Sword of Damocles hangs over Vodafone Idea’s bank guarantees

On 19 May, the Supreme Court rejected petitions from Bharti Airtel Ltd and Vodafone Idea to waive some of the dues linked to their adjusted gross revenues (AGR). Vodafone had told the court that without bank loans that are contingent on AGR relief, it may not be able to survive the current fiscal year.

Lenders are now awaiting communication from the telecom department on the fate of these guarantees, a public sector banker said. Vodafone Idea's plan to raise bank loans depended on potential relaxations on the adjusted gross revenues (AGR) front, which appear bleak after the SC order, the banker said. 

Telcos submit bank guarantees to support their payments towards licence fees, penalties and performance obligations, among others. Vodafone Idea has submitted guarantees worth ₹6,067.2 crore, as per data from rating agency Care Ratings. If the government invokes these guarantees, it will be another financial blow to the telco, which is creaking under hefty losses and dues.

“We have not yet decided what to do in this case, but hope that the government will step in to avoid a potential duopoly in an important sector like telecom," the banker cited above said on the condition of anonymity.

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Emails sent to Vodafone Idea, Department of Telecommunications (DoT) and State Bank of India, which has extended the largest bank guarantee, remained unanswered.

While bank loans carry an interest rate, bank guarantees have an annual commission attached to them. Typically, commissions amount to 1-2% of the guarantee amount, and are significantly cheaper than loan interest. While loans are given against collateral, guarantees are backed by margins or cash kept as fixed deposits.

When a guarantee is invoked, the bank pays the sum to the institution to which it was provided (the DoT, in this case), and the borrower must immediately repay the bank. This converts the guarantee to a loan, on which the borrower pays an interest, which is much higher than the commission amount.

A banker at another lender which had provided guarantees which were not renewed said that in such cases, it is up to the government to step in and resolve it. “Unless the government does something, there is nothing lenders can do," said the second banker.

As per Care Ratings, bankers to Vodafone Idea include State Bank of India, Punjab National Bank, Canara Bank, Bank of Baroda, and Axis Bank. While some have given term loans, others have provided bank guarantees. The situation now seems to be similar to five years ago, when as per reports, lenders requested DoT not to invoke bank guarantees.

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“The government has financial bank guarantees and performance bank guarantees of all the telecom operators. However, those are very less compared to the amount operators owe," a government official said, adding that while the government has powers to revoke those, it is the last resort.

Analysts are hopeful of the government’s generosity.

“The government is unlikely to invoke bank guarantees because that would cripple the telecom sector," a senior telecom analyst said, adding the recovery of the sector is more critical than recovering the bank guarantees, which would "ring alarm bells."

The government holds 48.99% stake in Vodafone Idea, while promoters Vodafone Group and Aditya Birla Group own 16.07% and 9.5%, respectively.

The company's government dues stood at about ₹2 trillion at the end of March. This includes ₹1.19 trillion in spectrum dues and ₹83,400 crore dues towards AGR. As of 31 December, the company's dues to banks stood at ₹2,326 crore.

The bank guarantees have reduced over the years as the government offered relief to the sector, which now has just three private companies - Reliance Jio, Bharti Airtel and Vodafone Idea.

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As per Vodafone Idea's annual report for FY24, the company's total bank guarantees stood at ₹5,889.8 crore.

The telecom relief package announced by the government in September 2021 reduced the bank guarantee requirement by 80% for licence fees and other charges, such as performance-related levies. The government also waived the requirement for submitting bank guarantee for the spectrum acquired after 2021, citing maturity of the industry.

“No requirements for multiple BGs (bank guarantees) in different License Service Areas (LSAs) regions in the country. Instead, one BG will be enough," the government said in a release dated 15 September 2021.

In December 2024, DoT further extended its support to the telecom industry by dispensing with the requirement of bank guarantee to be submitted for spectrum auctions held prior to the reform package i.e. for spectrum auctions of 2012, 2014, 2015, 2016 and 2021, with certain conditions.

The tussle over AGR has stretched out over almost 20 years. On 17 April, Vodafone Idea, which has 200 million subscribers, submitted a representation to the government, seeking a waiver of interest, penalty and interest on penalty on its AGR dues. The telco said the AGR liability demand from the government stands at ₹83,400 crore as of March end, with an annual instalment of approximately ₹18,000 crore due starting 31 March 2026 for next six years. In comparison, Vodafone Idea generated ₹8,400-9,200 crore cash annually in the last three years.

Vodafone Idea has been trying to raise bank funding of ₹25,000 crore for quite sometime now. However, banks want the AGR matter resolved before processing further loans.

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