Turmoil in the Indian Telecom Market

Reliance Jio has ambushed India’s telecom sector

In a string of events that has caught Indian telecom companies by surprise, the Supreme Court of India ordered that wireless operators pay the central government for spectrum based on their adjusted gross revenue. This has been an ongoing dispute that dates back to 2006.

Operators had been fighting the Department of Telecommunications, arguing that they should be charged on the basis of the core business that’s conducted using the allotted spectrum. The government, however, argued that the definition of adjusted gross revenue include other items, such as dividend, interest, capital gains on the sale of assets and securities, as well as gains from foreign exchange fluctuations. The Supreme Court upheld the government’s argument, so operators will need to cough up as much as $13 billion. For a sector that’s already reeling under debt, such a huge fee spells near disaster.

Last month’s Supreme Court ruling comes as India’s wireless operators are already under severe financial stress. This ruling will further weaken the viability of the sector as a whole. During the past decade, Indian telecom companies, particularly Vodafone and Airtel, have reformed the country’s communications landscape, placing India on the cusp of a digital transformation. But despite their past successes, operators are wading through what’s perhaps their worst business phase in recent memory, saddled with debt, ongoing financial losses and a telecom policy that has rendered business quite precarious.

And then came Reliance Jio. Its arrival in 2016 made things worse for the established operators. When it launched its LTE services in 2016, Reliance Jio offered heavily discounted prices, forcing Vodafone and Airtel to match its cutthroat pricing, resulting in their profitability beat-down. Vodafone subsequently formed a joint venture with Idea Cellular in 2018 to take on Reliance Jio. Reliance Jio has been sheltered from the regulatory environment as it started its service only in 2016, and has no legacy subscription dues, unlike Vodafone and Airtel, which had bid for spectrum in previous auctions.

Vodafone recently said its future in India could be in jeopardy unless the government provides relief on taxes and charges, subsequent to the Supreme Court judgment over spectrum fees (see Instant Insight: Vodafone Results, Fiscal 2Q19/20). In its judgement, the court has ordered Vodafone Idea to pay $4 billion in fees linked to past spectrum licences. The operator has clashed with Indian authorities over tax and regulatory issues ever since it entered the country with a $11 billion deal to buy a 67% stake in Hutchison Essar. The situation in India contributed to a group loss of €1.9 billion in the first half of Vodafone’s fiscal year, more than offsetting profit on the sale of its New Zealand operation.

With a 5G spectrum auction scheduled for 2020, Vodafone Idea is in a tough spot. The group already has $14 billion in debt and Vodafone has made it clear that it won’t invest more equity into its India business. It has asked the Indian government for a relief package comprising a two-year moratorium on spectrum payments, lower licence fees and taxes and the waiving of interest and penalties. Airtel is also mired in debt.

With the telecom sector in turmoil, India has fallen behind China and other countries in plans to introduce 5G networks. For now, India won’t be able to tap into the long-term potential of 5G to digitize economies and connect more people to robust services. Reliance Jio looks like it could be the last one standing. A healthy competitive ecosystem needs true competition.