Converting the telecom company’s debt into equity will give the management the breathing space it needs to nurse India’s third-largest telco back to health. This will help avert aggravating the bad loan crisis at banks, keep India from turning into a telecom duopoly and safeguard the government’s revenues. In other worlds, a win-win for all stakeholders.
Lenders to the cash-strapped and debt-laden Vodafone-Idea (Vi) are burning the midnight oil to figure out how to keep the troubled telco operational. The Department of Telecom is also concerned that unless an early solution is found to the crisis facing the company, it may go under and reduce the Indian telecom market to an effective duopoly between Reliance Jio and Bharti Airtel.
Then, rescuing Vi could also provide a boost to trade ties with the UK because Vi going belly up will serve as a very poor advertisement for India as a global investment destination. On the other hand, a government-led rescue of this ailing telecom major will reassure foreign investors, and especially those from the UK that the Indian government is serious about walking its talk.
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A recent meeting between lenders and the government deliberated over the issue. One of the suggestions put forth by lenders led by India’s largest bank, the State Bank of India (SBI), was to convert a part of the debt into equity.
But under Indian law, lenders can force such a conversion only in case of a default; and Vi hasn’t defaulted on any of its loan commitments yet.
The government has reasons to be worried. It has three major concerns with regard to Vi’s problems. First, it wants to avoid a situation where the Indian telecom market is a duopoly as this could lead to a rise in tariffs and prove anti-competitive. Then, it wants to avert the possibility of saddling India’s troubled banking sector with more bad loans in case Vi collapses. And finally, it stands to emerge as the biggest loser as Vi owes the public exchequer about $21 billion in dues. It will have to write off this amount if Vi sinks.
Vi, which was formed with the merger of India’s then third and fourth largest telecom companies Vodafone, a subsidiary of UK’s Vodafone plc, and Aditya Birla Group company Idea Cellular. Vodafone owns 44.39 per cent of the company, while its Indian partner owns 27.66 per cent.
Both partners have said they are not in a position to bring more funds into the company. Aditya Birla Group Chairman Kumar Mangalam Birla has, in fact, gone so far as to offer his stake in Vi to any government-owned company or financial institution. The government is yet to respond to this offer. Birla, who was chairman of Vi till recently, also said the company would not survive without government support.
Till the end of March 2021, Vi owed the government and its lenders $26 billion. Of this, it owed the government $13 billion as dues for spectrum payments, another $7.5 billion as adjusted gross revenue (AGR) liability.
It owes the rest to the banks. Of this, the funded exposure is about $1.8 billion, which is under risk of default. The remaining is non-funded exposure in the form of bank guarantees to DoT. Since the department is unlikely to cash them in anytime soon, these are unlikely to add to its troubles. Besides, Vi owes non-convertible debenture holders about $1 billion.
A recent report by brokerage firm Nomura said: “The total bank funded exposure is quite low and may not create wider implications across the banking system, although individual banks may have higher NPLs (non-performing loans).”
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The telco’s financial problems are compounded by the fact that its operations are not generation sufficient cash flows to meet its payment obligations. It has sought till next year to pay $1.1 billion in spectrum dues that will become due in April next year. Besides, the company also has to generate funds to pay of about $900 million in debts that are falling due this year.
Experts estimate that it faces a possible deficit of $3.1 billion in its cash flows in FY 23. And it had less than $45 million as cash in hand at the end of March 2021.
Lending urgency to the efforts by lenders to find a solution to Vi financial problems has been its inability to raise $3.3 billion despite its best efforts over the last 10 months.
The government is also believed to be working on a sector-specific relief package but many experts feel the best way forward would be to convert the bulk of Vi’s debts into equity and then, possibly, even merge it with the public sector BSNL.
They, however, caution that this should not be treated as a backdoor nationalisation. Instead, the experts advocate leaving the existing management team intact. The idea would be for the government and the lenders to offload their stakes once the company returns to good health, on the lines of the rescue effort launched by the Barrack Obama administration for General Motors following its 2009 bankruptcy.
That would not only resolve all the three concern areas for the government but also burnish India’s reputation as an investment hub at a time when it is keen on attracting fresh investments into India – and help it earn some brownie points on the ongoing trade negotiations with the British authorities.