Can government as largest shareholder save Vodafone Idea?

After evaluating various aspects of recovery, Vodafone Idea (VIL) management decided to make the Indian government an equity partner in its dwindling fortunes. Following the move that will make the government the largest shareholder in the debt-trapped company, the share price has crashed over 20% to ₹11.8 in the Tuesday's trade, as investors perceived it as the promoters' lack of confidence in reviving the telecom business.

The VIL board meeting held on Monday has approved the conversion of the full amount of interest related to spectrum auction instalments and AGR into equity. The move will result in dilution of all existing shareholdings, including that of promoters -- Vodafone Group and Aditya Birla group. Upon conversion, the government will hold about 35.8% of the total outstanding shares of VIL, and the promoter shareholders Vodafone Group would hold around 28.5% and Aditya Birla Group around 17.8%.

In fact, the government joining VIL as stakeholder will not change its debt position. The only breather will be that the company will not need to pay the interests for AGR dues and spectrum fees for four years. VIL has a debt of ₹1.9 lakh crore, including ₹1.68 lakh crore owed to the government as AGR and spectrum fee and ₹23,400 crore of institutional debt.

"The management hands over the largest portion of the promoter equity to the government for avoiding the interest payment and that hints at the severity of the financial stress," said a Mumbai-based investor. However, there are experts who believe that the government's entry in the company will make the fundraising easier, especially when it launches 5G. In the 2-3 years, the company has been trying hard to raise debt and equity capital to reduce its financial liabilities and for making investments. But it became unsuccessful.

With this move, the company will stand to gain some cash flow relief, said Gopal Krishnan, director – Global Development (South Asia), RIMS, the largest global risk management society. However, the government will become a party in the decision making and there is a possibility of leadership rejig in the company as well, he added.

The share price of the company was around ₹15 before the decision of the board. But relevant date fixed for equity pricing was August 14, 2021. The share price was below par value in August, so the equity shares will be issued to the government at par value of ₹10 per share. Since it will be fresh issue of shares to the government, all existing stakeholdings will be diluted. In short, the equity base will be expanded without any capital addition, said market experts.

"The Net Present Value (NPV) of this interest is expected to be about ₹16,000 crore as per the company’s best estimates, subject to confirmation by the DoT," the company said in a statement.

The Department of Telecommunications (DoT) had provided various options to telcos as part of its reforms package. After which VIL's board in October had approved deferring payment of spectrum auction instalments and AGR dues by four years. Another incumbent Bharti Airtel had recently announced that it will not avail the option of conversion of the interest on deferred spectrum and AGR dues into equity, under the reforms package.