BSNL-BBNL Merger, Vi and the Government's Bid To Contend in Telecom

Per media reports and sources, the government has started working to consolidate all its telecom ventures under one umbrella. After merging BSNL and MTNL in 2019, the government will move ahead with merging BBNL with BSNL. Furthermore, the BSNL-BBNL merger will happen sometime this quarter, therefore, before 31st March.

With this and the majority stake in Vodafone Idea the government will get, things are lining up for the government to gamble again on telecom. Will the Indian Government make a move and compete again?

BSNL-BBNL Merger: Consolidating All of the State-Owned Telecom Activities

For now, the details of the BSNL-BBNL merger are still under wraps. Neither BSNL, the DoT, nor BBNL have commented on anything. However, sources report that the merger will happen, and a Cabinet note is in progress. After the Cabinet approves the same, the merger will go through.

Incidentally, after the government started the BharatNet project, it created an SPV called BBNL in 2012 as a PSU. Since then, BBNL has handled the BharatNet project, which remains the government's most ambitious undertaking to connect all of India. The project will seek to connect all the villages of the country – all the 6.43 lakhs – via OFC. BharatNet seeks to empower India’s populations with affordable internet access. The project will cover around 3.61 lakh villages, including Gram Panchayats (GPs) across 16 states. These states are; Madhya Pradesh, West Bengal, Assam, Meghalaya, Manipur, Mizoram, Tripura, Nagaland, and Arunachal Pradesh, Kerala, Karnataka, Rajasthan, Himachal Pradesh, Punjab, Haryana, Uttar Pradesh.

Since it aims to deliver connectivity across the country, it receives funding from the USOF; the fund that the government established for the same purpose. Notably, all of the telcos pay a Universal Access Levy towards the USOF and have therefore been rather protective about it.

Currently, this remains in the field of speculation. However, should the merger go through, it would present a unique opportunity to BSNL. The state-owned telco has lagged significantly behind its private counterparts and has not launched a 4G network yet. With BBNL comes access to the USOF; the SPV has access to funds worth Rs. 60,000 crores. Therefore, that would allow

However, the BSNL-BBNL merger can lead to significant friction between the new entity and the private telcos.

The Bone of Contention Worth Rs. 60,000 Crores

If the merger does go through, BSNL might get access to the huge USOF war chest. This move, once confirmed, will surely face stiff opposition from the private telcos. It is worth mentioning here that out of the 8% of the AGR the telcos pay to the government, 5% goes to the USOF. Therefore, if BSNL, which competes directly with the telcos, gets access to what is essentially their money, it will cause an uproar.

For the state-owned telco, though, this could prove a lifeline it has needed for so long; with the incredible liquidity that USOF will bring, the BSNL-BBNL merger will help out BSNL more than anything. However, it can't afford to dream just yet; sources report that it will have to complete the pending work for BharatNet as well. For now, the telco looks set to create a separate division for BharatNet.

BSNL needs to remain on its feet here as its track record on BharatNet work is far from excellent. In March 2021, along with RailTel and PGCIL, BSNL was slammed by the Parliamentary Committee on IT for its unsatisfactory work on BharatNet. Given its performance, the Cabinet might even reject the merger proposal.

And even if the merger goes through, it will likely have to face much more hassle than right now. The merger could actually prove detrimental in its bid to roll out 4G this year. The state-owned telco should therefore consider this merger as more of a responsibility than a free pass.

The (Un)expected Vodafone Idea Twist

On 11th January, Vodafone Idea's board accepted the proposal to convert the telco's spectrum and AGR dues to equity. The move, once completed, will see the government become the largest stakeholder in the telco, with about a 35.8% stake. In a statement, the telco has said that it will issue equity shares to the government at Rs. 10 per share. The final price r remains subject to DoT confirmation, however.

The move also reduces the promoters’ stake significantly. Following the completion of the transaction, Vodafone Group will hold 28.5%, while ABG will hold about 17.8%. The statement also read that the accrued interest will get converted to equity under Section 62 (4) of the Companies Act. While it is not something that was totally unexpected, the investors have not received it well; shares of Vodafone Idea plummeted to ₹12 apiece as the news broke.

The telco has struggled to compete as its Capex spending lagged behind that of Jio and Airtel. Suffering from the constant churn and a plummeting revenue, the telco had also written to the DoT in November; it had notified the department that it won’t have enough funds to pay license fees for the 2nd, 3rd, and 4th quarter of FY22. With 5G auctions coming up within the next 3-4 months, without this move, the telco would have been unable to compete at all.

This is a good time to mention that Vodafone Idea is not a small fry by any means; it has a whopping 269.07 million subscribers. While it lags behind its private counterparts Jio and Airtel, it has more than double subscribers than BSNL, the only government-owned entity in telecom, which has 113.5 million users.

Has this opened the door just enough for the government to stick a foot in?

Towards a State-Dominated Telecom Sector?

Right now, the BSNL-BBNL merger should be considered as speculation. However, the Vodafone Idea stake the government has just bagged itself is a solid fact. If this is a sign of the times to come, we can soon see the government dominate the Indian Telecom landscape. Between BSNL and Vi, the center will have over 382 million users, making it the second-largest telecom business in the country, behind only Reliance Jio.

The government will gain great momentum from consolidating all telecom activities under BSNL, sure, but it takes a significant risk in doing so. The move will make private players uncomfortable, and not only because of the USOF controversy. Last year, the telecom minister Ashwini Vaishnaw had expressed hope that more private players would join the Indian telecom sector. However, the actions of the government seem to be rather different.

If the government wants to dominate the telecom sector, as it did three decades ago, it has all the right tools to do so again. Will it, though? Only time will tell. For now, the telecom sector waits. India's telecom sector might be on the cusp of witnessing history repeat itself, and not for the best.