The Network Has Gone Bad

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Tata Docomo’s performance was far from satisfactory and there were signs that Docomo would walk out
Tata bye-bye Tata Docomo’s performance was far from satisfactory and there were signs that Docomo would walk out, Photo: AFP

In the 1980s, getting a landline phone installed at home called for a celebration. Usually, you had to know someone who knew someone who was related to someone in the telephone exchange to be bestowed with this status symbol. Liberalisation sped things up a little. Then came the ’90s and the age of dial-up Internet. It might sound incredulous to a generation that learns to text as soon as it learns the alphabet, but the telecom leap is perhaps the biggest of them all.

Of late, however, the sun has not been particularly shining on the sunrise sector. Beginning with the multi-crore 2G spectrum allocation scam and the policy paralysis that followed, telecommunication companies have become wary. New players are watching the sector with interest, while existing players are becoming increasingly uncomfortable.

In what can become the beginning of an exodus, on 25 April, Japanese telecom company NTT Docomo announced that it had ended its partnership with the cellular operator division of the Tata Group. By pulling out at this stage, Docomo will take a hit of more than $1 billion. Tata will have to cough up the cash, adding frequent flier miles to a pile of debt from spectrum purchase and poor returns on investment.

‘Who is next?’ ask telecom sector insiders. While there is a question mark about the fate of Aircel, where no one knows who is running the show, the ailing telecom sector knows no new foreign investments will come anytime soon. Some companies are hopeful of better days following a change of government, but also do not expect anything drastic for at least another two years.

Docomo, listed both on Nikkei and the New York Stock Exchange (NYSE), announced its decision to withdraw from India at its shareholders’ meeting, a day after a board meeting. There is a ‘put’ option in the shareholders’ agreement, which means Tata Cellular has to buy out Docomo’s 26.5 percent stake in the joint venture if it doesn’t find a buyer. A company official said that Tata would probably buy it out only to put it up for sale soon afterwards.

Tata’s liability would be 50 percent of the value of Docomo’s stake or fair market value (FMV), whichever is higher. In this case, 50 percent is higher than the FMV. Docomo had initially invested $2.6 billion in 2009 and after further investments down the years, 50 percent of its stake comes to more than Rs 8,000 crore.

Was Tata surprised? Yes, but not shocked, is the response from within the group. Tata Docomo’s performance had been far from satisfactory, and a year ago, it was clear that Docomo would eventually walk out. “In the past few months, company representatives were making frequent presentations to the Japanese partners. All efforts were being made to ensure that they are in the loop about our activities and so that Docomo did not suddenly pull out,” says a senior executive of Tata Cellular. A review was done of the fiscal objectives that Docomo had set for Tata.

Consequently, on 31 March, Docomo indicated a year’s breathing period to Tata, with two reviews at six-month gaps, lending stability to the joint venture. Though things started looking up, Tata started searching for another strategic investor. The possibilities ranged from Vodafone to Aircel and Uninor.

“In the industry, everyone was and is talking to everyone else,” says the Tata Group insider. “The M&A (mergers and acquisitions) guidelines in the sector were not clear earlier but are now ‘getting clearer’.”

The feeling one gets after talking to members of the Tata Group is that if it is not among the top two contenders in the sector, the company sees no point in continuing. Telecom has not been good to Tata Sons, and after chairman Cyrus Mistry completed a year, there were rumours that it would sell the joint venture to Vodafone. As per the deal between Tata and Docomo, there was a long list of objectives that the JV had to fulfil but could not by the end of fiscal year 2013-14. The word is that Mistry is not passionate about telecom, preferring ‘conventional’ industries instead. According to experts, the rumour also made it easy for Docomo’s board to make up its mind.

Inside Tata Docomo, the mood is sombre. A Tata Docomo senior manager says that they were surprised by Docomo’s announcement. “We got an email from Tata Sons about Docomo’s detachment from the company and it seems Docomo had not even informed them in advance,” he says. The Tata Group seems to have anticipated this insecurity. In the last line of this communiqué, it stressed that “Tata Teleservices would continue to be an integral part of the Tata Group”.

The group had tried to address its problems by engaging different experts. First, it was Anil Sardana, who had been given a mandate of sorting out the leaks in the firm. Then, current MD N Srinath was entrusted with cutting the financial flab from the books. But, it is not possible to ‘fix’ Tata’s problem in isolation.

A senior official in Reliance Communications (RComm) points out that the National Telecom Policy rolled out by Telecom Minister Kapil Sibal appears promising but it is yet to be implemented. The same applies to the new M&A guidelines.

The only new entrant to the sector is the Mukesh Ambani-led Reliance Industries Limited (RIL), which is launching Reliance Jiyo with 4G technology to capture the mobile phone data market with high data speeds. Around 80 percent of the infrastructural setting-up work is done and RComm is ready to hand over the towers.

But, Ambani too wants a clean environment before launching Jiyo. Industry insiders hint at a possibility that RIL and RComm might enter into an operational JV. RComm executives, however, deny any such thing.

There is little sign of other investments. Indian banks and financial institutions have implicitly marked telecom as a negative sector for further investments and the companies have been surviving on loans from foreign banks at high interest rates. Docomo’s exit will make things even more difficult. Market leader Airtel has a debt of about Rs 70,000 crore. Even if it makes Rs 7,000 crore a year, it will spend half that on debt servicing and end with a profit of a few hundred crores. Others have sizeable debts, including as high as Rs 40,000 crore for RComm, Rs 20,000 crore for Tata, Rs 30,000 crore for MTS and Rs 25,000 crore for Aircel.

TEHELKA had earlier reported on how the high cost of the 3G spectrum allocation (Who killed the 3G revolution, 8 March) had adversely impacted the sector. On 29 April, the cellular operators were given some respite by the Telecom Disputes Settlement and Appellate Tribunal (TDSAT) in respect of 3G spectrum use. The tribunal rejected a government decision, which disallowed operators without 3G spectrum from providing the service to their customers using intra-circle roaming arrangements. The government had also slapped heavy penalty on the operators for this. However, the debts have piled up and the time and money spent on litigation have already caused a dent.

The UPA government added further burden to this sector through sky-high prices in the last spectrum allocation. The profits went towards diminishing a possible fiscal deficit of 10 percent. The situation is such that neither a UPA nor an NDA government will be anxious to touch telecom because of the taint associated with it. Starting with the leak of the Niira Radia tapes in 2010 and coupled with the 2G spectrum scam, it has become a no-go area for any politician. The government had brought in everyone at a lesser rate and later hiked the prices, while the regulations do not allow anyone to just pack up and leave.

Technologically, India is far behind its competitors; the number of users per megahertz (MHz) here is much higher. “The number of users per MHz here when compared with, say France, is like comparing apartments with Mumbai chawls,” says an industry insider.

The efficiency of the networks is also in question since mostly high-frequency bandwidth spectrum is being auctioned. The higher the bandwidth, the more the call-drop rates. The 4G technology works on 2,300 MHz, but gets worse as you go deeper inside a building. The army holds the 700 MHz bandwidth for its own communications and has refused to give it up unless it gets 400 MHz, which is used by the Indian Space Research Organisation.

What the telecom sector is hoping for is a stronger regime that can turn things around and won’t shy away because of the after-dust of past scams. Even then, by 2016, there would be several consolidations among all existing players if they have to survive. On 28 April, the first sign of a consolidation came as an announcement that RComm, Tata Teleservices and Aircel were starting a 3G roaming partnership. But, even the most sanguine observers do not see a chance of improvement for at least another two years.

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