Explained: Govt becomes largest shareholder in Vodafone-Idea

Shares of Vodafone-Idea spiked more than 20% after the government agreed to convert over 16,000 crore worth of AGR interest dues into equity. On Friday, in a filing with the Bombay Stock Exchange, the telecom company said that the Centre had directed it to issue shares worth Rs 16,133 crore at an issue price of Rs 10 per share.

What does this mean?
Post conversion of Vodafone-Idea’s Rs 16,133 crore dues to the govt, into equity, the govt of India will have around 33% stake in the telecom company, making it the single largest shareholder. The promoters’ stake will come down to about 50% from nearly 75%.
At a press conference, FM Nirmala Sithraman made it clear that the govt is not bearing Vodafone-Idea’s debts. She said, “The company is not in the position of giving the dues to the govt. That’s why we are taking the company’s shares. This means we are shareholders in the company. When the company will gain profit, we will also get the profit.” The govt has also clarified that it will not be part of the company’s management, nor will it have any representative on the board.

Why did Vodafone-Idea need this?
The telecom company is reeling under a massive debt of about Rs 2.2 lakh crore, which includes around 1.5 lakh crore of AGR dues (usage and license fee that the Department of Telecommunications charges to telecom operations), as well as dues to banks, which stands at around Rs 15,000 crore. Without the govt stepping in to help the cash-strapped telecom company, there was a realistic possibility of the company going bankrupt and collapsing.
The telecom company had been awaiting this ever since the govt announced a relief package for the telecom sector in September 2021, which allowed for conversion on deferred AGR dues owed to the govt, into equity.

Why did the govt agree to this?
The govt agreed to this conversion of dues into equity, after receiving an assurance from the company that they were committed to the company and would bring in the necessary funds. Union Minister of Communications, Ashwini Vaishnaw said, “We had sought a firm commitment that the Aditya Birla Group would run the company and bring necessary investments. Birlas have agreed and hence we have agreed to convert. We want India to be a three-player market plus BSNL and ensure healthy competition for consumers.

Aside from protecting its own dues and the thousands of crores owed to banks, the govt also wanted to avoid a duopoly. If Vodafone-Idea collapsed under its debt burden, it would mean that just two players, Jio and Airtel would own the giant’s share of the market. This may prove to be unfair to consumers, as without a third player to keep the balance, two players could drive market prices.

Does this solve Vodafone-Idea’s debt troubles?
Analysts believe that this move will only solve part of the problem. The total debt of the company is over Rs 2 lakh crore. The AGR dues to the govt alone is around Rs 1.5 lakh crore. This move is a conversion of only the interest dues on AGR which is around Rs 16,000 crore. Rohan Dhamija of Analysys Mason tells Economic Times, “VI needs around Rs 45,000 crore fresh equity infusion to bolster its 4G operations and roll out 5G networks to sustain and compete effectively with Jio and Airtel. Raising additional debt via fresh loans would further strain its already weak balance sheet”.

However, experts are of the view, that this is a big step in the right direction to help get the company back on its feet. With the govt sending out this strong message that it is behind Vodafone-Idea and is taking strong and decisive steps to make sure the company doesn’t collapse, investors will be more confident and encouraged to infuse capital into the company. With this, the company may be able to repay some part of its dues to its vendors as well as infuse money towards its 4G operations.