How India can 'keep' Vodafone Idea

The only viable solution for India to keep Vi is for the government to convert its debt into equity, preferably while merging it with BSNL, and then providing it a clear commercial mandate based on profitability targets and incentives.

The government should convert Vodafone Idea’s (Vi) debt into equity to avoid a duopoly in the telecom sector, Deutsche Bank Research said in its report on Monday.

This, the bank suggested, would be the only viable solution in the backdrop of the Supreme Court dismissing the telecom company’s application for recomputation of adjusted gross revenue (AGR) dues.

“The vast majority of Vi’s debt is spectrum and AGR obligations, and the company will need to take on 5G spectrum at some point too.

"Private investors are extremely unlikely to save the company, given successive governments seeing telecom capital as something to target,” Deutsche Bank research analyst Peter Milliken said in his report.

“So we think the only viable solution for India to keep Vi is for the government to convert its debt into equity, preferably while merging it with BSNL, and then providing it a clear commercial mandate based on profitability targets and incentives,” he suggested.

Vi had a debt of Rs 1.8 trillion as of March 31 consisting deferred spectrum obligations of Rs 96,270 crore, AGR liability of Rs 60,960 crore and bank debt of Rs 23,080 crore.

Its promoters, Aditya Birla group and Vodafone Plc of UK, own 72.05 per cent stake in the company and its current market capitalisation is over Rs 23,000 crore.

Vi’s existing shareholders would be heavily diluted as the government debt is roughly six times the company’s current market capitalisation but such a solution might be an acceptable outcome to shareholders, he said.

The telecom company has sought an extension of moratorium till April 2023 to pay over Rs 8,000 crore dues related to spectrum purchase. Vi has to pay that amount by next April but has sought an additional year as it is not generating enough cash from business.

Separately, Vi has also asked the government to take a decision on the issue of floor price for telecom tariffs.

It is also looking to raise Rs 15,000 crore from foreign investors but has made limited progress on the count.

“Providing spectrum debt roll-over for another year is not the solution, in our opinion.

"A floor price could be, but such discussions appear to have gone nowhere, and it is not best practice to regulate price.

"We believe the government is left with a fairly simple choice: set a floor price or recapitalise Vi itself.

"From our perspective, the latter choice is the best solution,” Deutsche Bank Research said.

Recently, the Supreme Court had dismissed the petitions of Vodafone Idea and Bharti Airtel seeking correction of alleged errors in calculating the dues linked to AGR.

Vi, which has been struggling to remain a going concern, calculated its remaining AGR dues at around Rs 21,500 crore after making a payment of Rs 7,800 crore.

However, the Depart­ment of Telecommunications (DoT) had arrived at around Rs 58,000 crore as total AGR liability for Vi.