An ongoing court battle in India came to a head last week, after the country’s Supreme Court issued a ruling that could leave telecoms firms operating in India liable for billions of dollars worth of license fees and fines. British operator Vodafone Group (LSE: VOD), through its joint venture Vodafone Idea, is set to be one of the hardest hit.
Levies and fines
The more-than-a-decade-long battle between telecoms firms and the government focuses on a fairly technical (beyond the scope of this article) piece of law, which contends that telecoms firms should pay levies not just on their core operations, but also on non-core revenues as well. Needless to say, this latest ruling found in favour of the government.
More than hindering future profits, the decision in fact means that companies will now have to pay many years’ worth of charges, as well penalties, which will hit the industry for billions of dollars. India’s Department of telecoms is seeking more than INR920bn ($13bn) in outstanding dues, for which Vodafone Idea faces the heaviest individual costs.
Idea is now on the hook for about $4bn in historical levies and fines, which if it is unable to pay could eventually cause the collapse of the company. Following the news, its share price was down about 26% on the National Stock Exchange of India.
British partner Vodafone Group, which holds a 45% stake in Idea, is also set to feel the pain, though more in the long run than an immediate hit (its shares stand down about 3% following the news). Vodafone Idea is at serious risk of collapsing if it is unable to pay the fees, which could write off the sizeable investment Vodafone Group has in the firm.
Even if it can survive the costs, or perhaps sees some leniency on the part of the government, the extra costs will hinder Idea’s ability to bid in 5G auctions – a key battleground for mobile operators over the coming years. For Vodafone Group, this means its foothold in India – the world’s second largest telecoms market – will be stagnant at best.
Away from India, Vodafone already announced this month that it will be closing about 1,000 stores across Europe, an indication of the shift away from bricks and mortar stores towards online purchases of mobile phones.
In July, meanwhile, the company said it would be making its tower business into a separate legal entity, which it would consider floating or selling in the next year or so. This was taken well by the market, combined with quarterly results that were better than expected.
In my opinion, the India ruling could perhaps represent more of a problem for Vodafone than a simple cost to be paid. If the joint venture does fail, it leaves it with no real exposure to such a large telecoms market. This may not scare UK shareholders in the short run, but over the long term it means Vodafone is going to lose out.
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Karl has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019