Concerned over bad loans, particularly from the telecom sector, which is facing huge losses, the largest public sector bank, the State Bank of India (SBI) has raised doubts over the proposed merger of Vodafone India Ltd (VIL) and Idea Cellular Ltd (ICL) during the discussion on ICL's proposal to renew the limit of working capital. Bank documents related to the proposal, accessed by DNA revealed the "substantial losses of ICL (9M 2018)" and "which has raised concerns of Vodafone which may pull out of the proposed merger".
The bank had observed this situation, in a recent high-level meeting, when they were discussing the ICL proposal for renewals of fund-based working capital (clean cash credit) limit at the existing level and non-fund based working capital (Bank Guarantee) limit. An official privy to the matter, on the condition of anonymity told DNA that Idea, as an acquirer, may be allowed to submit bank guarantees, equivalent to one-time spectrum charges (OTSC) dues before the merger with Vodafone India.
Despite repeated attempts, Idea did not reply to DNA's queries, till the time of going to press, whereas, Vodafone dispelled the bank's concerns. "The transaction has already received the necessary creditor approvals. This speculation is untrue", a spokesman said to DNA in an email statement. When DNA raised a query on the issue, the SBI spokesperson said: "As a matter of policy, the bank doesn't respond on individual accounts."
Reliance Jio's cheap data offering has sparked a price war among telecom companies including ICL and VIL and is "leading to high financial losses". The factors accounting for the losses of ICL like "reduction of revenue, impact of financing charges and depreciation of spectrum auction are applicable to the entire industry and not specific to the borrower only".
From July last year after the entrance of Jio in the telecom market, Vodafone-Idea's revenue level has gradually gone down. VIL and ICL's, combined revenues have dipped from approximately Rs 750 billion to Rs 650 billion. Recently, ICL reported the loss at Rs 9.306 billion for the fourth quarter of 2017-18 compared to Rs 3.256 billion a year ago. Whereas, the company has booked the loss for the full financial year to Rs 41.3 billion from Rs 4.04 billion in 2016-17.
In 2017, in response to an aggressive move of Ri Jio, ICL proposed to merge with VIL by which VIL would amalgamate into ICL in consideration of ICL issuing fully paid up equity share capital to shareholders of VIL.
UK-based Vodafone's Indian subsidiary VIL and Aditya Birla Group's ICL — country's second and the third-largest mobile operators have announced $ 23 bn deal on March 20, 2017. The merger process is expected to be completed by June this year.
ICL is the third-largest telecom operator in subscriber base, revenue market shares and customer base after Airtel and Vodafone. Though at a point the bank mentions, "proposed merged group would be among the few who will survive the consolidation within the telecom industry post-Reliance Jio disruption". But at other point bank is watchful on the telecom exposure and maintain that "there should not be any increase of exposure on the company (ICL) at this juncture".
After observing the losses, the SBI has decided not to raise further exposer in the company and the existing investment limit to be added to the non-fund based limit, which would be utilised for issuing of the bank guarantee (BG) in favour of the company.
Calling For Trouble?
- VIL and ICL announced $23 bn deal on March 20, 2017.
- The merger process is expected to be completed by June this year.
- VIL and ICL’s combined revenues dipped from Rs 750 bn to Rs 650 bn.
- ICL reported loss of Rs 9.306 bn for the 4th quarter of 2017-18 compared to Rs 3.256 bn a year ago
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