Tata Tele sets off losses of Rs5,141 crore,....Biggest write-off by an Indian firm; two-step capital restructuring to help company achieve profitabili

Tata Teleservices Ltd, or TTSL, the country’s sixth largest phone services firm, has started restructuring its capital by writing off Rs5,141 crore in losses and unabsorbed depreciation, according to excerpts from proceedings of shareholders meeting, in what is the largest such set-off by any Indian firm.

The restructuring, which was approved at an extraordinary general meeting of shareholders on 8 September and is pending approval from the Delhi high court, will potentially help the company achieve profitability faster.

This is the second occasion in the telecom sector’s recent history that such a large write-off is being executed; the first being in 2005 when Reliance Industries Ltd’s then subsidiary Reliance Infocomm Ltd, now called Reliance Communications Ltd, or RCom, wrote off Rs4,500 crore as part of a split between the Ambani brothers. RCom is now run by younger brother Anil Ambani’s Reliance-ADA Group.

According to the TTMLs profit-and-loss statement for fiscal 2008, the Tata phone firm had losses of Rs9,177.17 crore, including carried forward loss of Rs7,363.41 crore. Most of the losses were on account of increased capital expenditure for capacity building as the company expanded its subscriber base to nearly 30 million, as of end-August data from industry lobby Association of Unified Telecom Service Providers of India.

As its network expands and it gains customers in India, the world’s fastest growing phone services market by customers, TTSL has reduced annual losses to Rs1,813.76 crore for the period ended 31 March 2008, against Rs2,062.52 crore in the previous year. Revenue also increased to Rs5,377.90 crore for fiscal 2008, a rise of 15.70% over Rs4,647.80 crore in the year to 31 March 2007.

The restruc-turing plan includes reducing Rs1,967.71 crore from its share premium reserves on the balance sheet by writing off Rs983.85 crore of book losses (through wiping out share premium) and Rs983.85 crore of unabsorbed depreciation.

In a simultaneous move, TTSL plans to halve its equity share capital from Rs6,347.15 crore to Rs3,173.57 crore, by reducing Rs1,586.78 crore from its book losses and Rs1,586.78 crore against unabsorbed depreciation.

The capital restructuring will enable the Tata Sons Ltd subsidiary to hasten dividend plans and perhaps make it more attractive for a foreign strategic telecom partner to pick up stake. TTSL is an unlisted entity.

Writing off losses enhances TTSL’s dividend paying capacity, one expert said, but its benefit will have to weighed against the minimum or alternative tax benefits the company enjoys as a result of the losses. “One has also to see whether the dividend capacity is really useful at a time when further investments are called for,” said Vivek Gupta, partner at BMR Associates, an audit firm.

This move “right-sizes the balance sheet”, said Girish Vanvari, executive director at KPMG, a management consultancy and accounting firm. Share capital, reserves and surplus add up to a large net worth and bloat the balance sheet. Also, he added, “companies cannot declare dividends till they wipe out accumulated losses”.