Decline of Reliance Communications Ltd.

RELIANCE COMMUNICATIONS is the saga of the rise and fall of one of

India's blue chip company, coming from the house of one of India’s most talked
about business groups. It’s a tale of how a company from a new-age sunrise
industry, in just over a decade reached its peak and then turned to accumulating
losses, defaulting on payments and finally filing for bankruptcy. It is a textbook
case of how spreading oneself too thin and obtaining high debt to fuel
expansion can bring down a business. Especially if the business environment
also turns adverse.
 GENESIS OF THE COMPANY

Reliance Industries was founded by late Shri Dhirubhai Ambani, an icon of

India’s entrepreneurship and equity culture.

After a short stint in Yemen, Dhirubhai Ambani came back to India in 1957
and set up a yard trading business in Mumbai. In 1973 he set up Reliance, a
synthetic fabrics mill in Naroda, Gujarat. In 1975, the company expanded
into textiles with “Vimal” becoming a national brand. When Reliance
Industries got listed in 1977 on the Bombay Stock Exchange, it had attracted
thousands of small investors to a market then dominated by state run
financial institutions. The company's annual shareholders' meetings were so
well attended they had to be held in a football stadium. The name 'Reliance'
spelled shareholder value.

The company later entered into petroleum refining, financial services, power,
telecom and infrastructure sector. It grew from being a synthetic fabric and
textile company to one of India’s first multinational conglomerate. When
Dhirubhai Ambani died in 2002, Reliance had over two million shareholders,
the largest investor base for any Indian company.
Sensing future growth in the telecom industry and working on the vision of
his late father Dhirubhai Ambani, Mukesh Ambani in 2002 founded a
telecom company named RELIANCE INFOCOMM LTD. It was a part of
the Reliance group of industries offering voice and 2G and 3G data services.
It brought about a revolution in mobile telephony in India. Reliance
Infocomm was later renamed as RELIANCE COMMUNICATIONS LTD.

In 2006 the Reliance group split between Dhirubhai Ambani’s two sons -
Mukesh and Anil Ambani. Younger son Anil Ambani (his group of
companies came to be known as Reliance ADA Group), got the new-age
telecom business, along with the financial services and energy business.
Companies like Reliance Capital, Reliance Infrastructure, Reliance Power
and Reliance Communications came to Anil Ambani whereas the bread-and-
butter petrochemicals operations – Reliance Industries, a Fortune Global 500
company and Indian Petrochemical Corporation Ltd went to the elder son
Mukesh Ambani.
 INITIAL DAYS OF THE COMPANY

In the Reliance group, telecom business was the next frontier for growth.
Reliance Infocomm Ltd was founded in 2002. It introduced nationwide
telephony services using CDMA (Code Division Multiple Access)
technology. In 2006 the company rechristened as Reliance Communications
Ltd.

Late Dhirubhai Ambani dreamt of a digital India – an India where the

common man would have access to affordable means of information and
communication. Dhirubhai Ambani, who single–handedly built India largest
private sector company virtually from scratch, had stated as early as 1999:
“Make the tools of information and communication available to people at an
affordable cost. They will overcome the handicaps of illiteracy and lack of
mobility.” With this belief Reliance Infocomm (later Reliance
Communications) started laying 60,000 km pan India fibre optic backbone.

Reliance Communications encompassed various services like :-

 Mobile Telephony – With over 125 million subscribers across India,
Reliance Communications was one of the largest mobile service
brand.
 Broadband– The successful rolling out of broadband services across
the nation marked a successful chapter of Reliance Communications’
commitment towards digital revolution in India.

 Rural Communication– Reliance Communications brought about a

complete revolution in rural telephony covering 20,000 towns and 5
lakh villages.

 Reliance Mobile World – The Reliance Mobile World suite of

Reliance Mobile was a unique Java–based application. It enabled
complex Internet application to be introduced in mobile phones
effectively and quickly. Reliance Mobile World received over 1.5
billion page views per month from Reliance Mobile users.

 IDC– RCom provided Internet Data Center (IDC) services, by hosting

business critical applications of Indian and foreign blue chip
companies, financial institutions and other important organisations.

 Reliance World – Reliance World (formerly Reliance WebWorld)

was a nationwide chain of retail outlets for products and services of
the Reliance – Anil Dhirubhai Ambani Group. It was designed to give
the customer a delightful experience of the digital world of
information, communication, entertainment and utility services.

