VSNL at the crossroads

To say that the Indian telecom sector is ringing with activities all round may be a cliche but the extent of changes that have already taken place and the potential these developments hold in the days to come are truly breath-taking. Last week, Bharti Telesonic, part of the high profile telecom group, launched the country's first private sector national long distance (NLD) telephony service by offering 12,000 km of its nationwide optical fibre network to other telecom operators to route their calls. A large number of cellular operators have grabbed the offer. Long distance call rates will further fall once the Bharat Sanchar Nigam Ltd. (BSNL) joins in. Competition is the name of the game - in offering trunk lines, cellular rates and all other forms of telecommunication. The distinction between local, national and long distance telephony will get further blurred, sooner than is perhaps realised.

In the area of international telephony too, big changes are on the anvil. The Government has already announced certain key measures: Videsh Sanchar Nigam Ltd.'s monopoly over long distance telephony will end on April 2, 2002. In mid-November, the Telecom Regulatory Authority of India (TRAI), framed draft guidelines for the entry of new players. The Government seems ready to accept them. But the expected changes in the environment, profound as they will surely be, are not the only issue confronting the international telephony business.

For, VSNL itself is at the crossroads. For long a candidate for disinvestment, the Government has chosen for it the strategic sale route. A quarter of its equity is being offered to a strategic partner. The Government has nearly 53 per cent of its equity at present. Foreign institutional investors and holders of its ADRs hold between 35 and 37 per cent and the balance by the public, mutual funds and others.

The bidding for the strategic stake in VSNL is at an advanced stage. Initially six companies were in the fray. The list has since been halved - only the Tatas, Reliance and Sterling Cellular led consortium remain in the fray. The expectation is that VSNL's privatisation will be completed by the end of this fiscal (March 31, 2002). By that time, deregulation of international telephony should have taken place. The VSNL's new board will, therefore, have to comprehend a vastly different environment than the one that obtains now. Hence, not only will the country's (at present) sole international telecom carrier be transformed internally but - even as it copes with those changes - will function in a competitive environment.

How will VSNL's valuation measure up to the requirements of the Government and its potential strategic partner? VSNL's sale is considered to be in the big league, certainly more significant than say the sale of the six government owned hotels that was completed recently. Everyone agrees that finding the right price (and the right owner) for the Government's 25 per cent (strategic) stake is not going to be easy.

Apart from the reasons mentioned above, the impact of the TRAI guidelines on VSNL's valuation will have to be considered. Second, the VSNL board, ahead of its privatisation, has declared handsome dividends in two instalments - a 400 per cent dividend (Rs. 40 per share) in July and a 750 per ccent dividend (Rs. 75 per share) very recently. The Government has mopped up about Rs. 2,000 crores in the process. The total outflow on account of the extraordinarily generous dividend payout is Rs. 2,350 crores. Consequently, VSNL's reserves and surplus (Rs. 4,500 crores) stand depleted. The Government, the majority shareholder, gains. The cynical view is that the dividend route achieves one of the principal objectives of the disinvestment process - a revenue mop up by the Government to partially bridge the fiscal deficit. Again in a negative sense, the Government can say that it is not selling VSNL cheap, a criticism that has haunted all public sector sale processes so far.

However, in the context of its imminent privatisation, VSNL is the loser. Final bids from those still in the fray will no doubt reflect its weakened financial position. The successful strategic partner will have to raise loans to fund new and vital investments. The Government, which expects to hold a 27 per cent stake post-divestment, will be less by way of dividend in the coming years. The weakened balance sheet can be traumatic as VSNL moves into a competitive era.

That will also be the time to reckon with the TRAI rules for the new players. By fixing the entry barriers at a modest Rs. 25 crores plus another Rs. 25 crores by way of guarantees (to back up the roll out plans), the regulator probably aims to usher in open competition. Who knows one or more of VSNL's current suitors may opt out of the race preferring instead to start on their own? Global telephone tariffs are also set to decline and without its monopoly status VSNL's revenue streams will reduce. Clearly VSNL will be moving into areas such as providing internet services and national telephony. Its critics say that it missed the bus by allowing its cash stockpile to remain idle.

In the end, it is the turn of the customer across the entire spectrum. Rates will come down and with the real possibility of VoIP (voice over internet protocol) being put in place by April next, the customer will have yet another way of communicating.