Economic Perspectives

The 'pretend nationalisation' of Vodafone India

Print edition : February 11, 2022

Vodafone, India’s third largest mobile telecommunications network, has been posting losses for the past few years. Photo: Rupak De Chowdhuri/REUTERS

The Modi government’s acquisition of a 35.8 per cent stake in Vodafone India is part-nationalisation that supports a set of well-heeled private telecom players even as it has let the public sector in the same industry atrophy. Neoliberalism has once again proved to be a means of engineered transfer of wealth from the government to big business.

IN what is seen as paradoxical by many, the National Democratic Alliance government which accelerated privatisation, pledging to sell as much of public sector equity as it can and monetise a bunch of public assets, has decided to acquire a stake in private telecom player Vodafone India. The acquisition is aimed at converting part of the interest dues owed to the government by the company into equity. The net present value of those payments has been estimated at around Rs.16,000 crore. For that implicit sum, the deal gives the government a share of nearly 35.8 per cent in the company, with the original controlling partners, the Vodafone and Aditya Birla groups, seeing their shareholding fall to 28.5 and 17.8 per cent from 44.4 per cent and 28.5 per cent respectively. While managerial control will remain in private hands, this is partial nationalisation, even if without any interventionist interest.

While this stance of combining privatisation with nationalisation of a kind may appear paradoxical, it reflects the contradictions inherent in, and the resulting failure of, neoliberalism.

Consider the sequence of events that led up to the share acquisition. After many wrong steps and policy modifications and reversals under the liberalised telecommunications policy regime, the industry saw a drastic reduction in the number of service providers. The last round of the competitive shake-out occurred when Reliance Industries, which had to stay out of telecommunications for a specified period because of the terms of a hereditary assets-sharing agreement between the Ambani brothers, decided to finally enter. What ensued was a predatory push by the deep-pocketed Mukesh Ambani group to acquire a dominant market share by slashing prices.

At the end of that competitive battle, there were principally three private sector participants—Airtel, Reliance Jio and Vodafone India—in an industry that, only a few years earlier, had over a dozen firms. The public sector players Mahanagar Telephone Nigam Limited (MTNL) and Bharat Sanchar Nigam Limited (BSNL), both victims of state neglect under liberalisation, have not even been able to migrate to 4G and have seen a collapse in market share along with the collapse in their landline business.

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Among the three private players, Reliance, with a short history and a war chest, emerged the strongest in the price war. Airtel and Vodafone, with debt accrued to acquire spectrum, annex rivals, expand capacity and extend geographical presence, were hard put to show profits and face up to the challenge of moving into the next generation 5G technology. Vodafone has, in fact, been posting losses for the last few years.

It was at this point in time that the consequences of the battle over revenue sharing that they had fought and lost with the government hit both Airtel and Vodafone. After much litigation, the Supreme Court ruled that the government was correct in including receipts from activities other than telecommunications operations when calculating the adjusted gross revenue (AGR) of telecom players, a share of which accrued to the government as spectrum usage and licence fee charges. Telecom firms such as Vodafone and Airtel, with their longer history of operations in the telecom sphere, had challenged the government’s adopted definition and stopped paying what they considered to be illegitimate demands. After the court verdict, they became liable to pay up the accumulated dues along with interest on those dues, penalties for late payment and interest on the penalties. Already beleaguered by the price war, the two telecom majors were debilitated. Vodafone faced the prospect of closure and liquidation. Airtel appeared to have the resilience to tide over the crisis, but would have still found it difficult to stand up to Jio, especially if the roll-out of 5G services began soon.

The impact on Vodafone was particularly severe. Battered by the competition that followed Reliance Jio’s entry into the mobile telecommunications industry, and burdened with large spectrum charges, Vodafone India has been bleeding for some time, staying afloat with the help of debt, the servicing costs of which were on the rise. In such circumstances, the Supreme Court order made it impossible to continue operations if the promoters did not neutralise some of the losses as well as inject additional capital to win new customers and adopt 5G technology. However, Vodafone’s global leadership declared that it had already staked too much in the India operations and that it was unwilling to send more good money after the bad money it had invested earlier.

