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Friday, January 28, 2022

Explained: Why telecom major Vi will not become a ‘government’ company now

How will Vi's arrangement on the interest-to-equity scheme with the government work? How does this ensure that Vi will not become a government-run company now?

Written by Aashish Aryan , Edited by Explained Desk | New Delhi |
Updated: January 13, 2022 6:04:51 pm
After the completion of the deal, the government will become the single largest stakeholder of Vi.

The government clarified on Wednesday (January 12) that it was not interested in holding any board position in any of the three telecom service providers that had opted for the interest-to-equity scheme.

Of the three companies, the largest is Vi (formerly Vodafone Idea), which will allocate 35.8 per cent shares to the government on a preferential basis.

These shares will be allocated to the government through the Specified Undertaking of the Unit Trust of India (SUUTI), the company’s chief executive officer and managing director Ravinder Takkar had said on Wednesday.

How will Vi’s arrangement on the interest-to-equity scheme with the government work?

Vi, which is reeling under debt in excess of Rs 2 lakh crore, will offer these shares on a preferential basis to the government. It will be a non-cash transaction, wherein the debt that was owed to the Department of Telecommunications (DoT) will simply be turned into equity.

At a virtual press conference on Wednesday, Takkar said that the company had opted to convert the interest on all deferred payments to equity as it gave the company a chance to clean its books.

Since the company had a significant debt as well as a stretched balance-sheet, this interest-to-equity scheme would give Vi a chance to put aside more funds for investing in newer technologies.

The company chose to make use of this scheme right now instead of later, as the deadline for opting for the moratorium and the equity conversion was ending on Tuesday, Takkar said.

Ravinder Takkar MD & CEO at Vi (Vodafone Idea). (Source: LinkedIn)

How does this ensure that Vi will not become a government-run company now?

After the completion of the deal, the government will become the single largest stakeholder with 35.8 per cent stake, and the current promoters — Vodafone Group and Aditya Birla Group — will see their holdings reduced to 28.5 per cent and 17.8 per cent respectively.

This, however, will not mean a change in board positions. By another resolution, the current promoters have also agreed to amend the shareholder agreement, and have brought down the minimum qualifying shareholding threshold from 21 per cent to 13 per cent.

This means that both Vodafone Group and Aditya Birla Group will continue to hold rights to make important decisions about the company, such as the appointment of directors and other key officials, among others.

Also, the government itself has clarified that it would not take any board seats or appoint any executives to the board of Vi.

Will it be easier for Vi to survive the competitive telecommunications market now?

Since a large part of the debt Vi owed to the government has been converted to equity and handed back over to the DoT itself, Vi will have much cleaner books now. This, in turn, will make it easier for the company to raise funds from global as well as domestic investors.

The fact that the government is now also the single largest shareholder in the company will enhance Vi’s chances of raising funds from new as well as old investors.

That said, most industry experts and analysts believe that the company will have to look for avenues to increase its average revenue per user from the current Rs 109 to somewhere in the vicinity of Rs 300 to be able to sustain in the long run.

“The key question remains on VIL’s (Vodafone Idea Limited’s) ability to raise equity in the near term to meet cash flow needs over the next 2-3 years. We believe substantial improvement in operating performance is key for VIL to come out of this precarious situation and we have not seen enough evidence for the sustained operational improvement,” Credit Suisse said in a note on Tuesday.

On Wednesday, Takkar reiterated that the company was in talks with several investors from across the world and that there should be some news on infusion of funds in the coming months.

What was the government’s offer on conversion of pending interest and dues to equity?

In the telecom reforms approved by the Union Cabinet in September last year, one of the major decisions that was aimed at providing immediate relief to debt-laden companies such as Vodafone Idea was the decision to provide a four-year moratorium on payment of all dues arising due to the Supreme Court’s September 1, 2020, judgment on adjusted gross revenue (AGR).

This meant that telecom companies could opt to pay the principal, the interest, and all other penalties, as decided by the top court, after four years, instead of having to pay up immediately.

The government had then also given all the telcos a one-time opportunity to convert the interest on this deferred payment into equity at the end of the four-year period.

Vi, which is reeling under debt in excess of Rs 2 lakh crore, has been looking to raise funds from investors for quite some time. The government’s offer of deferred payment of adjusted gross revenue dues came as a major breather for Vi, which owed the Department of Telecommunications (DoT) more than Rs 58,000 crore just as AGR.

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