Telecom is too big to fail and the government needs to save it

In the last few days, there has been a flurry of results from telecom companies with all of them declaring huge losses! Between Vodafone Idea, Bharti Airtel and RCOM, these 3 companies reported net losses of Rs.100,000 crore for the September quarter. These losses were largely driven by the penal AGR charges imposed on these telecom companies under the Supreme Court order. All the telecom companies decided to take a hit on the charges in the September Q2 itself as the DOT had instructed these telcos to pay up in 3 months. How big could be the impact?

There is a big hole

Clearly, this write-off has created a big hole in the books of these telecom companies. Take the case of Vodafone Idea. They have reporting average losses of Rs.5,000 crore for the last four quarters and this quarter they have losses of Rs.50,922 crore. RCOM is already insolvent and they have reported losses of Rs.31,000 crore in this quarter. Bharti Airtel had some semblance of profitability but after the latest loss of Rs.27,000 crore, even the Bharti top management has affirmed that it could raise serious doubts over their continuance as a going concern. Even assuming that the current problem is sorted out, it will still leave a big hole in the books of these telcos and wipe out large part of their net worth. This hole also raises questions about all telcos other than Reliance Jio.

Don’t forget cascading effect

The cascading effect of these telecom troubles can be quite far-reaching. For example, between RCOM, Bharti and Vodafone; these companies owe more than Rs.250,000 crore to banks and to the government. If these companies get into trouble, the biggest loser in the process could be the banks and the Indian government. Banks have not yet started making provisions for telecom dues but they may have to start making sooner rather than later. This could trigger a second round of NPAs for the Indian banking system. Then there is the exposure Rs.3000 crore that Indian mutual funds have to the bonds of Vodafone besides their equity exposure to Bharti Airtel, RCOM and Vodafone Idea. That could lead to severe loss of trust among retail investors and could also impact SIP inflows into MFs.

 Government must intervene

There have been doubts raised over whether the government must intervene in the telecom bailout. Actually, there are 3 reasons why they should. Firstly, telecom poses a systemic risk for the financial system overall and India cannot afford at this point. Secondly, telecom needs competition and any type of monopoly or even duopoly is bad for the customer. Lastly, government has earned billions of dollars in spectrum fees over the years. It is time to pay back part of it to the telecom sector!