Financial Daily from THE HINDU group of publications
Wednesday, Oct 09, 2002
Corporate - Corporate Disputes
Cross-connections at VSNL
LESS than six months ago, triumphantly handing over the reins of international long distance calls major, Videsh Sanchar Nigam Ltd (VSNL), to the Chairman of the Tata group, Mr Ratan Tata, the Union Communications Minister, Mr Pramod Mahajan, quipped that he was proud to solemnise the "second marriage" in his family to "the most eligible bachelor in the country".
The first bride that Mr Mahajan had given away was CMC Ltd., which had earlier been successfully divested in favour of software major, Tata Consultancy Services.
Even as Mr Tata turned a shade pink, the Minister continued in the same vein: "As the son-in-law of the Government, I will ensure that you take good care of my daughter (read VSNL)."
Today, remind Mr Mahajan of these words, and it will be his turn to feel embarrassed. For not only has he made "married" life difficult for the "son-in-law" by telling VSNL what it must do and what it cannot, his demands have been so exacting that the company feels it could go bankrupt if it has to follow them. Even as the first controversy over the Rs 1,200-crore investment decision of VSNL in Tata Teleservices Ltd (TTSL) was fading from public memory, a second one has broken out between the "in-laws" over the sharing of revenue from international calls between VSNL and BSNL.
According to industry watchers the genesis of the latest controversy dates back before the TTSL row. VSNL's interconnection agreement with BSNL expired on April 1, 2002. Since then it has been trying to reach a new agreement, but found no meeting ground with BSNL. Negotiations on the issue remained deadlocked for close to five months before BSNL announced that it might shift its outgoing traffic to the other private international long distance operators (Bharti Telesonic and Data Access), if an agreement was not reached.
Officials pointed out that as long as VSNL was the only ILD operator, BSNL had no choice but to go along with whatever revenue share it was being offered. However, once Bharti and Data Access started ILD operations and offered a higher revenue share, BSNL had the option of going by commercial considerations.
The BSNL Chairman, Mr Prithi Pal Singh, shot off a letter to the VSNL MD, Mr S. K. Gupta, stating that the company was not obliged to route the outgoing international calls of its subscribers through VSNL.
"Enough time has already been given to VSNL to revise the interconnection rates. It has been five months since the earlier dispensation expired. How long can we wait? Since there has been no response we will be forced to divert all the calls to the networks of other operators," was his forceful comment.
VSNL, however, countered that BSNL was committed to routing all the calls through its network for two years after its disinvestment. The interconnect rates offered by Bharti and Data Access were possible because of their smaller networks. VSNL also made the point that it has a much better infrastructure spread across the country and the quality of its service was superior, and so it could not afford to lower its revenue sharing rates.
In fact, the feeling at that point of time was that BSNL was making empty threats. Mr Gupta was confident that BSNL could not afford to divert the traffic away from VSNL after being a partner for so many years. What is more, since the other two operators had just started business, he was pretty much sure that their networks would not be able to handle the entire outgoing traffic of BSNL (close to three billion minutes per year).
Mr Singh, however, walked the talk. He explained his position to the Department of Telecommunications (DoT), received its assent, and then decided to go for the kill.
Lobbies at work
Meanwhile, sensing an opportunity of bagging the entire outgoing traffic of VSNL, both Bharti and Data Access started their own lobbying with BSNL. It was not difficult to convince Mr Singh that both the companies together would be able to handle the volume of traffic. "An opportunity like this comes only once in a lifetime. Who would have ever thought that with a single stroke of the pen we will get a substantial portion of BSNL's calls," one of the operators quipped.
But the celebration was premature. In the first week of August, Bharti's i2i network (undersea cable), which routes its international traffic from Chennai to Singapore, developed a snag. And, ironically, Bharti was forced to use VSNL's gateways for its own ISD traffic.
VSNL jumped at the opportunity. BSNL's attention was drawn to this event. "How can Bharti, which is using VSNL's network, handle huge traffic on its own? Even they depend on us because of our superior network," BSNL's CMD, Mr Singh, was told.
Bharti officials countered that the i2i link failure was an aberration and enough contingencies were in place to ensure that traffic was not affected.
