The options seem to be running out for Vodafone Idea in India, even though it has decided to make payments in accordance with the last year's controversial ruling on Adjusted Gross Revenue (AGR).

The Supreme Court's refusal to grant any relief to Vodafone Idea over its payment schedule continues to spell trouble for the company and is driving it into a corner.

This week, Vodafone Idea told the top court that it could make a payment of only 25 billion Indian rupees ($350 million) now and would aim to follow that up with a payment of INR10 billion ($140 million) on February 21. Together, those payments would form only a small fraction of the $4 billion authorities are demanding in overall fees plus penalties and interest. Vodafone also appealed to the court to avoid any coercive action or invoke bank guarantees, saying this would negatively impact its operations. However, the appeal was rejected by the Supreme Court.

"As disclosed in the company's financial statements for quarter ending December 31, 2019, the company's ability to continue as a going concern is essentially dependent on a positive outcome of the application for modification of the Supplementary Order," said Vodafone Idea in its filing to the National Stock Exchange of India Limited.

The latest developments come after the Supreme Court last week threatened to hold Vodafone Idea in contempt for not paying dues by the first deadline of January 23. The court also admonished the Department of Telecommunications (DoT) for not collecting the statutory dues. The DoT then sent out letters instructing telcos to make the payments and avoid action.

Unlike Vodafone Idea, Bharti Airtel today made a payment of INR100 billion ($1.4 billion) to clear a part of the AGR dues. Vodafone Idea must now make its entire payment by March 17 or face being charged with contempt by the Supreme Court.

The sale of Vodafone Idea's fiber and tower assets could help the company to clear at least a part of its debt. Though unlikely, there is also the possibility that Birla Group, one of Vodafone Idea's main shareholders, decides to bail it out. With about 26% of the business, Birla Group might seek to purchase Vodafone Group's 45% stake and take full control of the operator.

Vodafone Idea reported a net loss of INR64.4 billion ($901.6 million) for the December-ending quarter, compared with a loss of INR50 billion ($700.7 million) for the same period a year earlier. Following the Supreme Court order, the company was forced to postpone its results call last week.

What if Vodafone Idea exits the Indian market?
The Indian market now seems to be headed toward a duopoly featuring Bharti Airtel and Reliance Jio. Vodafone has made it clear that it will be forced to shut down its Indian operations unless and until the government offers some relief, pointing out that its dues of $4 billion will wipe out its entire cash reserves.

If the market does end up with just two major private-sector operators – plus the government-backed BSNL/MTNL – the reduction in the number of competitors could put a financial strain on equipment suppliers and change the very nature of the industry. (See Can Vodafone Idea survive in India?)

The vendors now active in India are likely to suffer badly if Vodafone Idea collapses under the weight of AGR dues. They may respond by increasing prices, squeezing telco margins.

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Moreover, with Vodafone Idea out of the picture, Bharti Airtel could slash expenditure on network expansion and modernization. Investments in the development of new technology, such as 5G, could also take a hit, further delaying the rollout of 5G services.

India's tower companies could also come under pressure in a duopoly. The number of towers in India previously fell significantly after the 2017 merger between Vodafone India and Idea Cellular that gave rise to Vodafone Idea. Further consolidation or the exit of Vodafone Idea would create additional stress. Indeed, with just two private-sector operators, the very notion of passive infrastructure sharing might come into question.

It is paradoxical that India's telecom industry is heading for a duopoly, as that is how it looked in the early 1990s, when the government offered licenses to just two players in each circle. Not until much later was the sector opened to additional players to encourage competition. With a duopoly on the horizon once again, there is a danger of cartelization, in which case the end customer would be the biggest loser.

Impact on the Indian economy
There is little doubt that Vodafone's exit from India will have a massive impact on Indian business sentiment. The Indian economy is already going through a slowdown, and the departure of one of its biggest companies would be a hugely negative development.

The financial institutions have made significant investments in the Indian telecom industry and also in Vodafone Idea. If even a part of it turns into a so-called "non-performing asset," it could have repercussions for the entire economy. That would mean huge job losses, both directly and indirectly. And Vodafone's exit will severely tarnish India's image as an investment destination for multinationals and foreign investors.

— Gagandeep Kaur, contributing editor, special to Light Reading