Govt set to become largest shareholder of Vi, to own 35.8% stake

The government is set to own 35.8 per cent in Vodafone Idea (Vi) after the financially-stressed telco decided to convert interest on deferred spectrum and adjusted gross revenue (AGR) dues into equity. This makes the Union government the single-largest shareholder in Vi, a joint venture between the Aditya Birla group and UK-headquartered Vodafone.    

Vodafone Idea is not the only telco in which the government is picking up a stake. It would also own 9.5 per cent in Tata Teleservices (Maharashtra) Limited (TTML) through the same route, according to announcements made on Tuesday. The latest development implies government holding in four telcos in the country including two state-owned firms — Bharat Sanchar Nigam Ltd (BSNL) and Mahanagar Telephone Nigam Ltd (MTNL).  

The promoter shareholding in Vodafone Idea, which was till recently struggling to stay afloat in an extremely disruptive telecom market, will get diluted to 46.3 per cent from existing 72.5 per cent after the issue of additional equity. The government, which had proposed a rescue plan through equity buyout as part of a telecom package last year, will not take a board seat. The existing management of Vodafone Idea will continue to be in charge of the telco. TTML said its board had decided to convert the entire interest amount related to AGR into equity, subject to a mutual agreement on terms and conditions, including governance of the firm after conversion of interest into equity.

Last October, the Union Cabinet had cleared the telecom reforms package aimed at improving liquidity and ease of doing business. Telecom companies were provided with the option of four-year moratorium on spectrum and AGR dues. Companies were also granted an option to convert interest on deferred liabilities into equity.

On Monday, Vi’s board decided to exercise the option and approved the conversion of the full amount of interest (with a net present value of around Rs 16,000 crore) into equity. The shares would be allotted to the government at par value of Rs 10 per share since the average price of company’s share was below the par value on the relevant date that was fixed by the government under the reforms package.  The allotment will happen following confirmation by the Department of Telecommunications (DoT). The government also has the discretion to convert any part of such loan to preference shares instead of equity shares, which could be convertible or redeemable in nature.

The government is likely to hold the shares through the Specified Undertaking of the Unit Trust of India (SUUTI) or by any other trustee-type arrangement.

“The conversion will therefore result in dilution to all existing shareholders of the company including the promoters. Following the conversion, it is expected that the government will hold around 35.8 per cent of the total outstanding shares of the company and the promoter shareholders would hold around 28.5 per cent (Vodafone Group) and around 17.8 per cent (Aditya Birla group) respectively,” the company said in a stock exchange notification.

Currently, the Aditya Birla group holds around 27.7 per cent while Vodafone Group holds 44.3 per cent in the telco.

Vi promoters have also decided to amend shareholder agreement and articles of association to protect their governing rights. This amendment is necessitated following dilution of promoter shareholding.

Currently the rights are subject to threshold of 21 per cent stake for each group and that will be reduced to 13 per cent.

Vi stock crashed 20 per cent and closed at Rs 11.80 on Monday. A source close to the company said the price correction was due to an expected dilution in capital at a price lower than current rate. “It has nothing to do with the sentiment of government owning stake,” he added.

In case of TTML, the company has estimated the NPV of its interest due at around Rs 850 crore. It said average price on the relevant date works out to Rs 41.50 and conversion of interest into equity will result in the government holding 9.5 per cent stake in the company.

According to an industry analyst, Vi’s decision to convert interest into equity brings in more clarity to potential investors. The company management continues to pursue its fund raising talks and hopes to conclude them in the current fiscal year.

While the four-year moratorium will enable Vi to conserve around Rs 60,000 crore, it will need to raise funds to pay its bank loans, improve and expand network and acquire spectrum for 5G service that will be rolled out this year. The non-payment of interest would result in additional savings of Rs 16,000 crore.

As of September end, Vi had a gross debt of Rs 1.94 trillion comprising deferred spectrum obligation of Rs 1.08 trillion, AGR liability of Rs 63,400 crore and bank debt of Rs 22,770 crore.

In a note, CLSA said even after the latest relief, Vi will likely struggle to fund annual spectrum payments beyond the four year moratorium unless average revenue per user (ARPU) reaches Rs 250-300. Credit Suisse said substantial improvement in operating performance is key for Vi to come out of the precarious situation.

“VI’s decision to opt for conversion of interest into equity does not necessarily result in any significant liability reduction, but the government’s presence increases the likelihood of long-term survival. Board structure and management rejig remains key

going ahead. While the telecom package has definitely provided temporary relief to the company, significant ARPU (average revenue per user per month) growth remains the most critical factor for the company’s long-term viability. ARPU needs to increase to Rs 250, from its current Rs 109, over the next three to four years for it to sustain the leverage,” Edelweiss Securities said.