But the damage was done. Doubts started creeping in about the ability of the two private operators to handle such huge voice traffic. BSNL, however, remained unfazed by this blip. It was decided that VSNL would be given an ultimatum. Sign up, or else...
Battle in the media
Sensing that there was no other option available, top Tata officials decided to fight the battle in the media, a field in which they had lost the previous round (TTSL investments). In fact, at that time, the much-maligned Government PR machinery (Press Information Bureau) had done a much better job in keeping the media tuned in to its version of events.
The Tata group's PR agency was also told in no uncertain terms that its performance in handling the media had been way off the mark in recent times.
Top guns of the Tata group briefed select journalists in Mumbai that the group was intending to "return" VSNL to the Government. Some sections of the media, indeed, took the bait. "The honeymoon is over", the headline screamed from a front page the next day.
"It is like a marriage that one gets into expecting some minimum benefits. But we see that we have got a very raw deal. We see no reason not to seek a divorce, VSNL is bound in by caveats at all stages while the government companies can do whatever is possible to eat into the VSNL pie. The Government would have been better off keeping VSNL and merging it with the other telecom companies in its fold," a Tata official was quoted as saying.
Although it is common knowledge that the disinvestment was irreversible, alarm bells did start ringing in the Government. Not only would the entire disinvestment process be clouded in uncertainty but investor confidence would also take a beating.
VSNL briefs employees
Meanwhile, VSNL also briefed its employees about Mr Mahajan's "attitude" which could "harm the company". The employees, who were apprehensive about the VSNL disinvestment, had heaved a sigh of relief when the Tata group secured strategic control. They were confident that the Tata umbrella would protect their interests.
And now, when told that the Government was making life difficult for the company to survive profitably, they were up in arms. The VSNL unions roped in the trade unions of other PSUs and jointly threatened to bring the country to a halt if their company was troubled any more. The Tata group's tactic seemed to be working.
The Tatas then fired their next salvo. The media was told of its plans to approach the Telecom Regulatory Authority of India (TRAI) to resolve the conflict a tenable option open to the group.
The TRAI was in a fix. It had to make up its mind whether to set a precedent by addressing the issue suo motu or wait for either of the sides to approach it for mediation. A lot of internal debate followed, and finally the TRAI Chairman, Mr M. S. Verma, decided not to take up the issue.
Although interconnection agreements come under the jurisdiction of TRAI, the present conflict has more to do with interpretation of the compensation that was handed over to VSNL during disinvestment.
Tata meets Mahajan
On the last Monday of August, Mr Mahajan jumped headlong into important business meetings with the Reliance group Vice-Chairman, Mr Anil Ambani, Bharti Enterprises' Chairman, Mr Sunil Bharti Mittal, and Mr Ratan Tata.
The day began with a meeting with Mr Ambani who called on the Minister for the first time after the demise of Dhirubai Ambani. The Minister also met Mr Mittal to sort out pending interconnect issues dogging the national long distance licence for the group.
While Mr Ambani's meeting with Mahajan was described as a courtesy call, the meeting with Mr Ratan Tata discussed more specific issues of interconnection between VSNL and BSNL.
The Tata group, sources say, was uneasy on learning that Mr Ambani was to meet the Minister ahead of Mr Tata. Corporate rivalry seemed to loom that much larger. However, the meeting went off quite smoothly. It lasted for nearly two hours and Mr Tata was given the indication that BSNL may be asked to be a little more flexible in its interconnection charges with VSNL.
Mr Mahajan noted that since the Government also had a minority stake in VSNL, he would have to intervene to sort out the issue between the two sides. He apparently told Mr Tata that he was willing to give "somewhat of a premium" to VSNL because of the "volume of traffic it carries and the fact that the government still retains a 26 per cent stake in the firm".
After the earlier face off over the TTSL investment, it appeared that the Minister was softening his stand towards the group.
The following week, Mr Mahajan chaired a meeting with VSNL, BSNL and DoT officials to sort out the issue. And, in a volte-face, he reverted to his original position.
Convinced that BSNL was justified in demanding a greater revenue share (see accompanying story), he decided to back it to the hilt. The VSNL MD, Mr S. K. Gupta, was bluntly told that there was no easy way out.
Refusing to listen to Mr Gupta's explanation that it would lead VSNL to financial bankruptcy, the Minister stated that if BSNL did not stick to its stand then it would lead to BSNL's bankruptcy!
