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Rise and Fall of Reliance Communications: Project Report

The document discusses the rise and fall of Reliance Communications, an Indian telecom company. It analyzes the company's strategic mistakes like initially adopting the less profitable CDMA technology. It also discusses the huge debt the company accrued from expanding services and mergers, and how this ultimately led to its bankruptcy despite attempts to adapt to changes in the industry.

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Rehmat Hussaini
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0% found this document useful (0 votes)
136 views9 pages

Rise and Fall of Reliance Communications: Project Report

The document discusses the rise and fall of Reliance Communications, an Indian telecom company. It analyzes the company's strategic mistakes like initially adopting the less profitable CDMA technology. It also discusses the huge debt the company accrued from expanding services and mergers, and how this ultimately led to its bankruptcy despite attempts to adapt to changes in the industry.

Uploaded by

Rehmat Hussaini
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Project Report

On

RISE AND FALL OF RELIANCE COMMUNICATIONS

Under the Guidance


Of
Prof. Rameshan Pallikara

Submitted by:

Prasoon Agrawal (PGP/25/ 406)


Prerna Srivastav (PGP/25/ 407)
Priyanka Shaw (PGP/25/408)
Rahmat Hussaini (PGP/25/409)
TABLE OF CONTENTS

S. No Contents Page Number

1. Introduction to the study 2-3

2. Statement of problem 3-4

3. Objectives of study 4

4. Methodology 4-5

5. Sources of data 6

6. Presentation Scheme Planned 6-8

1
1. Introduction to the study

In this study we have tried to understand the curious case of reliance communications ltd.. By
looking into company’s internal decisions to its exterior environment, we have tried to
understand what led to diminishing revenue, reduced profitability, and unsustainable debt at a
telecommunication juggernaut which was a part of worlds fastest growing industry.

Reliance Communications - History


Reliance Communications Limited, founded in July 2004 was an Indian mobile service provider
and offered voice, 2G and 3G data services. In February 2019, the company was forced to file for
bankruptcy as it could not service its debt. It still owes 50,000 cr in debt, which is around 3 times
its total assets of 18,000 cr. While it might not have been the first company to provide
telecommunication service in India, Reliance communications was right at the forefront of
transforming the Indian telecommunications landscape by providing free incoming calls as well
as free cellular phones. The free cellular phone paired with free incoming calls was a game
changer and helped introduce cell phone to most of India. The impact of Reliance
communications could be understood by the fact that while its competitors charged 4-6 rs per
minute even for providing incoming calls, RCom made that free by selling a 500 rs handset.The
company was also the first to announce single rate at rs 1 per minute all over India.
Why we have chosen RCom as part of our study?
● The company was run by Anil Ambani, the younger son of Indian business magnate
Dhirubhai Ambani, who received the company from the family-owned conglomerate
Reliance Industries Limited in 2005 as part of his share in RIL. Anil's acquisitions were
thought to be profitable, with a lot of room for future growth, particularly the telecom
sector.
● The company was fairly placed at the pole position of an Industry which was expected to
have 1.2 billion subscribers by 2013 and was the worlds fastest growing industry at that
point of time.
● Despite its massive initial success and industry leading position, it started incurring losses
after a golden period and amassed huge debt. The company finally had to shut operations
after 13 years in business.
● There was green flag from the government for development of the telecommunications
industry. The Indian government established a task group to recommend steps for the
development of the industry. The abolition of the fixed licencing system and the adoption
of the revenue sharing model helped in expansion of the industry.
● The company realising its early mistake of entering the telecom space with less profitable
CDMA, adopted GSM technology, as well as expanded into 2G and 3G services.
● The company failed even after having strong partners in other market leaders like
Ericsson and trying a merger with AIRCEL.