 Carrier Business – Reliance Communications was a National Long

Distance (NLD) and International Long Distance (ILD) service
provider, rendering national and international transport links between
other telecommunication service providers' networks. Its customers
 included Indian and international telephony service providers, Internet
service providers, long–distance carriers, call centre operators,
multinational companies, business process outsourcing (BPO)
companies, IT–enabled service (ITES) providers and government and
quasi–government organisations.

RCom’s business provided a complete range of telecom services covering

mobile and fixed line telephony. It includes broadband, national and
international long distance services and data services along with an
exhaustive range of value–added services and applications. The
company's aimed to achieve customer delight by enhancing the productivity
of the enterprises and individuals it served at an affordable price. It spread
across the length and breath of India and soon became India’s number 2
company on basis of number of subscribers.
 BEGINNING OF THE DECLINE

Telecom market started with 2G voice and then shifted to data and internet
heavy 3G and 4G. Reliance Communications used CDMA (Code Division
Multiple Access) platforms whereas its rivals like Airtel, Vodafone and Idea
used the GSM (Global System for Mobile) platform. CDMA was limited to
2G and 3G (second and third generation) telephony. Rcom had to compete
with the GSM based telecom companies not only on price front but also on
the basis of technology.

This necessitated heavy investments in telecom equipments and

infrastructure as well as spectrum purchases for upgrading to 3G and 4G.
Pressure of high pitched telecom battle and aggressive investments started to
rub off on the company. When the tide turned in favour of 4G in India and
5G for the future, Reliance Communications began to lose out. Bulks of the
subscribers were on CDMA technology. Within a year Reliance
Communication shifted to GSM platform. The company also had to write
off Rs 450 crore of bad debts of Reliance Infocom’s “Mansoon Hangama”
scheme.
Eyeing scope in 3G, Reliance Communication bought 3G spectrum in over
13 cities, including expensive Delhi and Mumbai circle by paying Rs 8,500
crore. The company went in for big time expansion and invested in
infrastructure - cable laying, erecting towers etc to became a pan-India
company. It grabbed market share through aggressive pricing policy with a
target to reach 100 million users. Gradually it became one of the top three
subscriber based telecom companies in India. By December 2010 its
subscriber base increased to 125 million. Everything seemed to be going
good. It had to fork out Rs 6,600 crore for 4G spectrum. Nearly half of the
company’s debt was to buy spectrum. But for all this it had to take huge
debt.

Besides, Reliance Communications services could not gather large number

of high paying mobile users so as to give an incremental boost to the
company’s revenues.

Heavy investments and stiff competition made it an uphill task. Debts kept
mounting by the day. Heavy debt, plunging profitability and price wars not
only crippled Reliance Communications but affected the whole telecom
industry.

Slowly the decline of Reliance Communication started with its growing debt
without commensurate increase in income. In 2010 Reliance
Communications had a debt of Rs 25,000 crore which ballooned to Rs
43,000 crore by 2017. It had no clear strategy for debt management.

Unable to sustain any further, it announced closure of 2G and 3G mobile

business thereby losing 75% of its customers. It shifted to enterprise
business.
 INCREASING DEBT BURDEN AND ENTRY OF RELIANCE JIO

In 2008 the government issued fresh telecom licenses to new companies,

overnight doubling mobile operators to 14 companies. The new players to
establish themselves unleashed a price war which further squeezed Reliance
Communications’ margins. Later there was a CBI probe and Supreme Court
cancelled many of these licenses. A lot of time was lost in dealing with the
cases rather than concentrating on business.

In September 2016 Mukesh Ambani launched Reliance Jio and re-entered

the telecom sector. Jio’s incredible entry drastically changed the telecom
sector. Reliance Jio offered :-

 Free voice calls

 4G Data at ultra cheap price
 Faster mobile data
 Improved availability of broadband internet
 It predatory pricing and easy availability of 4G data changed the data
consumption pattern of the nation. It drastically increased consumption of
online content and led to the death of 2G and 3G. The market for 4G smart
phones exploded as everyone had access to Jio’s 4G network at very
affordable price. The whole telecom sector got shaken by Jio’s entry. First
time users as well as subscribers from other telecom companies rushed to
embrace Jio’s 4G available at rock bottom prices. Within no time Reliance
Jio grabbed 300 million subscribers. Not just Reliance Communication but
other companies like Airtel, Idea and Vodafone saw its sales dwindle. For
the first time these companies started to show losses in their quarterly
results. Reliance Communications got dislodged from the top three list.
Other service providers like Tata Teleservices, Telenor, MTS had to call it a
day and pull down their shutters.

