If govt lets Voda Idea go belly up, top banks to take big hit; FDI image hurt

State Bank of India is said to have an exposure of Rs 37,330 crore to the two telecom firms.

Will AGR issue force telecom sector to move towards duopoly?
A combined massive loss of Rs 74,000 crore by telecom majors Bharti Airtel and Vodafone Idea may have a significant bearing on the economy as well as on the banking sector.

SBI, the country’s biggest lender by asset, is said to have an exposure of Rs 37,330 crore to the two telecom firms. Similarly, HDFC Bank (Rs 24,515 crore), Axis Bank (Rs 17,135 crore), Bank of Baroda (Rs 11,471crore) and Punjab National Bank (Rs 7,318 crore) are also set to take a hit if their exposures turn sour.

The economy is already struggling. SBI has predicted India's gross domestic product (GDP) growth to slip to a record low of 4.2 per cent in September quarter.


Massive Rs 48,845 crore provisions against the Supreme Court’s ruling on average gross revenue (AGR) dues mainly dented bottomlines of these telecom firms in Q2.

While Vodafone Idea reported a record loss of Rs 50,921 crore for September quarter, highest ever for any Indian company in India, Bharti Airtel posted a loss of Rs 23,044 crore for the quarter due to a Rs 28,450 crore provision towards AGR dues.

Apart from being an accounting need, some experts see such big losses as pressure building on the government.
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“They are obviously playing a pressure tactic, as they are willing to let go of their businesses entirely. It’s like saying hum toh dubenge, sanam tumhe bhi le dubenge (we are already drowning, darling, but we'll take you with us). The government put axe on its own foot in attaining this Supreme Court judgment,” said Abhimanyu Sofat, VP-Research, IIFL.


Both telcos are cash-starved and find themselves unable to pay dues in full. The doors are closed for them, as Vodafone’s parents have refused to infuse money. Moreover, borrowing such a large amount will not be easy for either of them.

The management of Bharti Airtel on Thursday said there can be no assurance of success in the management's plans to raise funds.

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“This represents a material uncertainty, whereby it may be unable to realise its assets and discharge its liabilities in the normal course of business, and accordingly may cast significant doubt on the group's ability to continue as a going concern,” said Gopal Vittal, MD and CEO.

Vodafone Idea also issued a similar warning.

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Analysts think if they have to pay the dues, they will most likely go bankrupt. “Relatively, Bharti is better placed, but its operating cash flow will be close to Rs 20,000 crore. If they now have to pay the AGR dues of around Rs 30,000 crore, then everything will be gone. They will not have any cash left to survive in the business. No bank will finance this kind of obligations,” said Sajeev Hota, Vice-President and Head of Research at Sharekhan.

“Vodafone Idea could go bankrupt over this. They do not have the money to pay. You can call it pressure tactic or something else, the fact is they don’t have any option left other than request the government to give them some leeway,” Hota said.

Now the onus is on the government to provide the relief. A Committee of Secretaries (CoS) headed by Cabinet Secretary Rajiv Gauba is looking into the matter and many relief measures are under consideration. But, if it decides to provide some relief, it could open a pandora’s box, analysts said.

Deven Choksey, market veteran and Managing Director of KRChoksey Investment Managers, said the big losses were a given, as there are accounting laws to follow. As for their ability to pay the money, they cannot pay.

“The bigger question is if the government can offer them any concession on the terms of payment? Because, should they give concession in one case, they may probably have to offer similar concessions to many other industries, I suppose,” he said.

Choksey said it would be a tough call, because on one side, you have to manage the telecom industry. On the other hand, you have to manage the regulation. At the same time, the banking sector has a high exposure to telecom. If the telcos are unable to pay them, you are going to see a challenge for the banking sector.”

Sofat also believes it could have a cascading effect if any of the two telcos collapses. “They have the largest FDI investment in India, and as the largest investor, if you have to take such huge losses on your books, it will scare investors. The reason of loss is related to government regulations and how much money the government is taking from you. For that reason, if a company is in losses, so obviously it will be a very big negative.”
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