Vodafone Idea, one of India’s largest telecom operators, saw a sharp increase in its stock price on February 6th after the company announced that the government had cleared the conversion of interest owed on statutory debt into equity. The stock rose 21% to trade at Rs 8.34 per share, although this is still lower than the conversion price of Rs 10 per share.
Vodafone Idea will be converting Rs 16,133 crore ($2.2 billion) of debt into equity, resulting in the government owning a 1613 crore share stake in the company, equivalent to 33% of the total shares. According to DIPAM Secretary Tuhin Kanta Pandey, the government will not have any seats on the company’s board, and the holding will be classified as public shareholding.
This move by the government, after a wait of approximately a year, will make it the largest shareholder in Vodafone Idea. There are reports that suggest the company’s promoters may now infuse more money, which could be seen as a confidence boost for the company’s sustainability.
However, not everyone is optimistic about the company’s future. CLSA, which maintains a sell rating on the stock with a target price of Rs 6, emphasized that the government will own 33% of the company after the conversion. British Vodafone Group will hold 31.7% and Aditya Birla Group will hold 18.2%.
CLSA believes that Vodafone Idea will still be in financial crisis unless its average revenue per user (ARPU) reaches Rs 300. As of the September 2022 quarter, its ARPU was at a low Rs 131, which is the lowest among its peers.
In conclusion, the conversion of statutory debt to equity for Vodafone Idea is a significant development, but the company’s future remains uncertain. The government’s decision to become the largest shareholder in the company may provide some stability, but the company still faces many challenges, including funding its annual spectrum payments beyond the 4-year moratorium.
Why did the Indian government purchased a stake in VI?
The Indian government purchased a stake in Vodafone Idea (VI) as part of its efforts to reduce the country’s debt and provide stability to the telecom sector. The conversion of interest owed on statutory debt into equity allowed the government to acquire a 33% stake in the company, making it the largest shareholder.
This move was seen as a way to ensure the company’s sustainability and to address the financial challenges facing the telecom sector. The government’s decision to become a stakeholder in VI reflects its commitment to supporting the growth and development of India’s economy.
How Vodafone Idea (VI) became bankrupt in India?
Vodafone Idea (VI) became financially distressed in India due to a combination of factors, including intense competition, high levels of debt, and regulatory challenges.
- Competition: The Indian telecom market is highly competitive, with multiple operators offering similar services. This intense competition has led to a decline in revenue for many operators, including VI.
- High levels of debt: VI has been struggling with high levels of debt, which has put pressure on its financial stability. The company has been trying to reduce its debt by selling assets and improving its financial performance, but these efforts have not been enough to turn the situation around.
- Regulatory challenges: The Indian telecom sector is heavily regulated, and VI has faced several regulatory challenges that have impacted its financial performance. For example, the company was required to pay significant amounts of money to the government as part of an auction for spectrum rights, which has further added to its financial stress.
In summary, VI’s financial distress in India can be attributed to a combination of intense competition, high levels of debt, and regulatory challenges. These factors have made it difficult for the company to remain profitable and have put pressure on its financial stability.
Samridhi holds a Bachelor’s degree in Economics. Her research interests lie in examining the intersection of the social sector with poverty and inequality,
Along with this she is keen in understanding the systemic and structural issues that governs growth and development with an interdisciplinary focus.