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Vodafone Idea bank guarantees unlikely to be invoked for now

A Voda Idea collapse could have negative impacts on not just the telecom, but on banking as well.

Last Updated: Feb 19, 2020, 05.45 PM IST
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Analysts said that a Vodafone Idea collapse could have far-reaching negative impacts on not just the telecom and related sectors, but on banking as well, with ripple effects on the overall economy, due to debt default, lakhs of job losses and some 300 million subscribers being forced to port out.
NEW DELHI: The government is unlikely to invoke Vodafone Idea’s bank guarantees for now, even as the officials of the telecom and finance ministries met Cabinet secretary Rajiv Gauba to discuss ways to ensure that the sector retains three private players, officials said.

“First round of meetings happened on Tuesday… Government could consider postponing or staggering other payments due to it, in order to give some flexibility to telcos to cough up money towards AGR (adjusted gross revenue) dues,” said an official. “These are just very initial discussions.”

The official said invoking bank guarantees would be the precursor to termination of telecom licences.

Focus on Avoiding Defaults by Telcos
And the government would take such a step only ‘with utmost care’, the official added. “Right now, all efforts are in the direction of finding a way out...The government is trying to find ways to ensure no telco defaults on payments.”

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He said that the government can’t give any tax offset to Vodafone Idea against the AGR dues. This is because the finance ministry holds the view that such offsets can only be given against taxes. Vodafone Idea had requested that an input tax credit of Rs 7,000 crore, which is yet to be refunded, could be adjusted against its AGR dues.

Earlier in the day, Vodafone Idea chairman Kumar Mangalam Birla and managing director Ravinder Takkar met Department of Telecommunications (DoT) secretary Anshu Prakash, and discussed the telco’s dire situation and ramifications for the industry.

The Supreme Court on Monday rejected Vodafone Idea’s appeal to direct the DoT not to invoke its bank guarantees for recovering AGR-related dues. The telco’s lawyer Mukul Rohatgi had warned that if the bank guarantees were encashed, the company would have to shut down.

Shares of Bharti Airtel closed 3.1% lower at Rs 547.75, while those of Vodafone Idea plunged 11.4% to Rs 3.03, on the BSE on Tuesday.

The government has again called on the cabinet secretary to chalk out steps to try and ensure no telco shuts down, given the fact that a Vodafone Idea collapse will have wide implications across sectors, jobs, the wider economy and global perception of India.

Gauba had late last year led a panel of secretaries which suggested a two-year moratorium on spectrum payments to give relief to the telecom sector. The proposal was accepted by the Cabinet and gave an over Rs42,000-crore cash flow relief to Bharti Airtel (Rs11,746 crore), Reliance Jio (Rs6,670 crore) and Vodafone Idea (Rs23,920 crore).

‘Scenario Building’
Officials said Tuesday’s discussions revolved around “scenario building” in the wake of the top court’s order on February 14, which slammed the telcos for non-payment by the January 23 deadline, and the DoT for not collecting the dues. The court threatened telcos with contempt of court unless payments were made by the next hearing, which is slated for March 17.

While the government has publicly backed a three-private player market, it finds itself in a bind with the apex court’s position backing full payment by the telcos. Senior officials say the government is wary of being caught in the crosshairs of the judiciary or a political slugfest if it takes executive action to provide any relief on the AGR dues. Hence, it is looking for workarounds.

Bharti Airtel on Monday paid Rs 10,000 crore to the government and said it would pay the balance dues as per its self estimates before March 17. Vodafone Idea paid Rs 2,500 crore on Monday and said it will pay another Rs 1,000 crore by Friday. While the government has estimated Vodafone Idea’s AGR dues at Rs 57,000 crore, the telco’s own estimates peg the amount at around Rs 23,000 crore.

The company’s current financial position makes it difficult for it to pay even the lower Rs 23,000 crore amount unless the government provides some relief.

Analysts said that a Vodafone Idea collapse could have far-reaching negative impacts on not just the telecom and related sectors, but on banking as well, with ripple effects on the overall economy, due to debt default, lakhs of job losses and some 300 million subscribers being forced to port out.

“Ironically, the government, despite winning the suit, could see the biggest impact through deferred spectrum debt default of Rs 90,000 crore,” Motilal Oswal said in a report.

It added that the default could increase India’s fiscal deficit by about 40 basis points. It would also hurt India’s “perception in the global markets….”

Later Tuesday, India Ratings downgraded its rating on Rs 3,500 crore convertible bonds issued by Vodafone before its merger with Idea Cellular, on account of “severe stress on the company's near-term liquidity post the Supreme Court's ruling on 14 February 2020, which directed the telecom companies (telcos) to pay the adjusted gross revenue (AGR) related liabilities to the government of India by 17 March 2020,” Vodafone Idea said in a statement to stock exchanges.

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