Govt option? Part telco interest dues as equity

The government has discussed the option of converting a part of the interest dues of mobile companies into equity instruments as part of a larger solution to sort out the telecom financial mess, which is likely to be taken up by the Union Cabinet very soon in view of Vodafone Idea’s stressed finances.

The proposal being discussed includes extending the moratorium on spectrum payments for companies by a few years, and thereafter convert the interest portion — to be charged to maintain the net present value (NPV) of the outstanding — into equity, while the companies are be mandated to pay back the principal in its entirety, sources said.

A fresh break in payments towards spectrum purchase, over and above the two-year holiday, which ends at the end of this fiscal, will be a relief for the sector, especially for Vodafone Idea, which is facing a severe cash crunch in view of the company’s debt that runs up to Rs 1.7 lakh crore.

The government believes that survival of Vodafone Idea is important not only to maintain adequate competition in the telecom industry and avoid a duopoly (with Reliance Jio and Airtel as sole private operators), but also in view of saving its own interests as a large part of the company’s outstanding is towards the exchequer, which would become suspect in case it slips into bankruptcy.

To convert the interest into equity, Sebi’s preferential allotment guidelines will be followed when it comes to listed companies such as Vodafone Idea and Bharti Airtel.

The sources said that detailed modalities of the equity conversion are “likely to be complex with several operational issues” that will be worked upon jointly by the finance ministry, department of telecom, Sebi, apart from other relevant participants.

The sources added that the proposal also states that the government, at its sole discretion, may also decide to side-step the equity conversion route and would rather opt for redeemable preference shares (which may or may not be convertible), wholly or partially. In the past, the government has stayed away from such transactions and it remains to be seen if the proposal is finally taken up.

In a letter to Cabinet secretary Rajiv Gauba on June 7, industrialist Kumar Mangalam Birla (whose group holds 27% stake in Vodafone Idea) offered his stake to the government or any other entity that it deems fit in order to ensure its survival.