India's Vodafone Idea may be headed toward bankruptcy

India's third-biggest telecom operator looks dangerously close to collapse. Unable to resolve its financial difficulties, Vodafone Idea may be headed toward bankruptcy after years of struggling in India's fiercely contested telecom market.

Last year, it seemed as if the company's fortunes had finally changed when the government came to its rescue. As part of a relief package, authorities offered to convert telcos' interest dues into equity. Vodafone Idea decided to convert its 161 billion Indian rupees ($1.94 billion) of interest dues into a 33% government stake in the company. This would have made the government Vodafone Idea's largest single stakeholder. The move was approved by the Finance Ministry and the Securities and Exchange Board of India (SEBI).

But media reports suggest the Department of Telecommunications (DoT) wants the company's owners, Vodafone Group and Aditya Birla Group, to invest funds before it goes ahead with converting its dues into equity. While the owners did contribute of INR50 billion ($606 million) this year, they previously said they would not be investing more in the company.

Figure 1: Skyline of Mumbai, India.
(Source: robertharding/Alamy Stock Photo)

A large part of Vodafone Idea's $26.7 billion in debt is owed to the government and relates to fees under India's Adjusted Gross Revenue (AGR) rules. However, Vodafone Idea also owes money to vendors, which is preventing it from buying new gear and solutions to upgrade its network.

The deadlock between the government and the operator is now costing Vodafone Idea badly. To begin with, the uncertainty around the company's future means it continues to lose subscribers quickly. According to regulatory data, it lost 4 million subscribers in just one month in September this year.

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Vodafone Idea is also behind other telcos on 5G. While Bharti Airtel and Reliance Jio have already launched the new-generation technology in several cities, Vodafone Idea has not even announced which 5G vendors are to supply products for its network. The risk is that premium subscribers move to other networks that have started offering 5G services.

The company will also not be able to exploit 5G opportunities in the enterprise sector, where it has a decent presence. Its current financial position could put it at a massive disadvantage when it comes to future expansion in this market.

Need for speed

Expediting the conversion of debt into equity is necessary to reassure investors about the company's future. After all, any prospective investor will need to know if the government is going to be a majority stakeholder in the company.

A key reason for the government to offer a relief package to Vodafone Idea is to ensure that India does not become a telecom duopoly. Unfortunately, the delay in providing the relief package takes Vodafone Idea closer to bankruptcy. And if it is unable to compete effectively in the market, India could turn into a duopoly – for all practical purposes – even if it continues to exist. None of this bodes well for the industry or its customers.

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— Gagandeep Kaur, contributing editor, special to Light Reading