalty fees and interest payments. This is why the monies owed to the Indian Government is in the billions.

Vodafone Idea and Bharti Airtel, who have been in operation longer than Reliance Jio therefore have greater exposure, asked the Government for a more favourable repayment scheme, as well as reduction in penalties and interest. The Government didn’t agree, therefore the Supreme Court was called upon to make a decision. And this decision falls in the favour of the Government, placing financial pressure on Vodafone Idea and Bharti Airtel.

In most cases, one would suggest a corporation should pay what is owed, however you have to place this saga into context.

Reliance Jio caused a major disruption when entering the market, forcing the traditional players to reimagine business models and evolve rapidly. This has resulted in operations becoming far less profitable and competition contracting rapidly. The table below demonstrates how rapidly the market has shifted.

In the four years since Reliance Jio has entered the market, Telenor India, Reliance Communications and Tata Teleservices all exited the mobile segment, Vodafone and Idea Cellular merged, while both BSNL and MTNL only started 4G deployments in 2020.

In 2016, India had eleven different telecoms operators serving the world’s second largest country by population, this has effectively shrunk to three today. Some of these companies would have disappeared without the dramatic change in the Indian telecoms space, though it is now in an uncomfortable position which can get worse.

Vodafone will have to question whether it is commercially feasible and responsible to continue to fight against the disruptive Reliance Jio, a rival which seems have the favour of the Indian Government.

Aside from numerous rulings allowing Reliance Jio to continue to offer loss-leader services during 2017 and 2018, a suspect decision at the time, it appears Reliance Jio is lobbying the Government to have early access to 5G spectrum. Should this report turn out to be true, and the Government decides it is a good idea, it would afford another advantage to Reliance Jio at a time where its rivals are not able to respond.

This is a situation the Government should have never allowed to evolve. Competition is being distorted thanks to incremental, favourable rulings which are all coming to a head today. India could well become a duopoly in the very near future, which is not a scenario any Government would want to see.