For the government, the closure and liquidation of Vodafone would have been an embarrassment. The state of the industry is the culmination of a process that unfolded following the government’s decision to opt for liberalisation and privatisation. In principle, its neoliberal policy stance should take the closure of one or more units in the industry as being the natural result of the operations of a competitive market. Preventing the competition-induced closure of one or more private players would amount to interfering with the functioning of the market and favouring individual private players, both of which contravene the principles of neoliberalism.

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The difficulty is that neoliberalism does not deliver what it promises. Industry adjustments resulting from market-mediated competition are supposed to promote efficiency and deliver fair prices and better services to the consumer. But the reality suggests that the outcome of closure will be quite different.

Two players have come to dominate an industry that had grown at breakneck speed in which declining tariffs were the norm, even if it meant losses and closures for many post-liberalisation entrants. With a duopoly in place, it was more than likely that the ruinous competition would stop and collusive pricing could raise tariffs significantly. In fact, tariffs have already risen by about 20 per cent last year. Moreover, if the 25 crore subscribers who are still with Vodafone migrate to the two other private players (since the services offered by the two public sector players have been allowed to deteriorate), the congestion could worsen service quality even as tariffs rise. That would mean that all telecom customers, not just of the liquidated entity, would lose out. Finally, the liquidation of the telecom major with a debt of around Rs.1.9 trillion, a small but significant proportion of which is to banks, will have ripple effects, imposing losses on banks already burdened with non-performing loans and affecting the rest of the economy. Vodafone’s closure and its external effects would be a clear demonstration of the failure of neoliberalism and its illogical pursuit by the government in a high-profile industry.

Telecom reforms package

Keeping Vodafone alive is clearly in the government’s interest, even if not in keeping with its avowed neoliberalism. The government therefore decided to drop its neoliberal pretensions in September 2021 and stepped in with a “telecom reforms package” of concessions for the industry in general and Vodafone in particular. It offered a moratorium of four years on the payment of past spectrum and AGR dues, reducing the immediate burden of payment. It prospectively altered the definition of AGR revenues, excluding non-telecom revenue. These were all long-standing demands from the industry. Having withdrawn support for the state-owned BSNL and MTNL and even, as many argued, acted in ways that undermined their resilience, the government seemed ready to play saviour and bail out one of the big three that remained in what was once a multi-firm industry.

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Vodafone’s Indian promoter Aditya Birla was still unwilling to divert some of his wealth in Vodafone India’s direction. He wanted to transfer the onus of Vodafone’s liquidation to the state. Having stepped down as chairman of the company in August 2021, he declared in a dramatic gesture that he was willing to hand over his share of the company to any player designated by the government in order to save the firm and its customers. It was unlikely, however, given the large debt on the books of Vodafone India and its dwindling subscriber base and rising losses, that any private player would be willing to step in. And the two other incumbent private players, having infrastructure similar to or better than that of Vodafone, would see little benefit in acquiring the latter.

This was what triggered the “pretend nationalisation” of Vodafone. To help the firm manage its acquired debt burden, the government allowed it to convert past dues on account of unpaid interest into equity. Given the state of Vodafone’s finances, the price of its shares in the market ruled below its par value. Yet the price at which interest dues were converted into equity was the par value, resulting in a 35.8 per cent stake in the company. This is part nationalisation to support a set of well-heeled private players when the state is vigorously pursuing a privatisation agenda and when it has demonstrated its intent to let the public sector in the same industry atrophy.

It is unclear whether this will be enough to salvage Vodafone, which will now be liable to pay Rs.40,000 crore every year after four years, as compared with Rs.24,000 crore a year due at present. In time, more of the sums due to the government may have to be converted into equity without affecting private control over operations. Neoliberalism has once again proved to be a means of engineered transfer of wealth from the government to big business.