Indian telecoms groups plunge on levies ruling

Shares in Vodafone Idea and Bharti Airtel slid on Thursday after an Indian Supreme Court ruling made them liable for billions of dollars in spectrum and licence fees.

The decision to include non-core revenue in telecoms groups' gross adjusted revenue - the figure on which the levies are charged - is a huge blow to an industry reeling from the price war launched in 2016 with the entry of Mukesh Ambani's low-cost upstart Reliance Jio.

The sector has been locked in dispute with the government for more than a decade, contending that the levies should apply only to revenues from core telecoms activities.

Thursday's ruling means the companies must pay many years worth of charges, plus penalties. India's Department of Telecommunications is seeking more than Rs920bn ($12.9bn) in outstanding dues, according to local media reports, although the final amount may change and the timeframe for payment is yet to be determined.

Having been in operation for longer, Vodafone and Airtel would have to pay significantly more than Jio.

Vodafone Idea's shares plunged 26 per cent on Thursday while Airtel's slipped 7 per cent before recovering to close 3 per cent higher as investors bet it would benefit from any Vodafone struggles. Reliance Industries, Jio's parent, also rose 3 per cent.

Jio's launch three years ago has upended India's telecoms sector, forcing incumbents such as Vodafone Idea to consolidate and pushing others - including Reliance Communications, owned by Mr Ambani's brother Anil - out of the market completely.

"This decision has come at a time when the sector is facing severe financial stress and may further weaken the viability of the sector as a whole," Airtel said. "The government must review the impact of this decision and find suitable ways to mitigate the financial burden on the already stressed industry."

Vodafone Idea said the judgment "has significantly damaging implications for India's telecom industry" and that "today's order has huge impact on two private operators while most of the other impacted operators have exited the sector."

Recommended

Rajan Mathews, director-general of the Cellular Operators Association of India, said "the Supreme Court's judgment is the last straw in contributing to financial distress".

Analysts say the dispute could have been resolved by the government with a clarification of the definition of adjusted gross revenue. However, New Delhi was loath to make any concessions to the companies, according to Mahesh Uppal, who runs a consultancy on Indian telecoms.

"India's government has an obsession with revenues to the exchequer and this has meant that reasonable reform and reduction of levies has been virtually impossible, because no bureaucrat or politician wants to be responsible for causing a loss."

Hemant Joshi, a partner at Deloitte, said the financial burden on the two Indian carriers could hit the rollout of 5G in the country, with the government preparing to hold a spectrum auction in the coming months. "If there is no cash flow, who will bid? That is the challenge," said Mr Joshi.

Vodafone's foray into India has been troubled since it entered the market in 2007. It has been bogged down in a long tax dispute with the tax authorities and has struggled with the local telecoms regulator.

The entrance of Jio into the market triggered a $6.3bn writedown in the value of the Indian business in 2016, the second large write-off it had booked, which triggered the move to merge with Idea and stem the losses and investment needed in its Indian unit.

It was able to deconsolidate the division from its accounts as a result of the merger and has focused on its European and African strategies since. Shares in Vodafone Group dipped only 1 per cent despite the further Indian woes.