2
Scope of the case
The case covers various kinds of business risks faced by a firm. Here, in the case of Reliance
Communications Ltd., we have figured out the following risks:
● Strategic Risk
● Finance Risk
● Compliance Risk
● Competitor’s Risk

While the extent of damage bad decisions and strategies could result is quite clear from the case
of Reliance Communications, we decided to dive deeper to understand the strategies, decisions
and business strategies that resulted in the same. To understand the fiasco at Reliance
communication in a holistic manner we tried to look into the products, business scenario,
business strategies and practices of Reliance communications ltd., as well as practices of their
competitive firms. The data has been collected from various sources like company con-call
transcripts, annual reports, to various articles published in magazines and websites.

2. Statement of the problem

While the company’s decision to enter the Indian market using CDMA service allowed the
company to quickly make a name for itself in the Indian telecom space, by offering 500 Rs
handsets and free incoming calls, it backfired in the long run as GSM service was more
profitable and brought in more revenue compared to CDMA. The initial strategies of RCom was
responsible for bringing a revolution in the telecom space, when Reliance Jio, the current market
disruptor was not even incorporated and millennials were mere children.
The company realising its mistake, entered the GSM space. To remain competitive in the swiftly
changing business environment and cut throat competition, the business entered into 2G as well
as 3G data services, but had to incur huge debt as the initial operations were not as profitable as
it could have been due to the choice of wrong product (CDMA). The company took all the steps
needed to remain competitive in terms of technology by adding 2G as well as 3G to its services
portfolio, but still started losing customers as well.

The project will help us gain better understanding about:


● What was the actual cost of making a significant strategic error very early on in the
business
● Consider the course of action RCom could have opted to survive in the longer run
● The reason behind various strategic moves of RCom like merger with AIRCEL, and
acquisition of smaller players like Sistema

3
● How could an industry leader start losing customers and revenue despite keeping it up to
date in terms of services offered in the industry
● The actual cost of expansion by using debt financing in an industry with cut throat
competition
● Impact of entry of a new competitor which has the potential to disrupt the entire industry
● Why mergers could fail despite it being crucial for survival of all the parties involved in
the merger deal

3. Objectives of the study

The aim of the study is to analyse the survival tactics of Reliance which include the following :
1. Why did Reliance Communications acquire Sistema? Was this the right time for such an
acquisition and were they able to reap the benefits of this ahead the launch of Reliance
Jio?
2. Why did Reliance Communications merge with Aircel? Why did the merger eventually
fall apart?
3. How did RCom end up getting trapped in a debt-trap? Could this have been avoided?
4. Why did Reliance Communications propose to sell its tower business ? Did this help in
deleveraging of RCom?
5. What eventually led to the bankruptcy of Reliance Communications ? What could have
been done differently to avoid this?

4. Methodology

The Preliminary Study is completed using secondary resources such as articles, magazines and
newspapers. We comprehended the in-depth analysis of the industry in which the companies
operate. The analysis is also done to see if there is enough data available before, during, and after
the problem has been solved. To begin with, we have started Internal analysis of the company.
Internal Analysis of Reliance is conducted in terms of strengths and weaknesses in order to tap
into the company's resources, core competencies, and several other elements that can either
positively or negatively impact the company's strategic moving process.
We have chosen to use the SWOT analysis tool to understand Strengths, Weaknesses,
Opportunities, and Threats. It helps to uncover areas of business that hold a company back and
prevents it from achieving its goal. The reason why we think SWOT would help us analyze
Reliance Telecommunication is stated below:
SWOT analysis: Rcom was a major player and had disrupted the Telecom sector. It had
complete dominance in the market but still couldn’t expand its GSM services which eventually
led to massive debt. SWOT would help us know about the strategic position of the company with
respect to the Opportunities and Competitors threats it faced.

