Reliance Communications\u2019 plea to NCLT (National Company Law Tribunal) to proceed with insolvency process marks the demise of another telecom company. The insolvency plea was filed against RCom by Ericson, an operational creditor, in May\u201918 which has also filed some more cases against the company and its chairman. While the company cannot be blamed for not trying hard enough to save itself, it does seem to lack adequate sense of sacrifices and maneuver required to survive in a market like India. Its decline, in some ways, is similar to that of Yahoo! which rejected a number of offers, only to settle for much less finally. Here is a brief analysis of how the company went broke.Reliance Communication or RCom was primarily in the business of mobile telephony until the problems began. Company\u2019s woes began, not after the entry of Reliance Jio, but much before when it became clear that Indian telecom industry is soon going to migrate to 4G network. RCom had already spent lot of money for its 2G & 3G services and had substantial debt on its books. Consolidated debt at the end of FY14 was nearly Rs 37,000 crore, not much less than its current debt position of about Rs 47,000 crore. With the onslaught unleashed by Jio, company was fighting to reduce its debt to mitigate the risk arising due to declining revenues, instead of planning investment in 4G.<\/p>\n
While it was clear that it cannot survive alone, it made a mess of several opportunities to enter into alliance. (This was unlike the case of Tata Teleservices, which either could not read the market correctly or persisted with its plans despite knowing the risks involved). The only one that it carried out successfully was acquisition of Sistema Shyam Teleservices Limited (SSTL) in Oct\u201917. However, there was neither any financial gain not outflow for RCom as the merger happened in lieu of issue of equity shares. It had no implication on its objective to reduce debt<\/p>\n
The first major failure for the company was calling off the proposed JV with Aircel in Oct\u201917. The JV with Aircel, proposed in Sept\u201916, envisaged transfer of substantial part of its debt and its wireless assets to a new entity which was expected to have sufficient cash flow to service the debt. This turned out to be a double whammy as it led to cancellation of the deal to sell part of towers business to Brookfield. The failure of Aircel deal meant RCom\u2019s tower assets would not generate revenue as projected earlier forcing a rethink on the part of Brookfield.<\/p>\n
Yet, most hurting was the failure to complete the deal with Jio to sell its entire assets related to wireless telephony. While the deal failed as Jio refused to provide guarantee to clear dues of DOT\u2019s (Dept of Telecom) estimated at about Rs 3,000 crore, RCom should have managed to find a way around this. Even after provisioning Rs 3,000 crore to DOT, both RCom and Jio would have got significant value from the assets which may have much less value now. For instance, it is highly unlikely that company would get much value for Rs 14,500 crore of intangible assets in the form of telecom licenses.<\/p>\n
A related error made by the company was closing its entire 2G and 3G business in Dec\u201917 losing an estimated 6-7 crore subscribers, apparently to save costs. While there was no substantial decline in costs as bigger part of it is fixed in nature, it deprived the company of revenues, howsoever low it may have been. Further, they could have been moved to Jio\u2019s 4G network providing significant additional subscriber base to Jio and giving it additional reason to save the deal.<\/p>\n
The financials of the company show the sharp decline and money at stake. Consolidated income for RCom fell to Rs 4,700 crore in FY18, down from almost Rs 20,000 crore in FY17 partially due to discontinuation of 2G and 3G services. Even though the company made losses in FY17 also, the sharp decline in revenue further exacerbated the losses. Total losses incurred during the year were a staggering Rs 24,000 crore against Rs 1,300 crore in the previous year. (It could actually be higher as per a remark made by the Auditor). Against total debt of Rs 47,000 crore, equity was barely Rs 2,800 crore, sharp decline from over Rs 28,500 crore in the previous year. Interestingly, company\u2019s debtors also took it for a ride! Against trade receivables of Rs 3,500 crore in FY18, company has provided Rs 1,800 crore towards doubtful debt.<\/p>\n
As per the annual report, company had defaulted on loans and interest worth almost Rs 13,000 crore at the end of FY18. Default would be much higher by now as it had over Rs 23,000 crore of debt maturing before end of FY19. The default also indicates that creditors showed remarkable patience in dealing with the company and not dragging it to debt recovery or NCLT right at the beginning.<\/p>\n","protected":false},"excerpt":{"rendered":"
Reliance Communications\u2019 plea to NCLT (National Company Law Tribunal) to proceed with insolvency process marks the demise of another telecom company. The insolvency plea was filed against RCom by Ericson, an operational creditor, in May\u201918 which has also filed some more cases against the company and its chairman. While the company cannot be blamed for […]<\/p>\n","protected":false},"author":8,"featured_media":12404,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[856,919],"tags":[],"class_list":["post-12402","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-corporate","category-corporate-2","membership-content","access-restricted"],"yoast_head":"\n