Kumar Mangalam Birla, the chairman of Vi, has written to the central government, offering to hand over his stake in the telco in exchange for assistance in saving the company. Birla stated in a letter to Cabinet Secretary Rajiv Gauba that he would be delighted to engage with the government to examine all options for saving the company and enhancing national interest.
Why does Birla want to hand over his stake in Vi to the government?
Vi, formerly Vodafone Idea, is in debt to the sum of about Rs 1.5 lakh crore. The company owed the Department of Telecommunications (DoT) over Rs 60,000 crore in adjusted gross revenue (AGR), Rs 96,270 crore in deferred spectrum commitments, and another Rs 23,000 crore to banks and financial institutions as of March 31 this year.
Following the Supreme Court’s decision in October 2019 to affirm the DoT’s definition of AGR as the proper one, Birla stated in December 2019 that if the company does not receive assistance from the government, it will be forced to close its doors. In his June 7 letter, he warned that the telco’s operations would be driven to an “irretrievable point of collapse” if the government did not support the AGR problem, postponed spectrum payments, and a floor price for services delivered.
Birla’s letter is considered as a desperate attempt to preserve the company from bankruptcy. According to industry analysts, the letter, in addition to the appeal to the government, also implies that global investors will not participate in the Indian telecom sector until they are assured of a stable policy regime for a three-player market.
Can the DoT take over Vi though?
Yes, it is technically possible. Because telecommunications is a strategic industry, the government can make significant and critical policy interventions in the public interest to benefit the masses as a whole.
According to a July 26 Deutsche Bank Research report, Vi’s only chance of survival in the near future is if the government converts its debt into equity and merges the company’s operations with state-run Bharat Sanchar Nigam Limited (BSNL), then gives the merged entity a “clear commercial mandate based on profitability targets and incentives.”
“Should this happen, Vi shareholders would be heavily diluted, as government debt is roughly six times the current market cap. But such a solution might be an acceptable outcome to shareholders, with a $20 billion enterprise value feasible and non-dilutive,” the report said.
Other telecom analysts and government officials, on the other hand, believe that, at a time when the government is fighting to sell its stakes in numerous public sector enterprises across the board, it is improbable that it will take over another company, even if it is free.
What happens to Vi idea in the long run?
According to experts, Vi will need to seek funds over the next several months just to maintain day-to-day operations because of its crushing debt. Aside from that, the carrier will have to use the funds collected to gradually reduce its debt.
Because the government is unlikely to interfere by taking over the company, Vi will have to consider hiking tariffs in the near future to meet the costs of its operations, as well as pressuring the government to declare some sectoral relief on AGR and spectrum payments responsibilities.
However, most telecom industry experts believe Vi would struggle to be in business in the long run unless it can attract a large-scale investor willing to battle the low-tariff regime.