The Economist 14Dec2019

54 Business The EconomistDecember 14th 2019

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user has fallen by a third, to 102 rupees

($1.4). Even so, Vodafone Idea has lost 100m

customers in the past year. Jio has seized a

third of the market—334m customers.

The relentless price war combined with

surging consumer demand has made In-

dia’s digital highway—on which the three

big firms have spent $128bn—feel as

clogged as its roads. Calls often drop and

downloads stall. As telecoms troubles

mount, network quality could slip further.

Morgan Stanley expects Vodafone Idea,

Bharti and Jio to spend just $7bn on capital

investment and spectrum this fiscal year,

down from $15.6bn in the previous one.

Surviving this sort of brutal competi-

tion would be perilous at the best of times.

And for Indian telecoms firms, these times

aren’t. In October India’s Supreme Court

ordered Bharti and Vodafone Idea to pay

more than $10bn in charges for operations

dating back to 2003. These stem from In-

dia’s mangrove swamp of formulas which

tie licensing charges to revenues. The gov-

ernment defined revenue broadly, to in-

clude money made from rentals of office

space or foreign exchange. Even money

that the firms never actually collected—for

example unpaid late fees or the difference

between full and discounted plan prices—

were included by the government.

Fine, not dandy

The judges dismissed the companies’ argu-

ments that licence fees should be levied on

licensed activity alone. It also ordered

them to pay interest and penalties—and in-

terest on penalties—which accrued over

the years as they fought their way through

India’s Kafkaesque legal system. These sur-

charges account for 88% owed by Bharti

and 75% owed by Vodafone Idea. Dozens of

other companies are caught up in the case,

many of which have long since fled from

the industry, either because they conclud-

ed it was unprofitable, rigged in Jio’s fa-

vour, or both.

Of the 15 operators active in 2010, only

four still operate independently today.

Tata, India’s biggest conglomerate, ran out

of patience with its money-losing telecoms

arm and gave it away to Bharti in 2017. The

court still slapped Tata with a $2bn bill.

Reliance has shored up its balance-

sheet with the proposed sale of a 20% stake

in its petrochemicals arm to Aramco, the

Saudi Arabian oil giant, for about $15bn.

The other two mobile firms’ balance-sheets

are vulnerable. The cost of the legal saga

could push Bharti’s gross debts up to

$16.7bn, according to Morgan Stanley, 4.3

times its earnings before interest, taxes,

and depreciation. On December 5th the

company indicated it may need to raise

$3bn through a new share issue to help pay

the tax liability. Vodafone Idea, whose

$19.5bn in gross debt is a terrifying 33 times

earnings, has neither the cash nor the ap-

petite to pay. As Mr Birla put it, “It does not

make sense to put good money after bad.”

If either firm collapsed, India’s fragile

banks would be stuck with a Ghats-worth

of non-performing loans. Its embryonic

bankruptcy courts could face untold peri-

natal complications. The government, too,

would suffer. It had hoped to replenish its

coffers, emptied by a slowing economy,

with proceeds from an upcoming auction

of 5gspectrum. With no one left to bid but

Jio, too young to be ensnared in the tax de-

bacle, the pickings may be slim. Large in-

vestments, which Mr Modi wants more of

to boost growth, look ever more remote.

Having helped create the mess with its

heavy-handed treatment of some compa-

nies and coddling of others, the govern-

ment is now trying to salvage a viable in-

dustry from the wreckage. An expensive

bail-out of two mid-sized, state-controlled

telecoms companies has been announced.

With the government’s blessing, Vodafone

Idea, Bharti and Jio all recently announced

price increases of up to 50%. Spectrum

charges have been partially waived.

All this has buoyed Vodafone Idea’s and

Bharti’s share prices. How long the rally

lasts is another matter. Analysts are hastily

redoing their spreadsheets to work out the

impact of higher prices on revenues. The

results are mixed. Morgan Stanley reckons

that the announced tariff increases would

boost revenue per user by 24-37%. Jefferies,

another investment bank, thinks the figure

is closer to 11-23%, as some customers

downgrade plans or ditch them.

That may be enough to save Bharti but

not Vodafone Idea, which may need prices

to rise by another third, licensing fees to be

slashed and tax liabilities waived. Al-

though the finance minister, Nirmala Sith-

araman, insists she wants Bharti and Voda-

fone Idea to survive, markets appear to be

pricing in a Bharti-Jio duopoly. Bharti’s

shares have gained steadily in value as Vo-

dafone Idea’s condition has grown sicklier.

A committee of bureaucrats convened to

come up with a fix appears to have been

disbanded without providing one. And the

clock is ticking—the court has set January

24th as the deadline for the companies to

pay their tax obligations.

The telecoms mess comes at an awk-

ward time for Mr Modi. He plans to priva-

tise national champions such as Air India

and Bharat Petroleum next year. Airlines

and energy are, like telecoms, industries

with the ability to raise living standards.

But, also like telecoms, they are capital in-

tensive, highly regulated and politically

sensitive. This time the world’s capitalists

will study the telecoms tale carefully be-

fore piling in—as will, with trepidation,

those who have already bet big on India’s

digital transformation. 7

Losing signal

Sources: Capitaline Database; Datastream from Refinitiv *Estimate, March to September 2019

5

0

-5

-10

-15

-20

2000 05 10 15 20*

India, telecoms sector,net profit/loss, $bn

Years ending March

150

100

50

0

2019

Share prices, January 1st 2019=100

Reliance Industries

Bharti Airtel

Vodafone Idea

“I

t’s likesmoking; ultimately only a

hard intervention made people

change,” says Jochem Overbosch, an execu-

tive recruiter in Amsterdam. As with bans

on lighting up indoors, he says, so too with

mandatory quotas for women on company

boards, which the Dutch Parliament voted

for this month after softer targets failed to

move the needle much. Employers say they

approve. Assuming all goes to plan, the

Netherlands will join seven European

countries (and California) in replacing the

carrot of “please” with the stick of “or else”

to increase gender diversity.

Will it make a difference? Quotas with

consequences for firms—such as fines in

Italy or delisting in Norway—have in-

creased women’s boardroom presence.

Firms with more women seem to work bet-

ter, with higher attendance and tougher

monitoring of management. But no dis-

cernible impact on company performance

AMSTERDAM

How to deal with board gender quotas

Corporate governance

Skirting the issue