The only option

Govt should aim to move out of Vodafone Idea quickly

The Union government will now become the largest shareholder in the telecommunications major Vodafone Idea, which has about 270 million subscribers in India. The company was due to pay a large sum — interest on the deferred payments for spectrum and adjusted gross revenue dues — but the option of converting this into equity was made available and taken. As a result, the government will now own 35.8 per cent in Vodafone Idea. The company has said this does not amount to nationalisation, with management control remaining in private hands. It has also indicated that the government will not interfere in operations. However, the markets did not take this positively. As a result, the share price was quite volatile, falling about 20 per cent before recovering. The company presumably had to allow the government its shares in the absence of a large-scale capital infusion from any white knight. There had been hopes of such equity infusion, but given neither the multinational Vodafone nor the Birlas had been willing to put additional capital into their joint venture, it was always going to be hard to find another source.

The government has only itself to blame for this turn of events. India’s telecom market has been described by analysts as the most difficult in the world. A decade ago, there were dozens of claimants for a share of India’s telecom pie. Today, the government has to take equity in one of the three remaining companies to prevent the sector from becoming a duopoly. Excessive taxation and fees, licence cancellations, and regulatory uncertainty have all contributed to the government having to step in. It is being forced to solve a problem that it itself created.
 

The question is: Where to go from here? It should be crystal clear that the stake in Vodafone Idea cannot be held by the government indefinitely. The company needs time to breathe, raise tariffs, improve services, and stem the bleeding of its customer base, which was at around 400 million relatively recently. In general, tariffs will have to rise from their unsustainably low levels in India. Telecom operators have been increasing tariffs, but more will need to be done. Once a certain degree of calm has been restored, the government will have to look for opportunities to get out as soon as possible. It may not be able to sell its entire stake at one go, but it should begin to disinvest quickly.

The sector as a whole must now chart a path to maturity. Three large competitors are enough to maintain competitive dynamics, if regulation is properly conducted. Services need to be improved and extended, and investment will be needed for 5G networks and other enhancements. The government has seen where a decade of treating the sector as a cash cow has led it. This must be borne in mind when the time comes to price 5G spectrum. Telecom operators have been demanding lower base prices for spectrum. The government should not solely view this sector as an opportunity to increase revenues and meet fiscal requirements. The time has come for the government to prioritise stability, investment, and quality improvements in telecom. Its much-heralded Digital India plans depend upon such stability.