The government is set to own 35.8 per cent in Vodafone Idea and 9.5 per cent in Tata Teleservices (Maharashtra) after the two telecom operators decided to offer equity stake against their dues related to spectrum auction instalments and AGR payments.

This conversion will result in massive equity dilution for all Vodafone Idea (Vi) shareholders with the government becoming the largest shareholder. British telecom giant Vodafone Plc’s shareholding will come down from 44.4 per cent to 28.5 per cent and Aditya Birla Group’s stake will drop to 17.8 per cent from 27.7 per cent at present.

Worried investors thumbed down the company’s proposal and Vi shares tanked 20 per cent on the BSE on Tuesday.

Relief package

In October, the Department of Telecom (DoT) had announced a relief package under which operators were given a four-year moratorium on payment of spectrum and AGR dues. Telecom companies were also given the option of converting the interest payable for the four years into equity.

Tata Teleservices, which primarily offers fixed-line broadband services in Maharashtra, said it has decided to exercise both the options and the Net Present Value (NPV) of the interest payable is expected to be ₹850 crore. The average price of the company’s shares as on the cut-off date of August 14, 2021 set by the DoT works out to ₹41.50 a piece.

In the case of Vodafone Idea, the NPV of the interest payable is expected to be about ₹16,000 crore for which the operator has offered 35.8 per cent stake to the government.

The shares may be held through the Statutory Undertaking of the Unit Trust of India (SUUTI) on behalf of the government or by any trustee-type or other suitable arrangement. Since the average price of the company’s shares was below par value on the cut-off date, the equity shares will be issued to the government at par value of ₹10 a piece, subject to final confirmation by the DoT.

‘Wrong signal’

Experts said that Vodafone Idea’s move does not bode well for the company. Sanjay Kapoor, former CEO of Bharti Airtel, said, “As far as investors are concerned, Vodafone Idea’s move signals to the marketplace that they are not able to raise the requisite funds, and therefore require the government’s help. From a fundraising perspective, it weakens their position.”

With the government’s indifferent record of managing public sector units, especially BSNL and MTNL, chances that Vi will thrive in this type of management structure are bleak.

Positive and negative

“On the positive side, the company is now in a better financial position to raise external funds and the possibility of future flexibility in payments to the DoT is possible as well as the government will have interest in protecting the equity value of the company.

“On the negative side, potential concerns in management style and governance could be raised although this depends on how much the Government is involved in the management of the company,” said analysts at UBS Securities Asia.

Vi’s total spectrum-plus-AGR liability of ₹1.7-lakh crore remains unchanged, leading to annual payments increasing from ₹24,000 crore to ₹40,000 crore once the moratorium ends. According to CLSA, Vi will likely struggle to fund annual spectrum payments beyond the four-year moratorium unless the average revenue per user (ARPU) reaches ₹250-300 a month.

Many uncertainties

“The onus is on the company to successfully complete its capital raise, accelerate network investments, and stem subscriber losses, which come with their fair share of challenges.

“There is also still considerable uncertainty on the ability of the company to meet its enhanced payments to the government after the moratorium period ends, which would require far more meaningful tariff hikes and potentially further government relief,” said a Citi Research report.

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