Mr Mahajan also set a deadline of October 1, before which VSNL was to match the rates offered by Data Access-Bharti, failing which the entire outgoing traffic would be moved out of VSNL. He added that since he was also responsible to Parliament, he could not justify anything other than a marginal concession.
But Bombay House was not to take things lying down. Finding Mr Mahajan "unreasonable", they decided to appeal to the Prime Minister, Mr Atal Bihari Vajpayee, and the Deputy Prime Minister, Mr L. K. Advani. Mr Tata flew to Delhi for some hectic lobbying.
Mr Vajpayee and Mr Advani were told that Mr Mahajan was being unfair by demanding the same interconenct rates as the smaller player Bharti and Data Access. By continuously creating problems for VSNL, the Minister was not only giving an impression of working on behalf of other interests, but was also damaging the image of the country, was a point emphasised.
VSNL is listed on the New York Stock Exchange. Any "unreasonable adversities" against VSNL would hamper foreign investor confidence and would prove to be detrimental to the whole economy as such, they were told.
Mr Tata also reportedly offered VSNL back to the Government saying he was tired of this continued interference by Mr Mahajan.
Realising that the matter could get out of hand, Mr Advani convened a meeting with Mr Mahajan, the Finance Minister, Mr Jaswant Singh, and the Disinvestment Minister, Mr Arun Shourie. As it happened the "truce" meeting was on September 26, the day of the Akshardham temple attack, and it had to be wound up relatively quickly. No decision was taken.
None of the Ministers is willing to disclose what happened at the closed-door meeting. They, however, noted that another meeting was scheduled for October 5 when a final decision would be taken.
The Tata group decided that it had waited enough. Mr Gupta shot off a letter to the TRAI seeking its intervention in the matter.
BSNL, meanwhile, started "test routing" of outgoing calls through the networks of Bharti and Data Access.
A couple of days later, the Data Access MD, Mr Siddhartha Ray, wrote to the Authority asking it to keep out of the conflict. He noted that BSNL would lose Rs 2,900 crore in revenue if it continued to route calls through VSNL at its present interconnect rates.
As of today, the Authority is yet to reply to Mr Gupta's letter. BSNL continues to route a major portion of its outgoing calls through VSNL, and the proposed high-level October 5 meeting took place a day later but was once again inconclusive.
It remains to be seen which of the "in-laws" has the last laugh "father-in-law" Mahajan or "son-in-law" Ratan Tata.
Crux of the matter
WHEN you telephone a friend in the US, the call is carried from your house or office to the local exchange owned by a basic services operator (BSNL, MTNL or any of the new private companies). The basic operator hands over the call to an international long distance gateway (such as VSNL's) which, in turn, relays it to the international carrier (for example, AT&T in the US) and then on to your friend's local service provider.
Since the international carrier delivers the call on behalf of VSNL, it charges the latter what are called "settlement" rates for this service. The settlement rate is usually half the accounting rate, that is, the price charged from the subscriber of the originating country.
Thus, for each outgoing international call, BSNL bills the caller some collection charge, keeps a portion of it and shares the remaining part with the ILD operator. Out of this, the ILD operator pays settlement rates to the foreign carrier.
Similarly, for incoming calls, the ILD operator is paid by the foreign carrier. It retains a portion and shares the rest with BSNL. The average tariff for an outgoing international call at present is Rs 21 per minute. ILD operators Bharti Telesonic and Data Access have agreed to settle for about Rs 9 of this for themselves, leaving BSNL with Rs 12. VSNL, in contrast, wants Rs 13.80 per minute, which means BSNL will be left with only Rs 7.20.
For incoming international calls, BSNL gets an average of Rs 7.20 per minute from Bharti and Data Access, while VSNL wants to part with no more than Rs 4 per minute.
It may be recalled that before the VSNL disinvestment, the Government had, as part of the compensation package for terminating its monopoly in ILD two years ahead of schedule, stated that both BSNL and MTNL would necessarily route its international traffic on their network for two years.
However, after disinvestment, DoT softened its stand on the issue and permitted BSNL to consider steering its traffic to other operators (currently Bharti Telesonic and Data Access) as long as they offer better commercial terms (read larger interconnect revenue share).
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