Entry of Reliance Jio acted as a double whammy for Reliance

Communications. On one hand it had to service its huge debts and on the
other hand its business was falling. Losses were mounting and sustaining
any further became difficult with each passing day.
 DEBT REDUCTION EFFORTS

Reliance Communications tried to reduce its debt burden by trying to sell

and monetize its towers, fibre and other telecom assets and also by merging
other telecom companies with itself.

Various attempts to sell its telecom infrastructure failed.

 Tower deal with GTL Infrastructure Ltd,

RCom and GTL Infra had got into a deal to form an independent
transmission network with around 80,000 towers valued at Rs 50,000
crore. This would have created India’s second largest operator of cell
phone towers. It would have reduced RCom’s debt burden by about Rs
15,000 crore. The deal collapsed due to valuation reasons.
 Tower deal with Brookfield
In an effort to reduce its debt, RCom entered into a Rs 11,000 crore
tower sale deal with Canadian infrastructure company Brookfield. The
near completed tower sale deal with Brookfield too failed.

When RCom did sell unfortunately it did not time the sale right. It was
offered over Rs 30,000 crore by Tillman and TPG for its tower and fibre
assets, but when it did a deal with Reliance Jio, the assets were valued at Rs
8,500 crore. Similarly, Sun TV offered Rs 2,500 crore for a 26 percent stake
in Reliance Communications’ direct-to-home business, which eventually it
sold it with no cash.

 With a view to consolidate its market share, Reliance Communications

bought another telecom company MTS. Later it tried to buy out Aircel
and merge it with itself. Merger between RCom and Aircel would have
created an entity with assets worth Rs 65,000 crore and a net worth of Rs
35,000 crore and would have had the second largest spectrum holding
amongst all the operators. Merger would have reduced RCom’s debt by
about Rs 20,000 crore. But the merger deal could not go through due to
“legal and regulatory uncertainties and inordinate delay in receipt of
approvals for the proposed transaction.”
 DEMISE OF THE COMPANY

Reliance Communications was reeling under a debt of over Rs 47,000 crore.

Sectoral stresses, heavy debts, fierce price wars and plunging profitability
that crippled India's telecom sector also took their toll on Reliance
Communications. The company was unable to repay its lenders and
vendors. It started to default on its loan repayment to banks and institutions.
Loans to Reliance Communications were now being classified as NPA (Non
Performing Asset). Payments to suppliers and creditors were also stopped.

Finally suppliers like Swedish telecom major Ericsson took the company to
court. It accused the company of deliberate and willful default in payment of
Rs 550 crore, scaled down from the original demand of Rs 1600 crore. It
filled a petition before National Company Law Tribunal (NCLT) to invoke
insolvency proceedings against Reliance Communications. In May 2018,
the National Company Law Tribunal (NCLT) admitted three insolvency
petitions against Reliance Communications filed by the Swedish company
Ericsson. Reliance Communications moved the National Company Law
Appellate Tribunal (NCLAT) and averted bankruptcy proceedings by citing
its telecom infrastructure sale deals with Reliance Jio and Brookfield. It
agreed to pay Ericsson Rs 500 crore as a settlement.

The final nail in the coffin for Reliance Communications’ troubles was the
failure of a potential deal to sell its telecommunication assets including
spectrum to Reliance Jio. To its dismay, the spectrum sale to Reliance Jio
was rejected by the Department of Telecommunications (DoT) after Jio
refused to be held liable for any of Reliance Communication’s past dues. Its
towers sale deal with Brookfield also failed. Reliance Communications was
unable to pay Ericsson the promised amount, triggering contempt of court
petitions in the Supreme Court against RCom’s Chairman Anil Ambani.
Chairman Mr. Anil Ambani had to face the humiliation of being threatened
with a jail term by the Supreme Court. Finally Mukesh Ambani helped his
younger brother Anil to pay the Rs 500 crore dues to Ericsson and escape
imprisonment.

In less than a decade RCom slipped from a dominant position to closing

down its operations. In 2010 it had a market share of more than 17% and
was at second position in the telecom industry. By 2016 its market share
was less than 10% and it was nowhere in the top ranks of the telecom
industry. Its woes of losing its market share were compounded with its
piling debt. From nearly Rs 25,000 crore in 2009-10, the debt has nearly
doubled to Rs 45,000 crore in 2018. Huge debts coupled with falling
revenues resulted in heavy losses. Finally with the coming of Reliance Jio,
the company was left with no options and was forced to shut its wireless
operations. It had to opt for insolvency proceedings.
The fall of Reliance Communications is part of the decline of the Anil
Dhirubhai Ambani group, after the spilt of Reliance in 2016 between the
two brothers - Mukesh and Anil Ambani.

