Sixty-five days after Aditya Birla group chairman Kumar Mangalam Birla sent an SOS to the Centre to save the beleaguered Vodafone Idea (Vi), the government has yet to respond. The radio silence is only fanning speculation on what could be a possible outcome for a company that now trades at a market cap of ₹20,000 crore.

Given that Birla wrote the letter to the exchequer and not bankers is a clear indication that a possible solution could come from North Block. Of the Rs 1.8 lakh-crore financial obligation, Vi owes the maximum (over 80%) to the Centre—deferred spectrum payment of ₹96,270 crore and AGR liability of ₹50,399.63 crore. For lenders, Vi is still a going concern and a performing account since it has not defaulted on interest payments. Not yet. While Anil Ambani-owned Reliance Communications (RCom), which is undergoing a bankruptcy process, owes ₹26,000 crore to banks, Vi’s dues to public and private banks is ₹23,080 crore, the bulk of the exposure (₹11,000 crore) is with State Bank of India.

The fact that Vi promoters are unwilling to put in equity and have sought deferment of the AGR payment due in April 2022 is clear indication that Vi could be months or quarters away from suddenly pulling the plug on its operations.

While a natural death via bankruptcy looks imminent, there are two options before the government to help Vi stay alive.

Option (A): Bailout by BSNL

Now, one can argue why throw good money after bad, given that state-owned BSNL and MTNL are in no great shape. MTNL was to be merged with BSNL but there is no clarity on whether that will happen. As of March 2020, it had a net loss of ₹15,592-crore. While Birla offered his stake in the venture to the government, will a three-way merger work any better? A PSU and private sector combination is unlikely to work out and for all practical purposes, Vi will become BSNL.

Today, BSNL has a stronger rural brand recall and reach than Vi. In fact, a Deutsche Bank report suggested if the government converts its debt into equity while merging Vi with BSNL, existing shareholders will be heavily diluted given that government debt is six times that of Vi’s current market cap. On the plus side, while Vi has the 4G network BSNL sorely lacks, the PSUs edge in wired broadband will come in handy for the merged entity.

Option (B): Golden goose for government

Both Aditya Birla and Vodafone are giving Vi on a platter to the government. It’s a fantastic trade that the Centre cannot and should not miss. The big problem is that it cannot pay dues to the Centre. Now that both promoters are refusing to pump in any equity, this is a golden chance for the government to convert its entire outstanding into equity, thus diluting existing promoters.

The Centre should make Vi a strategic undertaking of the government instead of merging it with BSNL. Get a professional board with a clear mandate for a turnaround, and eventual profitability. The moment it becomes a strategic entity of the government, the share price gain will more than make up for potential AGR and spectrum loss. More importantly, the government can then sell a strategic stake to a SWF (sovereign wealth fund) or a big private equity fund.

According to New York-based Global SWF, in CY20, SWFs invested a record $14.8 billion in India, over three times the $4.5 billion invested in China. The government should make the most of the global liquidity that is sloshing around. If a consumer tech company with no real business and path to profitability can rake it in, the government-owned Vodafone can do much better.

Rather than let it collapse and go bankrupt, the government can make it a la ITC. What Vi needs is a new owner, and the government is getting it for free. We don't really need to feel sorry for exiting promoters as they failed to invest ahead of the curve and the government can salvage what was due to it anyways.

In the past, banks to airlines have got nationalised, the Modi government can learn from history and not nationalise it. We shall know soon enough, whether the mandarins at North Block can really pick on a smart trade.

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