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Will Vodafone Idea survive? August 09 2021Market Update

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· The Vodafone idea is currently in a delicate situation, with one of its promoters, Kumar Mangalam Birla, willing to give up his 27 percent stake to the government.

· However, its British parent company, Vodafone Inc., has refused to invest another penny in the company.

· Then what will happen to the company's 270 million subscribers, and primarily its creditors who have lent the company 1.75 lakh crore, and the Indian telecom market.

The decline of the Vodfone idea continues to hound the company, its subscribers, and, to some extent, the government.

With Rs 1.86 lakh crore in debt [including interest accrued but not due and adjusted gross revenue (AGR) liability], the country's third-largest telecommunications company, Vodafone Idea, is on the verge of insolvency, with the owners – Birla with 27 percent and Vodafone with 44 percent – unwilling to put more money in it.

Birla stated in the letter that he is willing to surrender his entire stake to the government in order to keep the company running with its 27 crore users. On the other hand, Vodafone Plc, based in the United Kingdom, has stated that it will no longer invest in the company.

In a July 23 investor conference call, Vodafone CEO Nick Read stated, “We as a group try to provide them with as much practical support as we can, but I want to make it very clear, we are not inducing any additional equity into India”. According to Birla's letter, potential investors were unwilling to invest due to a lack of clarity on AGR liability, an adequate moratorium on spectrum payments, and, most crucially, a floor pricing regime above the cost of service.

This year, Vodafone Idea has already lost more than half of its value.

So, what if the third-largest telecom player dies?

The impact of Vodafone Idea going bankrupt would first result in the industry becoming a duopoly, as it was in the 1990s.

To recapitulate, the Indian telecom market went from a monopoly regulated by the Department of Telecommunications to one with multiple companies, including Reliance Communications, Airtel, the former Hutch (later purchased by Vodafone), Idea , Virgin Mobile, Tata Docomo, and Aircel, among many others.

Today, Reliance Jio, Airtel, and Vodafone Idea dominate the Indian telecom sector, with government-run BSNL and MTNL, among others, playing a modest role.

Another effect could be a considerable increase in tariffs.

The cost of sustaining the telecom industry will be spread among only two companies rather than three, greatly increasing the company cost and, as a result, the tariffs.

 Will it have an effect on the banks?

As previously stated, the corporation owes a significant sum of money to its creditors and banks. If its assets are insufficient to fulfill its debt, it will be forced to write down its loans to the company. If Vodafone Idea fails, the bankers and service providers will have to suffer a significant hit as well, as compared to a scenario in which the telecom remains functioning and manages to repay its debt.

IDFC First is the most vulnerable because its exposure to Vodafone Idea is the greatest as a percentage of the bank's loan portfolio.

Are Jio and Airtel prepared to absorb another 270 million subscribers?

Vodafone Idea now has over 270 million customers. Its insolvency could put a strain on Airtel and Jio. They may lack the capacity to accommodate such a large consumer base, which will undoubtedly raise tarrif rates in the country.

Vodafone Idea Must Be Saved!

In his SOS plea to the government, Kumar Mangalam Birla stressed three issues that must be resolved in order to save the struggling telecommunications company: clarification on AGR dues, a moratorium on spectrum payments, and a floor pricing regime above the cost of service.

· In the matter of AGR dues, the Supreme Court's decision leaves the government with no options.

· The moratorium on spectrum payments would necessitate a change in the parameters agreed to by the operators, and supporting only one telecom would be difficult.

· The term "floor price" refers to the lowest possible pricing for voice and data services, which indicates that telecom providers will not be able to offer rates lower than the floor price. The floor pricing regime will necessitate determining the cost of service, which may range from one telecom to the next, making it difficult for the government.

· In addition, due to the most recent modification Cairn Energy and Vodafone Group, both of which owing the government more than $3 billion, will gain considerably from the Finance Ministry's retroactive taxation.

Which takes us to the final option: create an innovative solution that reduces risk for all stakeholders.

Finally, resolving Vodafone Idea's challenges involves more than just a good plan. 

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