Since the split in Reliance group, Anil's fortunes have spiraled downwards.
The companies between the two groups too reflected this trend. The 10-year
compounded annual growth rates (CAGRs) of Mukesh Ambani's Reliance
Industries since the split have been 11.2% (sales), 9.4% (profit) and 17.8%
(returns). The same for Anil's Reliance Group have been 9.4% (sales), -
12.6% (profit) and and -1.7%(returns).

Also the market capitalization of Anil Ambani group of companies has

dwindled to less than $4 billion, while Mukesh Ambani’s Reliance Industries
stood at $98.7 billion.

As on 31/3/19, Reliance (Anil Ambani) group’s listed companies hade more

than Rs 1,00,000 crore debt.-
Heavy debts, constant requirements of fresh funds to keep up with
technology changes and spectrum requirements and finally the coming of
Reliance Jio brought down the company to its knees. The company turned
from a jewel crown in Anil Ambani group of companies to a bankrupt
company.
STOCK PRICE OF RELIANCE COMMUNICATIONS LTD ON NSE
 CURRENT DEVELOPMENTS

In November 2019, the Supreme Court allowed the government to recover Rs

1.3 Lakh Crore from telecom companies towards Adjusted Gross Revenue
(AGR) dues. The verdict came as a big setback for the telecom operators,
including Reliance Communications, already reeling under heavy debt and
intense competition in the sector. Of the 15 old operators impacted by the order,
only three private sector operators remain in service today. Department of
telecommunications has claimed license fee dues of Rs 21,682 crore from
Bharti Airtel, Rs 19,823 crore from Vodafone Group, Rs 16,456 crore from
Reliance Communications and Rs 8,485 crore from Idea Cellular. The revenue
accruing to telecom companies other than termination fee and roaming charges
are a part of the adjusted gross revenue, the Supreme Court said. However, the
telecom companies had argued that non-telecom revenue like rent, internet
income and dividend income should be excluded from the AGR.

RCom posted a consolidated loss of Rs 30,142 crore for the September 2019
quarter due to provisioning of Rs 28,314 crore for liabilities after the Supreme
Court's ruling on adjusted gross revenue (AGR) dues. This loss of of Rs
30,142 crore was the second worst in corporate India history, behind that of
Vodafone Idea losses.
Reliance Communications has been waging legal battles against the telecom
department and other operational creditors over its dues. Lenders – financial and
operational – have put in claims worth almost Rs 90,000 crore against the
company.

After his company posted losses of Rs 30,142 crore for the September 2019
quarter, chairman Mr. Anil Ambani along with four directors - Ryna Karani,
Chhaya Virani, Manjari Kacker and Suresh Rangachar, resigned from the Board
of Directors of Reliance Communications. But the Committee of Creditors
(CoC) rejected their resignations and advised them to continue to perform their
duties and responsibilities as the directors of RCOM and provide all
cooperation in the corporate insolvency resolution process.

RCom in the past had tried to sell its assets to various companies, including
Reliance Jio, to clear debts but the deals did not materialize. Reliance Jio
cancelled the agreement to buy RCom assets as it did not want to bear the
previous liabilities of the debt-ridden firm. Insolvency proceeding against
RCom was started on a case filed by Swedish telecom gear maker Ericsson after
the company failed to clear its dues. As on August 2019, RCom's secured debt
is estimated to be around Rs 33,000 crore. Lenders have submitted claims of
around Rs 49,000 crore in August 2019.

Reliance Communications and its two units, Reliance Telecom Infrastructure

(which had licences to provide telecom services in eight regions) and its tower
company Reliance Infratel which collectively owe Rs 86,187 crore to financial
creditors have put all its assets for sale. This included spectrum holding of 122
MHz that the company before insolvency proceedings estimated to be around
Rs 14,000 crore, tower business worth Rs 7,000 crore, optical fibre network
worth Rs 3,000 crore and data centres worth Rs 4,000 crore.

Telecom rivals Reliance Jio Infocomm and Bharti Airtel, besides private
equity firm Varde Partners and infrastructure focused I Squared Capital fund,
are competing for Reliance Communications assets. While Airtel and Jio are
bidding mainly for RCom's 850 MHz spectrum, I Squared Capital is interested
in RCom's data centres and optic fibre assets. RCom's 43,000 towers, housed
under Reliance Infratel, are also up for sale. An asset reconstruction company,
namely UV Asset Reconstruction Company is bidding for these assets.

