Vodafone Idea future is at risk as the major Telecom Company faces possible Bankruptcy.

Date:

The future of Vodafone Idea Limited (VIL), a cash-strapped telecom provider, is in question as it approaches bankruptcy.

If it fails to generate sufficient funds or receives no government help, the telco could go out of business soon.

If the world’s third-largest telecom business goes bankrupt, it will affect current employees, customers, lenders, and perhaps the government.

Another source of concern is that if VIL fails, the telecom market will be reduced to just two players: Reliance Jio and Bharti Airtel, creating a duopoly that will undoubtedly harm consumers.

An oligopoly, which keeps prices under check, is the preferred model in communication around the world.

THE CRISIS OF THE VODAFONE IDEA MERGER

Vodafone Idea came into being via a merger of two major telecom operators in 2018 – UK-based Vodafone and Idea Cellular, a subsidiary of Aditya Birla Group (ABG).

Vodafone Group maintains around a 45 per cent investment in the corporation while ABG has a little over 27 per cent share.

The two telecom corporations announced a merger in 2017 to counter Reliance Jio’s expanding dominance in the telecom sector after its introduction in 2016.

On the other side, Jio’s traditional competitors experienced significant losses due to price cuts, and they also lost a substantial portion of their market share to Jio.

Given their more excellent debt ratios, older telecom businesses were forced to decrease tariffs, significantly harming their operations.

The changing telecom market dynamics were complex for all legacy telecom companies, and it was a significant factor in Vodafone and Idea’s decision to merge three years ago.

The $23 billion Vodafone Idea acquisition produced a lot of interest because Vodafone Idea became the country’s largest telecom provider, with the highest share of active consumers (around 35 per cent after the merger) and subscribers (430 million).

The Debts & Losses

Despite Vodafone Idea’s best efforts, Reliance Jio’s aggressive pricing proved too much for it to bear.

Vodafone Idea continued to lose subscribers and struggle, as seen by the company’s terrible financial performance since the merger – the telco has never posted a quarterly profit since the merger.

The company’s loss ratio continued to rise, making it more difficult for it to survive. It had a big debt pile of Rs 1.8 lakh crore to pay off, and the covid-19 epidemic worsened the situation.

Why have investors been concerned about Vodafone-financial Idea’s health?

The Vodafone Idea Limited (VIL) share price has been decreasing on the Bombay Stock Exchange (BSE) over the last several days as concerns regarding the company’s financial health and ability to continue operating in the face of massive debt have been raised.

On August 3, the stock dropped 10% when it was revealed that Aditya Birla Group(ABG) Chairman Kumar Mangalam Birla had offered to hand over his ownership in the telecom company to the government or any entity deemed worthy by the government.

On August 4, the VIL share price fell 17 per cent following reports that the company had approached the government to help sustain its operations.

In a letter to Union cabinet secretary Rajiv Gauba on June 7, Birla reportedly offered handing over his interest.

‘With a sense of responsibility to the 270 million Indians who VIL connects, I am more than willing to hand over my stake in the company to any entity—public sector/government/domestic financial entity or any other that the government may deem worthy of keeping the company a going concern,’ he wrote.

According to the letter, the company’s adjusted gross revenues (AGR) liability to the government is one of the primary areas of worry.

According to the DoT (Department of Telecommunications), Vodafone-Idea has massive AGR dues, at Rs 58,254 crore. It has already paid Rs 7,854 crore out of this total.

In a nutshell, telecom operators are obligated to share a percentage of their AGR with the government in annual licence fees and spectrum usage costs.

Vodafone Idea seeks help from the government.

Birla wrote in his letter, without ‘immediate active support’ from the government, the financial situation of VIL will come to an ‘irretrievable point of collapse’.

VIL’s insolvency, on the other hand, may cause an instant catastrophe for the government and lenders.

Given the money it owes to lenders and the government, saving the troubled telecom operator from bankruptcy appears to be critical.

In his report, Deutsche Bank Research Analyst Peter Milliken stated, “The only viable solution is for the government to recapitalize Vi by converting its debt into equity, preferably while merging it with BSNL, and then providing it with a clear commercial mandate based on profitability targets and incentives.”

Akshit Poddar
Akshit Poddar
Akshit Poddar is an undergraduate student pursuing Computer Science and Engineering from Shri Shankaracharya Group Of Institution. He usually pens down his thoughts and feelings poetically. From there, the content writing thing comes into play as he wanted to learn something new. He believes the more we learn, the lesser time it takes for us to learn even more. He's a kinda shy guy who loves to meet new people. He's a football enthusiast, bibliophile, loves to listen to music and have a crush on mountains. "Your life is a story that you tell yourself. I am gonna make sure or at least try that this story is worth telling."

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