InvestorQ : Can you tell me about the government converting its dues into equity in Vodafone Idea and would that dilute the equity of the company?
Riya Dwivedi made post

Can you tell me about the government converting its dues into equity in Vodafone Idea and would that dilute the equity of the company?

shrinidhi Rajan answered.
1 month ago

Let me answer the second part of your question first. Yes, the conversion will result in expansion of the equity base and to that extent it will dilute the EPS and the equity size. However, the company is currently making losses, so it is positive since the loss per share would now be lower as it would be distributed among more number of shareholders. In the latest development, SEBI has approved the conversion of the AGR dues of Vodafone Idea into equity to the government. This move was part of the Telecom rescue plan announced in the previous year, with only Vodafone Idea opting for conversion of dues into equity.

The total dues converted into equity would be around Rs16,000 crore ($1.92 billion) that is currently owed by Vodafone Idea as AGR charges to the government. We will talk about AGR charges a little more later. Now, as per the rescue package, government had offered telcos the option to convert outstanding statutory dues by way of AGR dues to government into equity. Incidentally, out of the telcos, Bharti Airtel and Reliance Jio waived the offer and opted to pay up the entire statutory dues rather than dilute the equity. On the other hand, the stressed Vodafone Idea accepted the offer to convert debt into equity.

There is an interesting background to the AGR dues, which is the subject here. It was offered on the Adjusted Gross Revenue dues that telcos owed to the government. The amount was substantial for Bharti Airtel and Vodafone. The AGR liability arose because payment of license fees was made only on telecom revenues and not from other income like leasing of towers and service charges. Supreme Court upheld the contention of DOT and telcos and little choice after that. While Bharti agreed to pay the charges, Vodafone Idea opted for conversion of dues into equity under the special rescue package of the government.

This rescue package and the conversion allowed Vodafone Idea to literally come back from the brink of bankruptcy. In the absence of this rescue package, Vodafone would have declared bankruptcy, and put thousands of jobs as well as put loans worth Rs1.50 trillion owed to banks in danger of default. This is almost akin to partial nationalization of one of the largest telecom services providers in India. Before the arrival of Jio, it was Bharti, Vodafone and Idea that had dominated Indian telecom. Things took a drastic turn after Jio entered the fray and changed the rules of the game with its loss leader strategy.

Based on valuation estimates, the government stake in Vodafone Idea could would be more than 30% post conversion. Government of India will becomes a key shareholder in Vodafone Idea, alongside the Aditya Birla Group and Vodafone PLC of UK. However, the government stake will be classified as public holding and SEBI has approved the request of treating its holdings in Vodafone Idea as part of public float under special circumstances. The reason is that in this case it was more an acquisition by default rather than design. Government will not sell its stake in Vodafone Idea till the telecom operator turns around to profits.