At the time of its bankruptcy filing, RCom had debt of Rs 46,000 crore, making
it one of India’s largest insolvencies. As many as 53 financial creditors,
including local and foreign banks, nonbanking finance companies and funds,
have claimed Rs 57,382 crore as dues from the company, out of which Rs
49,224 crore has been accepted by the resolution professional. Besides banks,
operational creditors such as tower companies, equipment vendors and DoT
have claimed nearly Rs 30,000 crore in dues, of which over Rs 21,000 crore has
been verified.

The committee of creditors (CoC) overseeing the bankruptcy resolution of

Reliance Communications (RCom) expects to raise at least Rs 14,000 crore
from the sale of the telco’s assets, including spectrum, fibre and towers. At that
level, the haircut would be about 70% for financial lenders that have filed
claims of Rs 49,000 crore against RCom and its units Reliance Telecom and
Reliance Infratel.
In November 2019, three Chinese banks – Industrial & Commercial Bank of
China Ltd (ICBC), China Development Bank and Export-Import Bank of China,
sued Reliance Communications chairman Mr. Anil Ambani in the UK courts,
for failing to repay $680 million of loans.

These three Chinese banks had agreed to loan $925.2 million to RCom in 2012
on the condition that Chairman Mr. Anil Ambani provided a personal guarantee.
The RCom chairman had travelled to Beijing in 2011 to directly negotiate the
loan with ICBC’s then chairman Jiang Jianqing. The lenders had sought a share
pledge before granting the loans. But now a legal dispute has arose which
centres on whether Mr. Anil Ambani or one of his associates went on to provide
a personal guarantee as security or not. Mr. Anil Ambani claims he never
knowingly provided any guarantee. According to him he had only authorized
his employees to furnish a non-binding "personal comfort letter" to the three
lenders. Somehow, that letter of comfort got converted into what the banks now
argue to be a personal guarantee. A trial will commence next year. Pending the
verdict, the court may ask some or all of the claim to be deposited with it.
 Decline of Reliance Communications Ltd.

This topic as project was chosen by me as it demonstrates the entire life cycle of
the company – from its birth, to growth, to its peak, and then its decline and
demise.

It shows how in an ever changing business environment, a company – even if it

happens to be a blue chip company from one of the most successful business
houses, if not managed well can meets its doom’s day sooner or later. It
narrates how the coming of a new business competitor with a different way of
doing business, can turn a well established business upside down. It shows that
in the new age business environment old business style may not work and that
new methods of doing business may be required.

Finally it justifies the old age adage – bite as much as you can chew – take debt
that can be repaid for spreading oneself too thin and obtaining high debt to fuel
expansion without a proper business model, can bring down a business.

HYPOTHESIS

H0: BUSINESS MODEL BASED ON GROWTH FUELED BY EXCESSIVE

DEBT DID NOT CAUSE THE DOWNFALL OF RCOM.

H1: BUSINESS MODEL BASED ON GROWTH FUELED BY EXCESSIVE

DEBT CAUSED THE DOWNFALL OF RCOM.
OBJECTIVES

 TO STUDY THE CAUSES FOR DECLINE OF RCOM.

 TO UNDERSTAND HOW A BUSINESS MODEL BASED ON

GROWTH FUELED BY EXCESSIVE DEBT CAN CAUSE THE
DOWNFALL OF A COMPANY.

 TO UNDERSTAND HOW NEW BUSINESS COMPETITORS

ENTERING THE MARKET WITH A DIFFERENT BUSINESS
MODEL CAN IMPACT ESTABLISHED BUSINESSES.

 TO UNDERSTAND HOW SUDDEN CHANGES IN GOVERNMENT

AND REGULATORY POLICIES AFFECT THE COMPANY.

 TO UNDERSTAND THE IMPORTANCE OF LONG TERM

LIQUIDITY FOR A COMPANY.

To study the factors that can cause a blue-chip company to fall from its peak
to its rock bottom. To see how excessive debt with inconsistent and
declining income can lead to the fall of a company. To see how the coming
of a new business rival having a new business model coupled with changes
in business environment, cause even a well-established company to its
demise. To understand how unforeseen situations like changes in
government policies and new companies entering an already saturated
market can pose a threat to the existence of a company.

BIBLIOGRAPHY

 Wikipedia

 India Today

 NDTV News

 Economic Times

 Rediff.com

 Business Standard

 Live Mint
 Bloomberg

 www.ril.com

 www.rcom.co.in