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Govt stake in Vi will have implications for consumers, competition

On Tuesday, Vodafone Idea informed stock exchanges that the company was opting for the government’s offer of converting its interest obligations into equity. With this conversion, the government will become the largest shareholder of the company with a stake of around 35.8 per cent. As a consequence, the shareholding of the Vodafone Group and the Aditya Birla group will be diluted, declining to around 28.5 per cent and 17.8 per cent respectively. That Vodafone Idea chose to exercise this option suggests that efforts of the promoters to rope in strategic investors or to raise funds have not borne fruit. With this move, the Indian government will own stakes in multiple telecom operators, placing it in a unique position in the world, with the exception of China. For a government that has repeatedly stated its intent to divest its stake in public sector entities — it recently announced the first major outright privatisation of a public sector company with the sale of Air India to Tata Sons — it is ironical that it should now end up with a stake in a private telecom operator.

The decline in the fortunes of telcos is a consequence of both policy action and inaction. Its beginnings can be traced to the tariff wars beginning in 2016, which were compounded by the verdict in the adjusted gross revenue (AGR) case. In order to address the consequent financial stress among telcos, last year, the government had announced a series of measures, amongst which was the decision to provide a four-year moratorium on the payment of spectrum and adjusted gross revenue (AGR) dues. The government had also provided telcos the option of converting the interest on the deferred liability into equity. According to the notification to the exchanges on Monday, Vodafone Idea’s board decided in favour of this option, approving the conversion of the interest (at a net present value of Rs 16,000 crore) into equity, while Airtel had earlier announced that it would not opt for the conversion of interest dues to equity.

While this move will ease Vodafone Idea’s cash flow woes, the company is likely to face considerable challenges ahead. Foremost among them is the need to raise funds to acquire spectrum in the upcoming 5G auctions. The question is whether this move will facilitate or hinder capital raising. Further, at an operation level, if the government shareholding translates into the same limitations being imposed on Vodafone Idea as they are on public sector telcos, BSNL and MTNL, then the implications for competition, consumers, and for the telecom sector as a whole are not difficult to fathom. Reacting to this announcement, shares of Vodafone Idea fell 20.8 per cent, indicating investor concerns over the company’s prospects. Indian Express

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