Vodafone's bailout vs Air India’s sell-off: a confusing U-turn by the government
Summary
The Indian government's contrasting strategies towards Vodafone Idea and Air India are baffling. While the bailout for Vodafone aims to maintain competition, the privatization of Air India seems to have reduced options for passengers.
It is difficult to reconcile the Indian government’s actions in repeatedly bailing out Vodafone Idea on the one hand with its decision three years ago to let go of the state-controlled Air India (AI). In the case of Vodafone, the conversion into equity of billions of dollars in dues to the government seems to be driven by the need to prevent the vital telecom services sector from turning into a duopoly of Reliance Jio and Bharti Airtel. While that’s a laudable objective, it doesn’t square up with the sale of Air India to the Tatas on the premise that it isn’t the government’s business to run an airline.
At least in the case of AI, the government was well-advised to get rid of a company that had turned into a white elephant long ago, and that was costing an estimated ₹20 crore per day to keep it flying. Also, at the time the decision to privatize the airline was taken, it wasn't evident that GoAir would soon go belly up or that the resolution plan for bankrupt Jet Airways which was approved in June 2021, would come unstuck later. As it turned out, SpiceJet, which was expected to provide competition to the big two, also failed to scale up for a variety of reasons. It isn't also known if the Tata Group shared with the government its plan of eventually killing its existing airline, Vistara, by merging it with Air India. If it did so, it seems funny the government cleared a proposal that effectively reduced competition in the sector.
Either way, that privatization exercise has played out badly for passengers, with the near-duopoly of IndiGo and Air India leading to service quality that would send passengers scurrying elsewhere if there were options.
Also read: Vodafone Idea’s revival plan adds equity, but erodes shareholder value
Against that background, it is a moot question whether the current move to prop up Vodafone Idea as an alternative to Jio and Airtel will fare any better.
Governments have a duty to step in when haemorrhaging companies can have serious consequences for the public. In Satyam and Yes Bank, timely government action prevented further losses while ensuring that employees and shareholders were spared the consequences of serious promoter misdemeanours. But the woes of those companies, as well as others like IL&FS, were because of serious fraud which justified government intervention. However, since both companies were in sectors that were booming, all they needed was deep internal cleansing.
Vodafone Idea faces no such governance issues. But its business faces serious challenges.
Also read: Vodafone Idea’s revival plan adds equity, but erodes shareholder value
The government’s equity conversion only ensures that Vi’s dues are covered until September. But it leaves open the question of the payments it has to make after that. The company is hoping that with the government stepping in, bankers will reopen the lending tap. That appears doubtful given its low credit rating and its existing debts. In the meantime, it needs capital to fund its growth and arrest the decline in its subscriber base, now down to 126.38 million, well below Reliance Jio’s 476.58 million and Bharti Airtel’s 289.31 million. Its revenue per user also trails the big two.
It's important to remember that Vodafone is no victim. The circumstances under which the telecom environment turned adverse in India were the same for all 12 telcos in 2016 when the Jio storm hit the market. Most companies folded up. Vodafone and Idea Cellular were among the four that decided to stay the course. Both held substantial market shares at the time. Their merger in 2018 was a marriage of numbers two and three, and should have created a strong competitor. That it didn’t, can’t just be put down to regulatory demands. Airtel faced the same and emerged stronger.
Which makes the current liquidity support by the government difficult to understand. With its stake now up to 48.99% it is the beleaguered company’s largest shareholder. But operational control still rests with the promoters Kumar Mangalam Birla Group and Vodafone Group Plc.
Also read: Can the Tatas still save Air India from flushing away its reputation?
In the fairytale book of corporate turnaround stories, Birla and his team would use the financial reprieve from the government to turn around the company, reclaim market share from the leaders, post the first profits in some years, and reward shareholders as its stock takes off. The government would also come off smelling of flowers.
Occasionally, fairy tales do come true.
