Vodafone Idea will convert money it owes the government in the past into equity, giving the latter a nearly 36 percent stake in it.
Indian telecom operator Vodafone Idea Ltd said its board had approved the conversion of money it owed the government in the past into equity, giving it a nearly 36 percent stake in the country’s third-largest telecom operator.
The company said on Tuesday that under the bailout, it would convert all interest related to spectrum auction installments and dues owed to the government to use the airwaves into equity.
The “net present value” of the interest is expected to be around 160 billion Indian rupees ($2.16 billion), according to the company’s estimates.
Converted to equity, the Indian government is expected to hold about 35.8% of Vodafone Idea’s total outstanding shares. Promoter shareholders Vodafone Group will hold 28.5% and Aditya Birla Group will hold 17.8%.
Shares of Vodafone Idea fell as much as 19% in Mumbai trading, the biggest drop in more than five months. The benchmark S&P BSE Sensex edged higher on Tuesday.
The embattled wireless operator has not posted an annual profit since Reliance Jio Infocomm Ltd sparked a brutal price war in 2016. While the latest move avoids bankruptcy of the joint venture between Vodafone Group and billionaire Kumar Mangalam Birla’s conglomerate, it will be a stopgap measure for companies that have lost customers in droves. Investors will also focus on what a sudden shift to state control means.
“While this will avert the immediate danger of bankruptcy, it does not bode well for any equity investor in a private company,” said Utkarsh Sinha, managing director of Mumbai-based consultancy Bexley Advisors. “Putting aside the apparent concerns about its performance as a parastatal, it sends a very negative signal to the business community.”
“Equity dilution is something that promoters or existing shareholders are less likely to welcome. A dilution of around 10% to 15% would be welcome by the government,” said Likhita Chepa, senior research analyst at CapitalVia Global Research.
The entry of billionaire Mukesh Ambani’s Reliance Jio has disrupted India’s telecom industry and forced some rivals out of the market. Huge dues owed to the government have also compounded the industry’s woes.
Vodafone Idea, a combination of the Indian unit of Britain’s Vodafone Group and Idea Cellular, has paid the government 78.54 billion rupees ($1.05 billion) in dues, but still owes about 500 billion rupees ($6.7 billion).
India’s Supreme Court gave telcos 10 years to pay their dues in 2020 to 2031, but rejected last year’s request to correct the calculations.
Bigger rival Bharti Airtel said on Friday that it would not convert interest and government dues into equity.
“From an industry perspective, it’s clear that the market won’t narrow down to two players… The addition of the government has not changed the competitive landscape as they have not injected any capital,” said Ambit Capital analyst Vivekanand Subbaraman.