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Government will not manage operations at Vodafone Idea despite picking up majority stake: Report

The troubled telco has chosen to swap out crores of interest accrued on dues by surrendering equity.

The Indian government intends to sell off its stake in Vodafone Idea (Vi) once the company stabilises its financial position, according to a report by Economic Times.

The government will also not embark upon the route of converting the telco into a state-run company or insist upon a seat at the board of directors table. It will not dictate the direction of the company or manage its affairs despite being the largest stakeholder at 35.8 percent, the report added.

Why this matters: This development gives a picture of the role that the Indian government intends to play in the third-largest telecom operator in the country after it picked up a majority stake.

How did Vi evade the burden of spectrum and AGR payments?

Vodafone Idea’s Board of Directors approved the conversion of the full amount of interest arising out of the company’s spectrum auction instalments and AGR (Adjusted Gross Revenue) dues into equity, according to a regulatory filing with the National Stock Exchange. The filing revealed that the Net Present Value (NPV) of the interest was around Rs.16,000 crore, according to the company’s estimates.

Vodafone Group will hold around 28.5 percent and the Aditya Birla Group will hold around 17.8% respectively after the conversion.

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What about its competitior? Bharti Airtel, like Vi, also opted for the four-year moratorium on AGR and spectrum dues last year but decided to not opt for conversion of interest into equity last week, according to Moneycontrol.

One of the analysts Moneycontrol spoke to suggested that “the move hints at the company’s intent to prepay the deferred due early and not dilute the existing shareholders in favour of government equity”.

“This decision is a show of confidence by the company to be able to bear the liabilities early in the future and avoid the interest or equity burden. Investors should welcome this move, but there would be increased scrutiny on execution given that the company has taken this decision now,” Sonam Srivastava, Founder, Wright Research, was quoted as saying.

What relief plan did the government come up with for telcos?

Vi’s conversion of pending dues was first proposed as part of a relief package announced by the DoT last year. It permitted telcos to defer spectrum auction and AGR dues payments by four years. However, it said that interest would accrue on the outstanding payments.

The department had also communicated to the companies that it was willing to provide a period of 90 days for them to consider the option of converting the interest that would accrue on instalment payment during the moratorium period into equity.

It laid down the following criteria:

  • NPV of the interest amount to be calculated as on the date of exercise of option;
  • Equity shares would be issued to the central government on preferential basis;
  • Relevant date for pricing would be 14.08.2021;
  • The price shall be equal to higher of the average of weekly high and low of the volume weighted average price of the equity shares during the last 26 weeks preceding the relevant date or two weeks preceding the relevant date;
  • It had said that the price would not be less than par value.

Vi’s struggle in the past with staying profitable

Vodafone Idea has been struggling to keep pace with Airtel and Reliance Jio as the latter’s entry in 2016 triggered a price war which saw revenues dip for all telecos. It has been trying to stay afloat since then by searching for investors.

A recent earnings call revealed that the company was in the middle of its fundraising process. “Any additional coverage improvement [in coverage of the network] will only take place after the funds from this fundraise are declared to capital expenditure,” CFO Akshay Moondra had said.

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Vi managing director and CEO Ravinder Takkar said in response to a question on subscriber decline that most of the reduction was due to the pandemic and the second wave. Takkar said the subscriber base was stable, and “we only saw a decline of one million 4G subscribers,” and that usage was up during the lockdown.

The company also had to reckon with the Supreme Court’s judgement on AGR dues. The apex court rejected a plea by Vi and Airtel to correct what the telco described as mistakes in a judgment on AGR dues pronounced by the court. It meant that the company has to cough up thousands of crores (Rs. 61,000 crore) in pending dues to the government.

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