4
Just conducting internal and external analysis of the company is not enough to maintain or check
the competitive forces at work in an industry. We also need to assess the attractiveness of an
industry, and pinpoint areas where we can adjust our strategy to improve profitability. For this we
can use Porter’s Five Forces tool. It takes Five forces into consideration that can impact the
competitiveness of an Industry. The parameters are Competitive Rivalry, Supplier Power,
Buyer Power, Threat of Substitution, Threat of New Entry. By using these parameters we
can assess the competitive position of any company. The reason why we think porter’s Five
would help us analyze Reliance Telecommunication is stated below:
Porter’s Five forces: Porter’s five will help us determine the competition level in the industry.
It will help us analyze the existing competitors, threat of substitute service and entrance of new
players. It will help us understand why Rcom acquired Sistema Shyam Teleservice and
announced a merger with Aircel. We will get to know why the Rcom and Aircel merger didn’t
work and how the entrance of JIO disrupted Rcom’s market.

To analyze a company we need to identify the macro-environment factors that can have an
impact on an organization.For this we can use the PESTEL analysis tool. PESTLE is a
mnemonic which in its expanded form denotes P for Political, E for Economic, S for Social, T
for Technological, L for Legal, and E for Environmental. It will give us a view of our
environment from all important angles. The reason why we think PESTEL would help us
analyze Reliance Telecommunication is stated below:
Pestle Analysis: Rcom faced various challenges when the Indian government tried to change
the taxation policy to contain the carbon footprint of the Services sector. It also had to deal with
Efficiency of the financial market of India and Exchange rates. Rcom also had to look for
dissemination of mobile technology and transformed customer expectations in the Services
sector. Likewise Rcom faced various Political, economical, Social, Technological and legal
issues. PESTEL analysis will help us analyze each of the factors in a structured way.

It is important for a company to determine the future direction considering the risk and Benefits
associated. In this case Ansoff Matrix tool is of great help. It highlights 4 strategies based on
New and Existing markets versus New and Existing products. With this company can formulate
a strategy for its future growth. The reason why we think Ansoff would help us analyze Reliance
Telecommunication is stated below:
Ansoff: The Ansoff matrix helps the company analyze the growth strategies in combination of
products and market. We will use this tool to analyze why Reliance Telecom wanted to diversify
its services to GSM when it could continue with CDMA services. This tool will help us analyze
how reliance telecom could combine its services and market by identifying new opportunities for
growth.

5
5. Sources of data

We will be making use of different sources of data in order to understand the issue from all sides
and to present an unbiased analysis. These include the following:
1. Annual Reports for Reliance Communications Ltd.
2. Concall Transcripts
3. Newspaper articles
4. Online editorials and articles on RCom and its competitors

6. Planned presentation scheme

The objective of the study is to analyse the survival strategies of Reliance Communications. In
order to analyse the problem from all fronts we need to consider multiple facets and study the
circumstances leading to it. Beginning with the leading position of Reliance we briefly look at
the market conditions that lead to the boom of the telecom industry in India. We then look at the
strategies employed by Reliance followed by the impact of competition. Looking at the debt
crisis of Rcom we try to understand the key steps taken as recovery measures and their reasons
for failure which ultimately lead to the bankruptcy of Reliance Communications.

The final report will contain analysis, interpretation and implications of the following headers
with a brief focus on the factors leading up to the fall of RIL and a deeper understanding of the
different survival techniques employed and reasons for their failure.

Introduction

After the Indian business tycoon Dhirubhai Ambani decided to split the various arms of Reliance
Industries between his sons Mukesh Ambani and Anil Ambani, the younger brother (Anil) got
command of Reliance Communications Ltd, apart from the financial and insfratsructure arm of
Reliance Industries Ltd.. Anil’s acquisitions were considered to be better and more profitable
than that of elder brother Mukesh. Reliance Infocomm (later renamed as Reliance
Communications or simply RCom since 2005) was a part of the sunrise industry and received
support from the government as well. In 1998, the Indian government established a task group to
recommend steps for the development of the telecommunications industry. The abolition of the
fixed licencing system and the adoption of the revenue sharing model, which required telecom
providers to contribute a percentage of their earnings towards licencing fees, was the first step
toward attaining this goal. Despite initial opposition, the move was eventually embraced by the
industry. Later on, this resulted in the sector's expansion.

