Vodafone Idea's board today announced that the entire amount due to the government as interest on spectrum auction instalments and adjusted gross revenue (AGR) would be converted into equity. The move, for all practical purposes, nationalises Vodafone Idea, which is the third largest private telecom operator in the country after Reliance Jio and Bharti Airtel.
This move by the Vodafone Idea board will dilute the existing shareholders of the company, which includes the promoters, while making the government a 35.8% owner of the entity.
For the record, the promoter shareholders Vodafone group would hold around 28.5% and the Aditya Birla Group (Idea) would have 17.8% stake.
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Vodafone Idea and its messy finances
This development follows a scheme offered last September by the Department of Telecommunications (DoT) for settlement of dues. The cash-starved company had AGR dues worth Rs 58,254 crore, of which it has paid Rs 7,854 crore. “The Net Present Value (NPV) of this (spectrum auction instalments and AGR dues) interest is expected to be about Rs 16,000 crore as per the company’s best estimates, subject to confirmation by the DoT,” Vodafone Idea said. Equity shares will be issued to the government at par value of Rs 10 per share.
The government's telecom relief package in September included spectrum payment moratorium, option to convert interest on airwaves into equity, reduced bank guarantees amongst others. The company’s board, at its meetings held on 18 October, 2021, and 27 October, 2021, had approved deferment of Spectrum Auction Instalments due up to four years; and deferment of AGR-related dues by four years. But now, it has now accepted equity conversion as well.
Bharti Airtel, on the other hand, has gone for the moratorium but not the equity conversion while Reliance Jio has not opted for anything.
How the situation came to such a sorry pass
Indian private telecom companies like Bharti Airtel and Vodafone Jio are in financial doldrums because of a two-decade-old dispute over how revenue is to be defined for licence fee and spectrum usage charges. Operators were of the view that receipts from core telecom services had to be shared; the government wanted a piece of everything from rent, dividend and interest income to profit on sales of fixed assets. The Supreme Court upheld the government’s demand in 2019.
The telecom companies avoided bankruptcy when the court last year allowed the payments to be made over 10 years.
Reliance Jio, being a new entrant, has escaped the outsize back-payments to the government.
Jio, which is financially less encumbered, has come up with aggressive pricing and has stolen both Airtel and Vodafone's thunder. Further, Jio has also managed to lure big-ticket investors to its stable like Facebook and Google.
Is Vodafone Idea a quasi PSU now?
But Vodafone Idea would still need funds to tide over its financial strife. Many global players including Amazon, Verizon and Google were rumored to be among the interested lot. But whether Vodafone Idea can lure those investors, now that it has become a quasi PSU in a manner of speaking, is the big question.
The government's track record in running its own telecom company BSNL is not all that encouraging. The State-run organisation is buffeted by losses and poor management strategies. Its performance while running Air India, after it took over from the Tatas is also nothing to to write home about (ironically, the government recently sold Air India back to the Tatas). Also, with BSNL already under its kitty, there will be conflict of interest too when the government is also in charge of another telecom company.
It is too early to talk of what government intends to do with Vodafone Idea. Its strategy will be interesting and it will have a huge say in how the other companies shape up and survive in the sector. It might disinvest its stake, too.
The stock market has not reacted all that positively to the latest turn of events. Vodafone Idea's shares tanked sharply shortly after the news of government being its largest shareholder emerged.
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