Vodafone Idea’s board on Tuesday informed the department of telecommunications (DoT) that it will opt for converting the interest on adjusted gross revenue (AGR) and spectrum dues into government equity. Once the plan goes through over a period of four years, the government will become the single largest shareholder in the company with a stake of 35.8%.
Post the equity conversion, the government will also become a creditor for the company, which would have some positives as well as negatives for Vodafone Idea. On the positive side, the company would be in a better financial position to raise external funds and there will be a possibility of flexibility in future payments to the government. Further, the government would have an interest in protecting the equity value of the company.
On the negative side, potential concerns with regard to management style, governance, capital allocation, etc, could arise but all this would depend on how much the government gets involved in the management/board of the company.
Analysts said that while Vodafone Idea’s near-term existential concerns have been addressed by this move, the onus is still on the company to successfully complete its capital raise, accelerate network investments and stem subscriber losses. The company would also need to make more meaningful tariff hikes in the days to come.
“…the board of directors, at its meeting held on January 10, 2022, has approved the conversion of the full amount of such interest related to spectrum auction instalments and AGR dues into equity. The net present value (NPV) of this interest is expected to be about `16,000 crore as per the company’s best estimates, subject to confirmation by the DoT,” Vodafone Idea said in a regulatory filing.
“The conversion will, therefore, result in dilution of all the existing shareholders of the company, including the promoters. Following conversion, it is expected that the government will hold around 35.8% of the total outstanding shares of the company, and that the promoter shareholders would hold around 28.5% (Vodafone Group) and around 17.8% (Aditya Birla Group), respectively,” the filing said.
The shares will be issued to the government on a preferential basis and relevant date for pricing would be August 14, 2021, the filing said. “The government, at its sole discretion, may convert any part of such loan to preference shares instead of equity shares and such preference shares may be optionally or compulsorily convertible and/or redeemable and/or participating in nature. The shares may be held through the statutory undertaking of the Unit Trust of India (SUUTI) on behalf of the government of India or by any trustee-type or other suitable arrangement,” Vodafone Idea said.
Since the average price of Vodafone Idea’s shares at the relevant date of August 14, 2021, was below par value, the equity shares will be issued to the government at par value of Rs 10 per share subject to the final confirmation by the DoT.
The government has given telecom operators an option of paying interest for the four years of deferment on the deferred spectrum instalments and AGR dues by way of conversion into equity of the NPV of such interest amount.
The loss-making and financially-constrained, Vodafone Idea, which is the country’s third largest telecom operator, has total AGR dues of Rs 58,254 crore of which it has paid Rs 7,854 crore.
As is known, Bharti Airtel has opted for the four-year moratorium on payment of AGR and spectrum dues but not for conversion of interest into equity by the government. Reliance Jio has opted for neither of the provisions, which were part of the September 15, 2021, package offered by the government to the telecom operators.
Annual instalments before the government’s relief package for Vodafone Idea amounted to Rs 15,000 crore for spectrum and `9,000 crore for AGR, which came to a total of Rs 96,000 crore for four years. With this amount now deferred, and interest on deferral converted to equity, total interest comes to Rs 19,500-20,000 crore assuming an 8-9% interest rate and the present value of this comes to Rs 16,000 crore.