6
RCom's Strategy

When the business was divided, Anil wanted to independently manage the telecom business, and
the amount of Rs.45 billion incurred on the handsets sold through the introductory offer was
written off as a loss. By then (between the years 2005-08), the competition had become intense
and a large number of telecom companies had already entered the market and were offering
quality services at affordable prices. It was during the year 2008 that RCom started offering
services on both CDMA and GSM technologies. GSM would also function as a complementary
service to the existing CDMA services offered by the company.

Role of sectoral Stresses

A combination of intense competition and aggressive bidding for airwaves has resulted in rapid
deterioration in the health of the industry. the telecom sector was under stress and banks were not
extending any credit.Sectoral stresses such as price wars, heavy debt and plunging profitability
that crippled India's telecom sector also took their toll on RCom.

Debt Crisis

RCom's debt was made up of funds from a collection of Indian banks led by the State Bank of
India, as well as loans from outside the country. The switch from CDMA to GSM technology, as
well as the purchase of expensive 3G airwaves for Rs8,585.04 crore in 2010, all contributed to
the growing debt. In 2011, it took up a Rs6,000-crore loan from China Development Bank to
refinance the amount it had paid for the 3G spectrum. It agreed to settle outstanding FCCBs
(foreign currency convertible bonds) with three Chinese financial institutions, ICBC, CDB, and
EXIM, a year after they were due to be redeemed.

By that time, the company had fallen into a debt trap, having taken on new debt to pay off
existing debt. The NCLT admitted three insolvency applications against RCom filed by Ericsson,
a Swedish gear maker, in May 2018, seeking payment of approximately Rs1,100 crore in dues.
As part of the bankruptcy proceedings, the insolvency tribunal selected three different IRPs from
RBSA Restructuring Advisors LLP to oversee RCom and its two companies, RTL and Reliance
Infratel.

Impact of Reliance Jio

In the early years, Anil's telecom business was at its peak, and he remained in second place for a
long time while competition intensified. RCom had fallen to fourth place in the market by 2015,
behind Airtel, Vodafone, and Idea. Jio's disruptive strategy, which included free voice calls and

7
cheap data, as well as offering all services for free for six months, prompted a telecom sector
consolidation. Users flocked to Jio's profitable 4G services, and companies like Tata
Teleservices, Sistema, Telenor, and RCom also suffered a hit.RCom saw its subscriber market
share plunging from 9.54 per cent in June 2016 (before Jio’s market entry) to 5.20 per cent in
October 2017. Its revenue market share, which was under 6 per cent in the second quarter of
2016-17, slid to less than 4 per cent by the first quarter of 2017-18.

Recovery Measures

Just weeks ahead of the long-awaited launch of telecoms operations by Reliance Industries, the
conglomerate controlled by Ambani’s brother, Mukesh Ambani. Rcom acquired Sistema Shyam
Teleservices Ltd. The local unit of Sistema, had less than 1 per cent share, with some nine
million customers and Rs.1,500 crore in annual revenue, in a market that has over 10 players.
But it owned precious bandwidth that services the high-speed fourth-generation, or 4G, network,
which was expected to see a huge demand as more Indians use their smartphones and tablets to
shop, bank or surf the Internet.

In a move to overcome the debt burden and withstand the competition, RCom initiated measures
for consolidation and sent proposals to the Telecom Regulatory Authority (TRAI) for approval of
the merger of RCom with Aircel, in December 2016. Both the companies decided to merge their
wireless businesses.

Besides this, RCom also made a proposal for the sale of its tower business. Further the strategic
merger and sale of both the businesses was expected to reduce the debt burden of RCom from
Rs.450 billion to Rs.220 billion.

Bankruptcy of Reliance Communications

Despite the several measure taken to recover from debts and face the competitors in the telecom
industry, Reliance Communications failed. They were unable to match the industries technology
and eventually failed to pay their dues. Reliance Communication was forced to close its wireless
operations in 2017 due to declining sales and debt. Furthermore, in 2010, Reliance
Communication had a 17 percent market share, but by 2016, its market share had dropped to
10%. Moreover, the company's debt has climbed by a factor of ten over the same time period.

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