Why is the government stake in Voda Idea puzzling markets?

The government taking a 35.8% holding in Vodafone Idea has surprised many. At a time when it looked poised to dilute its stakes in many public sector companies, the move failed to excite the Street too, as the cash-strapped company’s shares dipped 21% yesterday.

Experts also pointed out that ailing government-owned telecom giants MTNL and BSNL are also crying for attention. They are yet to roll out 4G services.

But the move may well give Vodafone Idea a lease of life. The third-largest telecom carrier’s fundraising plans are significantly delayed and Vodafone Group has made it clear it will not make any fresh equity infusion into its Indian unit. 

Against this backdrop, the government of India is set to become the single largest shareholder in struggling Vodafone Idea after the telco opted to convert interest worth Rs 16,000 crore on deferred spectrum liabilities and Adjusted Gross Revenue dues into equity.

It had previously accepted a four year moratorium on spectrum and AGR dues offered by the government’s Telecom Reforms Package announced last September. 

While Airtel had chosen to pay the interest arising out of such deferment, Vodafone Idea is taking advantage of the relief package to convert them into equity. This will result in a massive dilution to existing shareholders. 

The government will hold some 35.8% stake in India’s third biggest carrier. The Vodafone Group will own around 28.5% and Aditya Birla Group about 17.8%. 

While this may provide comfort to financial creditors, at the same time it places an undue expectation on the government for any future fund infusions as it has consciously chosen to be part of the company’s turnaround. 

As of September end, Vodafone Idea had a gross debt of Rs 1.94 trillion, 90% of which it owes to the government. The company’s decision crucially prevents a duopoly in the telecom market, which was ostensibly the intent of the telecom reforms package. 

While this move has helped the company extinguish some dues, the government holding has evidently unsettled investors.

Prime Minister Narendra Modi had declared last February that “government has no business to be in business”.  

Vodafone Idea should not be allowed to remain a quasi-public sector company for long. While the government may become the largest shareholder, it may not get involved in running the company.

In an earlier interaction with Business Standard, Vodafone Idea’s CEO Ravinder Takkar had said that it would be incorrect to state that the company will turn into a public sector undertaking. He said the government has no interest in acquiring and running telecom companies.

The government will also have an option to convert the due amount pertaining to the deferred payment into equity at the end of the four-year moratorium period. 

In the absence of any significant external fundraising by the company, such a scenario would mean the government becoming a controlling shareholder. 

Nevertheless, it should soon come up with an exit strategy for its stake. Its support provides short-term relief and stability but over the long term it needs to be ensured that Vodafone Idea does not go the Air India way.  

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