Govt in Vodafone Idea: Should Vi, BSNL, BBNL merge?

Last year, the Government of India allowed telecom operators to defer their repayment of spectrum liabilities and offered a window to convert the net present value of the interest that will accrue on the deferred payments into equity. The government, at its sole discretion, may convert any part of such loan to preference shares instead of equity shares, and such preference shares may be optionally or compulsorily convertible and/or redeemable and/or participating in nature. The shares may be held through the statutory undertaking of the Unit Trust of India (SUUTI) on behalf of the Government of India or by any trustee-type or other suitable arrangement.

Tata Teleservices has opted to convert the interest on the spectrum and adjusted gross revenue dues into equity. It is the second company to do so after Vodafone Idea. The GoI will own about a 9.5% stake—technically an insignificant minority stake—in Tata Teleservices.

Vodafone Idea

Vi, as the erstwhile Vodafone Idea/brand is now known, had been attempting to raise funds or bring a strategic investor. It has now decided to convert interest on spectrum installments and adjusted gross revenue dues into equity—giving the Indian government a 35.8% stake in the entity. The equity shares will be issued to the Government of India at par for ₹10 per share, subject to final confirmation by the Department of Telecommunications. The current promoter shareholders would hold around 28.5% (Vodafone Group) and around 17.8% (Aditya Birla Group), respectively.

Governance rights of promoter shareholders are governed by the SHA (shareholder agreement). The rights are subject to a minimum qualifying threshold of 21% for each promoter group, and in light of the conversion of interest into equity, the promoters have agreed to amend the SHA to reduce the minimum rights-qualification shareholding level to 13%. This would allow the GoI a meaningful stake, and to immediately have a say in appointments pertaining to directorships, key management personnel of the entity.

Past & Now—in telecom

One side of the markets will cheer that the company has some bail-out solution in sight. There is also bound to be market criticism that the GoI is unduly doing this heavy-lifting—especially when its telco stakes have been bleeding it so far.

But the alternative is having a large scale default of this size of the debt—which would have a negative cascading effect, both in the domestic debt market and consequently, in the wider capital markets. The good news is that this stake is in a company that has 25 crore paying subscribers (no small feat!).

With this immediate debt relief, Vi could benefit from using its cash flows to be spent on its network capability expansion, to try and catch up with the competition. The question is if this amount alone would be sufficient for a capex investment needed to be competitive in a sector where the leader is expanding and investing constantly.

While this development indicates that the telecom sector won’t end up in a duopoly as fears have been around, this does not necessarily mean that the brand would have sustained firepower to continuously invest in upgrading its technology, network, consumer offerings. What it also means for its ability to attract talent is a question mark, considering that it won’t be an MNC employer brand, and might have a public sector approach to board governance, including on its KMP appointments.

What was probably an intent to provide a breather to industry players, has turned into GoI owning one more company in a sector where its track record with BSNL & MTNL is already abysmal?

GoI’s legacy telco - BSNL

In October 2019, the GoI had provided a ₹70,000 crore revival package to BSNL, of which, a large chunk of ₹29,937 crore was towards VRS for employees above 50 years of age. The firm is said to have sought funding support to the tune of over ₹37,000 crore over 3-4 years, to build its 4G-rollout plan as well as to adjust its AGR dues of nearly ₹5,000 crore.

There has been market speculation that the GoI could also allot the ambitious BharatNet project (which targets connecting the six lakh villages across the country with high-speed internet) to BSNL, after winding up BBNL (Bharat Broadband Network). If this BSNL-BBNL integration happens, BSNL could have access to over ₹60,000 crore of the Universal Service Obligation Fund (USOF). The USOF is created from the Universal Access Levy (UAL) that mandates telecom service providers to contribute a certain percentage of their funds.

Can it be made VIn VIn & Win?

The government owning significant minority (and controlling) or majority stakes in multiple telcos will only stress-test the elasticity of its bandwidth to govern each of those stakes. Will it not be fruitful to merge BSNL, BBNL and VI into one entity?

To enable them to be meaningfully relevant, technologically competitive, and business-wise viable? In this case, it assumes that the other shareholders will agree to such a merger, which would then increase the GoI stake.

The telecom sector is now a technology-led sector, and especially a consumer-facing one—which needs constant investments in innovation, and in adopting the latest consumer insights to be a significant industry participant. Will the government have the financial bandwidth to invest regularly, and more importantly, attract private sector talent in its (to be soon) portfolio company? Or, does it make sense to merge these telcos into one attractive platform and disinvest it a few years down the line (once it is profitable) at a premium? This could help in two ways—the ease of governance of its stake; digital inclusion; and yet potentially book a disinvestment-profit in 3-5 years.

In any case, apart from handholding a stressed industry, the larger question is—what does GoI hope to achieve by owning a stake in a standalone telco? Well, it was a Hobson’s choice. But this idea of a larger BSNL-BBNL-Vi entity and its potential valuation need not be one.

Time will tell if this entire exercise can be called “what an idea, sirji”!

Views expressed are personal. Srinath Sridharan is a corporate advisor and an independent markets commentator.