How govt brought Vodafone Idea back from the brink & earned a neat profit in the process

In 2021, the government allowed telcos to convert interest on deferred spectrum payments and AGR dues into equity. This made it the single largest stakeholder in Vodafone Idea.

A man walks across the LED display board showing the logo of Vodafone-Idea at the ongoing India Mobile Congress 2022, at Pragati Maidan, in New Delhi, India, on 3 October, 2022 | Reuters

New Delhi: Last week, at the listing of Vodafone Idea’s (Vi) follow-on public offer (FPO), Kumar Mangalam Birla, promoter of Vodafone Idea and chairman of the Aditya Birla Group, said this marked the beginning of Vodafone 2.0. His words indicated that the fresh infusion of capital would herald a new phase in the company’s trajectory. 

Vodafone Idea’s recent history shows that such a turnaround, which is still uncertain despite a successful FPO, would not have been possible without the Indian government’s efforts to ensure the company survived its severe debt stress, and that the telecom sector didn’t become a duopoly. 

The now-completed FPO — which was subscribed 6.5 times — paves the way for starting the much-needed capital expenditure cycle, mainly for upgrading its network and technology. This is expected to trigger a growth cycle for the company by increasing its competitiveness while also slowing the loss of its market share.

A company near death

Vodafone Idea came into being in 2018, following the merger between Vodafone India and Idea Cellular. The union of the two companies created the country’s largest mobile operator, with a 35 percent market share and around 430 million subscribers. 

However, what was expected to be an upward trajectory soon lost significant momentum. 

Since the merger, Vodafone Idea has been losing its subscribers to rivals Bharti Airtel and Reliance Jio, with a current market share of just about 19 percent. According to the Telecom Regulatory Authority of India (TRAI), Vodafone Idea had a subscriber base of 220 million at the end of February 2024. 

The decline of Vodafone Idea’s fortunes was largely due to intense competition in the market, especially with Reliance Jio’s market entry in 2016. Soon after its entry, Reliance Jio began capturing market share through its extremely low tariffs. 

In 2017-18, Vodafone Idea’s consolidated net loss stood at Rs 41,682 million, as against Rs 3,997 million for the previous year. The losses ballooned to Rs 293,011 million in FY 2022-23.

Amidst this, Vodafone Idea continued to reel from mounting debt, exacerbated by the Supreme Court’s September 2020 judgment on Adjusted Gross Revenue (AGR).

In its ruling, the Supreme Court ordered telecom companies to clear their dues to the government — relating to licence fee and spectrum usage charges — over 10 years, with the first instalment due in March 2021.

In December 2019, Vodafone Idea Chairman Kumar Mangalam Birla warned that the company would need to shut down its operations in the absence of relief from the government. As a last-ditch effort in June 2021, Birla even offered to hand over his stake in Vodafone Idea to any entity, public or private, to keep the company afloat. 

As of February 2024, the telco had a debt of over Rs 2,01,829 crore, of which 97 percent is the dues owed to the government for AGR (about Rs 65,110 crore) and deferred spectrum payment (Rs 1,30,699 crore), according to the company’s Red Herring Prospectus (RHP) released before the FPO.

Government steps in with a lifeline

However, in September 2021, Vodafone Idea got a lifeline with the Union cabinet approving a major reform package for the telecom sector. While the package was aimed at promoting healthy competition and infusing liquidity into a telecom sector reeling under financial stress, it proved particularly important for Vodafone Idea to stay afloat.

As part of the reforms, the telcos were offered the option of choosing a moratorium of up to four years in the annual payment of dues arising out of the Supreme Court’s judgment on AGR as well as on dues payments for spectrum previously purchased. 

Additionally, the government also gave telcos a one-time opportunity to exercise the option of paying interest for the four years on deferred spectrum instalments and AGR dues by way of conversion into equity of the Net Present Value (NPV) of such interest amount.

This option proved an attractive one for Vodafone Idea, which grabbed the helping hand offered to it. Within a month after the reforms were announced, Vodafone Idea opted for a four-year moratorium towards deferment of payment obligations related to spectrum auctions conducted until 2016 and AGR dues until the financial year 2019. 

Later, in January 2023, its board also approved the conversion of the full amount of interest arising due to the deferment of spectrum instalments and AGR dues until the financial year 2017 into equity. 

In February that year, the government approved the conversion of Rs 16,133 crore of Vodafone Idea’s interest dues into equity after receiving a commitment from the Aditya Birla Group that it would continue to run the company and bring in the necessary investment. 

With this, the government became the single-largest shareholder in Vodafone Idea, with a stake of about 33 percent. This was the help the company needed to survive until it could raise further resources to expand its infrastructure. 

What’s also notable is that this help from the government was not incidental. It was part of a larger plan to ensure that competition continued to exist within the telecom sector, which was increasingly trending towards a duopoly of Jio and Airtel. 

The government’s strategy is perhaps best highlighted through a statement made by Finance Secretary T.V. Somanathan in an interview with CNBC-TV18 in April this year, in the run-up to Vodafone Idea’s FPO. 

In that interview, Somanathan said that preserving competition with multiple operators in the market is a major policy goal of the government.

“India’s economic growth needs a thriving telecoms sector,” he said. “We need multiple operators to preserve competition and protect consumers. Preserving competition is a major policy goal of the government and is reflected in the September 2021 telecom package and the large capital infusion to BSNL.”  

This strategy seems to be paying off already. In a research note in April, IIFL Securities, a capital market company, said that while earlier there was a 25 percent probability of India becoming a two-player market, “we now change to 100 percent probability of a three-player market”.

Important, too, from the taxpayers’ perspective, is that the government has even managed to see the value of its investment in Vodafone Idea increase as much as 32 percent in a single year. That is, the roughly Rs 16,000 crore worth of equity the government received is now worth more than Rs 21,000 crore due to the rise in Vodafone Idea’s share price.

Back to stability, but future uncertain still

Industry analysts say that the success of the Rs 18,000-crore FPO is a good sign for the company, as it said it would use the proceeds for much-needed enhancements of its 4G coverage and to finally enter the 5G market. 

Pointing out that the Aditya Birla Group has remained committed to this sector for over two and a half decades now, Birla said last week that along with Vodafone Group, they have cumulatively invested around Rs 1.7 lakh crore in the Indian telecom industry. 

“Before this FPO, in the last 5 years, out of Rs 30,000 crore raised by the company, more than 75 percent has come from the two promoter groups. The latest fundraising has also seen an investment of over Rs 2,000 crore from the Aditya Birla Group,” he said.

However, analysts say the FPO, part of the company’s plans to raise Rs 45,000 crore via a mix of debt and equity, may be a temporary fix as challenges remain for the company. 

This includes the substantial erosion of its market share and the repayment of the rest of its gigantic debt.

“Even if we assume a 20 percent step change in tariffs followed by a 10 percent per annum tariff compounding and no subscriber erosion, we estimate it would take Vi well over 20 years to organically pay back the government’s obligations; i.e. in the absence of government’s write-offs, this constrained cash flow and potential dilution dynamic remain a fundamental challenge,” the Macquarie Group said in a note in April.

Kotak Institutional Equities, too, added in its own research note that while the FPO was a step in the right direction, albeit much delayed, and should improve Vi’s near-term fortunes, “we don’t expect Vi to gain any meaningful market share from peers”.