Time for Vodafone Idea to act: Management must aim to raise capital

The Union government has given a fresh lifeline to Vodafone Idea (Vi) by converting the telco’s outstanding spectrum-auction dues into equity shares, worth ₹36,950 crore, at a premium, in the process raising its stake to around 49 per cent in the company from 22.6 per cent. However, the relief extended by the government, as part of the 2021 Telecom Reforms and Support Package, will help the struggling telecom operator only in the short term. While the Centre could convert further dues of Vi into equity shares later, if the need arises, such a scenario may mean Vi becoming a public-sector undertaking (PSU), with the government holding crossing 50 per cent.

 

This would be undesirable because private telecom companies should be able to carry out their business on their own. Also, there are two telecom PSUs — Bharat Sanchar Nigam Ltd (BSNL) and Mahanagar Telephone Nigam Ltd (MTNL) — which deserve attention on service quality and infrastructure upgrade. For BSNL and MTNL to go to the next level and compete with strong rivals like Reliance Jio and Bharti Airtel, government investment in them needs to increase adequately. This is the way the government should look at preventing a duopoly situation in the telecom sector, rather than extending multiple lifelines to financially stressed Vi. The government’s fear is that in a duopoly, customers are at the risk of getting hurt. But by strengthening the PSUs, the government could serve the same goal of preventing a duopoly.

 

Over the weekend, the government converted the telco’s dues into equity shares at a premium, perhaps to keep its stake below 50 per cent and avoid turning Vi into a PSU. Converting the dues into equity at Vi’s stock price of ₹6 at that point would have pushed up the government’s stake to over 55 per cent. The government was also in line with the Companies Act, 2013, under which shares cannot be issued at a discount. Even so, taxpayers may have reason to ask questions: Why does the government need to take a step that makes it the largest shareholder in a telco when BSNL and MTNL need serious fund infusion? Why is one telecom firm (Vi) being given so much support without promoters doing enough to turn the company around? More importantly, what is the government’s plan in doing what it is doing?               

 

In essence, the September 2021 package was a positive government intervention to revive the sector, which had a significant debt pileup in terms of past statutory dues. In 2021-22, the telecom industry collectively had a debt of over ₹4 trillion, with Vi having the largest share at around ₹1.9 trillion. While other private telcos too benefited from the Cabinet decision four years ago by way of a moratorium on dues, cut in spectrum-usage charges, and redefinition of adjusted gross revenues, it was Vi that opted for the provision of the government acquiring equity shares in the telco through a conversion of its dues. It’s time now for the promoters of Vi to make meaningful investment in the company. With the government backing, raising funds should get easier for the telco. The stock price increased by about 19 per cent on Tuesday. The company, which has already seen an erosion of its subscriber base, needs to give its users confidence to remain a player of any consequence.