😲 Government A Majority Stakeholder in Vi?
Why is Vodafone Idea giving the government a majority stake in the company?
Vodafone Idea's story has no less twists and turns than a Bollywood film.
We've been following its hardships and victories closely and noticed that one way or the other the debt-ridden telecom company manages to make the news.
And this time, it is making headlines because of a massive change.
The new twist in its story is that the government is soon going to be the company's biggest stakeholder.
Yes, it will own about a 35.8% stake in the company, reducing the existing promoters' share to 28.5% (Vodafone Group) and 17.8% (Aditya Birla Group) respectively.Â
But what caused Vi to give the government a majority stake in the company?
Vi's Woes
Vodafone Idea hasn't been doing all that well in the last few years. Thanks to Jio's dirt cheap phone plans, the company slowly began to lose valuable market share. Plus, it was facing a number of other problems (Here's our article detailing what exactly went wrong with Vi).Â
But the main reason it was struggling was because of its massive debt to the government.
You see, telecom companies need to buy spectrum or radio frequencies from the government to ensure that we get network coverage. And these airwaves cost a pretty penny, especially in India.
TRAI has set the price per spectrum at Rs. 492 crores. In comparison, the auction determined price in the UK was Rs 70 crores, in Australia, it is Rs. 35 crores in Australia, and in Spain just Rs. 14 crores.
On top of that, companies also had to pay a spectrum usage charge. And that's not all, they also have to give the government a part of their revenue.Â
Now, this wouldn't have been such a huge problem. But the government wanted a share of the telecom companies' entire revenue and not just the telecom revenue.
And even though this seemed unfair to many, the Supreme Court ruled in the government's favour.
This entire ordeal put Vodafone Idea in such a bad state that Kumar Mangalam Birla, the non-executive chairman of Vi stepped down in August last year. He offered his stake to the government so that it could keep Vi afloat. Even the Vodafone Group was ready to give away its stake for free to any financial institution that could help the company.
This and the telecos' mounting debt made the government realise that it had probably put too much on their plate. And if Vi went down, the duopoly of Airtel and Jio could wreak havoc in the strategic sector. Surely it did not want a situation like that.Â
So, last year it announced that the telecos need not include non-telecom revenue to compute AGR dues.Â
So all the old dues forgiven?
Naah. Itna bhi bada dil nahi hai (The government isn’t that generous)!Â
This reform will be applicable in the future. Also, no Spectrum Usage Charges are required for spectrums acquired in the future.Â
But, what about the dues that are already there?
The companies have been granted relief for the next 4 years from paying these dues to the government. But they have to pay interest for this period.
The Current Scenario
Jio has refused to take this moratorium. It will continue paying its debt. Meanwhile, Bharti Airtel has agreed to pay the interest. But what about Vi?
For Vi, whose debt is around Rs. 50,000 crores, this interest is approximately Rs. 16,000 crores.
And the company is in no state to pay it, especially as it is still losing customers.Â
So, it chose the second option: convert the interest into equity and make the government the shareholder.
Not just Vi. Tata Teleservices has also chosen this option. It will convert its Rs. 850 crores debt to give the government a 9.5% stake.
Now, the move could be good for the company as it will ensure its long-term survival but investors are very unhappy. You see, government-owned institutions in our country do not have a good reputation. They usually become lax and non-competitive. The government already has BSNL in its telecom kitty. Do we need any more proof?Â
Plus, this has majorly diluted the company's stock without reducing any liability. Yes, the company does not have to pay interest but it still has a massive outstanding debt that it will need to pay off.Â
This investor unhappiness has caused Vi's stock prices to plummet. As of 3:30 pm yesterday, the stock had fallen around 20.9% to Rs. 11.75.
Do you think the move will help Vi bounce back? Or will it make matters worse?
Only time will tell…
P.S. This post has been created in collaboration with StockEdge.
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