VSNL's worries

Print edition : July 20, 2002

ACCOUNTING frauds are surfacing with alarming regularity in multinational corporations in the West. In almost every case, a part of the mess has washed up on Indian shores. In the latest scandal, WorldCom, the global telecommunications giant based in Mississippi, United States, revealed that it had overstated its profits by a staggering $3.8 billion (Rs.18,240 crores) and was now likely to file for bankruptcy. The first victim of this scandal in India is Videsh Sanchar Nigam Limited (VSNL), to which WorldCom owes Rs.500 crores as settlement charges for carrying international call traffic during April-June 2002. Should WorldCom declare bankruptcy, VSNL, a Rs.7,000-crore company, could be hit quite severely.

Ever since VSNL's creation in 1986, WorldCom has been its major partner for calls to and from the U.S. According to a VSNL official, in all these years the U.S. telecommunications company had never faulted on its payments. Therefore, officials are confident that WorldCom will uphold its commitments in India.

WorldCom pays VSNL for carrying its traffic into India. In the telecom world, one international carrier pays another for routing and carrying calls in their countries. In this case, calls made to the U.S. from India are routed through VSNL to WorldCom, which would then connect it to the local access provider in the U.S. From the other side, calls from the U.S. to India are routed by WorldCom to VSNL.

As calls generated from the U.S. to India are many more than calls generated from India to the U.S. - the rate is 70:30 - WorldCom has to pay VSNL the difference. Normally, this works out to about Rs.150 crores a month. While the payments are calculated on a monthly basis, there is a three-month time-lag before the money is received. "Since we have been getting our dues regularly from WorldCom, we never really thought it was in trouble," said the official.

A telecom expert, however, points out that VSNL could have been a little more vigilant. In fact, he says that VSNL's books should now be scrutinised. A newspaper report hinted at the possibility of a government investigation into the WorldCom-VSNL deal and the memorandum of understanding signed between the two in April 2001. But there has not been any official statement on the report. One of the reasons why WorldCom is so important to VSNL is that VSNL is largely dependent on revenues emanating from telecom traffic between India and the U.S. For instance, VSNL's revenues from incoming traffic in 2001 was Rs.4,200 crores. Of this, the U.S. alone accounted for upwards of Rs.1,800 crores.

However, some Indian telecom analysts are not much worried by WorldCom's revelations. "Effectively, if WorldCom does go bankrupt, VSNL will have to write off the amount. But it has the strength to take the hit," an analyst with an investment banking firm told Frontline. "Of course, it would be a significant business loss but you cannot fault VSNL for this. It chose WorldCom because it was the cheapest carrier. Besides, for all these years their relationship has been fairly good."

The payment of dues to VSNL will depend entirely on WorldCom's ability to raise $5 billion in new financing. This amount is essential to WorldCom's survival but insufficient to cover its $30 billion debt, says a telecom analyst. Nevertheless, VSNL seems optimistic. Its official statement says that "....the concern that VSNL may not be able to recover large sums of money from WorldCom seems unwarranted at this point in time.... We believe that our discussions with WorldCom will continue in a positive and mutually beneficial manner". In fact, a VSNL official said that VSNL had been assured of a remittance very soon.

It is unlikely, the analyst told Frontline, that WorldCom will go the Enron way. According to him, WorldCom is much too entrenched in the U.S. government and military telecommunications systems and will therefore have to be kept afloat at any cost.

Non-payment of dues will put VSNL in a vulnerable position. Until recently VSNL enjoyed a monopoly in the telecom sector as it was the only long-distance phone company in the country. With the government opening up long-distance telephony to private players, VSNL will soon face stiff competition. Therefore, writing off a few hundred crores is something it could well do without at this point. In its first quarter results, VSNL stated that it handled 3.1 billion minutes of international telephony traffic last year. International telephony accounts for 87.65 per cent of its revenues. The company is also a large Internet service provider.

If VSNL is not paid, the bigger loser would ultimately be WorldCom. Other international telecom giants such as AT&T and Sprint are waiting to take over WorldCom's coveted agreement with India.

WorldCom has a significant presence in India through its wholly owned subsidiary, MCI WorldCom India Private Limited. Apart from its partnership with VSNL, WorldCom was involved in several projects in the country. As recently as February this year, it got an approval from the Indian government to manufacture, distribute, market and sell personal identification numbers (PINs) for use outside India. In addition, WorldCom has been providing consultancy and management services for the installation and maintenance of end-to-end private circuit capacities. It was also an adviser to several leading telecom companies in the country. The India operations office has refused to comment on the status of the projects and the company's existence in India.

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