Centre is nationalising Vi's losses while privatising Air India, LIC, PSUs

Under an ambitious programme to raise ₹1.75 lakh crore, the Centre announced in Budget 2021 a disinvestment plan that included the sale of public sector undertakings (PSUs), nationalised banks, and insurance behemoth Life Insurance Corporation (LIC). When critics accused it of selling the family silver, the Centre shot back that it was just monetising assets for the nation’s growth.

Now, just weeks ahead of Budget 2022, there appears to have been a change of plan. Rather than selling, the Centre is now buying a company that is neck-deep in debt and struggling to survive in a cut-throat market, pitched against formidable rivals.

With Vodafone Idea (Vi) opting to convert its interest dues into equity, the government will become its single largest shareholder with a nearly 36% stake. In effect, the government will be nationalising the losses of a private telecom operator, even as it has been unable to profitably run the two telecom companies it owns — BSNL and MTNL.

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Vi has for long been a loss-making enterprise, and analysts have repeatedly warned over the past year that it is teetering towards collapse under the burden of insurmountable debt and spiralling losses. In June 2021, Vi’s Indian promoter Kumar Mangalam Birla had, in fact, written to the government, asking it to take over his share in the company to prevent large-scale job losses and imminent collapse.

Grand privatisation plans

To some, Vi may seem too big to fail. They may see the government’s decision to turn white knight as a viable option to save the telecom industry’s fortunes, and also spare millions of subscribers a lot of pain. But others question the wisdom of the move, especially since the BJP government has been crying hoarse about the need for it to exit businesses.

It has just concluded the Air India sale, on the plea that the government has no business being in the aviation sector, and it cannot fund the national carrier’s mounting losses. In the case of Indian Railways, the government is offering select routes, station development and many other functions which were seen as its monopoly, to private parties. And already, preparations are on to offload an incremental stake in the profitable state-owned insurance major LIC. So, the move to nationalise Vi’s losses is bound to raise several uncomfortable questions.

As the news trickled in, some analysts said this would pave the way for the Indian telecom market to become a two-horse race. The only fully private telcos left will be Bharti Airtel and Reliance Jio Infocomm (RJio), who might soon enjoy duopoly status.

Losses and more losses

Vi has not been in good financial health for a while now. In the September quarter of FY 2021-22, the telco posted a quarterly net loss of ₹7,132 crore while its total gross debt (excluding lease liabilities and including interest accrued but not due) stood at ₹19.48 lakh crore. This included debt due to deferred spectrum payment obligations, AGR (adjusted gross revenue) liabilities and debt from banks and financial institutions.

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Pitched against tough players such as RJio and Airtel, Vi has been unable to periodically hike tariffs, which has only hurt its balance-sheet some more.

So, at a meeting on Monday, the Vodafone Idea board approved the conversion of the full amount of interest related to spectrum auction instalments and AGR dues into equity. The company said in a stock exchange filing on Tuesday that the net present value (NPV) of this interest is expected to be about ₹16,000 crore and that the conversion will result in dilution in holdings of all the existing shareholders of the company.

After the conversion, it is expected that the government will hold around 35.8% of the total outstanding shares; the promoter shareholders Vodafone Group and Aditya Birla Group would hold around 28.5% and 17.8%, respectively.

The Vi move follows a directive by the Department of Telecommunications (DoT) last October, which provided various options to telcos to pay past dues under a ‘Telecom Reforms Package’. The telcos had, by then, lost appeals in the Supreme Court regarding the payment and quantum of these dues, which pertained to license fee, spectrum payments and interest accrued due to the long time the dispute dragged on between the DoT and the operators.

The options included a one-time opportunity to pay interest for four years of deferment on dues by converting them into equity. This is the option which Vi has now decided to exercise.

Will this help Vi?

Vi accounts for nearly a fourth of the telecom industry’s revenue, has a pan-India presence with 25.3 crore subscribers in Q2 FY22, and the largest spectrum portfolio among all operators. Navin Killa and Aditya Chandrasekar of brokerage UBS pointed out that the government becoming the single largest shareholder in the company has benefits: Vi will be in a better financial position now to raise external funds; the possibility of future flexibility in payments to the government exists; and there will likely be greater interest of the largest shareholder, the government, in protecting the equity value of the company.

Downsides, however, also exist. These include concerns over management style, governance and capital allocation under the government’s watch, said the analysts.

Another brokerage said that significant government holding may dissuade potential investors, who may fear increased government intervention in the operations of the company. In any case, a strong increase in average revenue per user (ARPU) will still be critical for getting Vi back to health.

Competition that killed

The entry of RJio in 2016 heralded a rapid consolidation in the fragmented telecom market, in which over half-a-dozen operators were functional at the time. RJio introduced intense competition through freebies and discounts, forcing others to follow suit.

The result was not just market consolidation; it also led to a massive readjustment for the legacy players in terms of revenue and subscriber market share. RJio’s aggression and continued rock-bottom tariffs for data as well as voice have had a large role to play in the state Vi is in today, say analysts.

Added to competitive pain was the government’s intransigence over the mode of calculation of past dues and then the interest that accrued on these dues as litigation dragged on for decades. All of these factors came together to weaken Vi’s balance-sheet and have now brought the troubled telco to the government’s shoulders.