PremiumThe conversion of its dues into equity will give the Centre a say in it, but it’ll take a hands-off policy on the telecom firm’s operations for it to act as a rescue that raises its enterprise value
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The board of Vodafone Idea (VI) has approved the issuance of equity to India’s government in lieu of interest owed by the debt-laden telecom major on account of spectrum and annual gross revenue (AGR) dues, the company said on Tuesday. Once done, the Centre will own 35.8% of it, while the Vodafone Group and Aditya Birla Group—the promoters of this joint venture—will see their stake dilute to 28.5% and 17.8%, respectively. The net present value of this interest, the firm added, is estimated at ₹16,000 crore, and shares will be issued to the government at their ₹10 face value. This follows a call taken by VI in its battle for survival to go for an option offered as part of a rescue plan by the Centre that let it defer its payments for spectrum and AGR dues by four years. Already weakened by a telecom tariff war after Reliance Jio’s 2016 entry, VI had to cough up that money after a 2019 Supreme Court ruling on a revenue-sharing formula with the government controversially went in the latter’s favour. With its latest move to absorb the impact of that blow, VI is not just assured of a future, an easing of the financial pressure it’s under would give it that much more space to focus on its market.
The past few years have seen Jio emerge as the biggest player in our telecom arena, with Bharti Airtel, which was also lumped with large AGR dues, as its chief competitor. Today, as they prepare for the roll-out of 5G services, VI may have much to catch up on. It has been losing customers to rivals in recent times and needs to reverse this attrition with minimal use of uneconomic price offers. This is no longer as difficult as it was now that market tariffs have begun to rise from rock-bottom rates. This price reversal is best seen as a search for sustainability in a sector that must both thrive and stay well-contested for it to support an Indian flourish of digital ambitions. Without VI, we would have had a private duopoly, which may have denied us the benefits of genuine live-wire competition. Our state-run duo of BSNL and MTNL await a merger, have state-set social coverage goals to pursue, and can hardly be called competitors. Yet, the government is set to become VI’s single largest shareholder, a prospect that could be interpreted as partial nationalization of a private joint venture. This may already have made some investors uneasy, given the slide of VI’s stock on Tuesday viewed in the context of our government’s far-from- flattering record on business ownership.
The company’s ability to stay competitive and the rescue effort’s success would critically depend on the space VI gets to operate as a privately-run enterprise. While its two major private owners intend to secure their rights to appointments and the like via an internal tweak of its Articles of Association, a government stake that’s larger than a quarter would give it enough of a vote in VI to meddle in its affairs should it opt to. However, unless a big lapse of governance occurs, the Centre should maintain a hands-off approach, with the firm’s management left to the sectoral expertise of its promoters. Operational freedom would grant the company its best shot at rejuvenation, raise its valuation and thereby serve the state’s purpose. With equity acquired at face value, the government could score portfolio gains as a passive investor, and in due course, it could sell its holding to book a neat profit on this investment. It just has to ensure that a telecom rescue isn’t overcome by mission creep.
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