Vodafone Idea: How The Government Should Handle Its Stake
As narrated to BloombergQuint.
First, let’s look at the issue as an abnormal circumstance for the telecom industry as well as the country. India was facing a situation where an oligopoly in telecommunications was getting decimated to a duopoly. That’s the time the industry sought government help. Therefore, all these bailout packages were a net result of the government acting as a saviour for the industry and trying to retain the oligopoly structure which is good for consumers, industry, and the nation.
Now, under those circumstances, the government did what it did. The fact of the matter is, everybody at that stage knew that government action alone will not be enough for Vodafone Idea Ltd. to be sustainable and competitive in the future. The choice that VIL is making today of wanting to convert their interest levies etc. into government equity, at the end of the period, is basically spelling out two things. First, it spells out the fact that a lot of capital is required to stay afloat, and to be competitive and fund the 4G to 5G transformation, and that additional capital is not easy to come by. The company is left with little choice but to move toward converting the interest dues to government equity.
I don’t imagine this can be a preferred route for any private-sector operator, where that private sector operator hands over a significant stake to the Government of India. On the other side, for the Government of India to accept it… well that’s a bailout promise it had made, so the government is just honouring that. The government has been pretty clear that it should not be in the business of doing business, which is a fairly well-stated position. The government is doing so only under exceptional circumstances it is faced with.
Nature Of Government As Shareholder
If the government tries to run Vodafone Idea being the largest shareholder, then we return to the basic question of asking – does it have a track record of running such businesses successfully? Where BSNL and MTNL are today is a good enough reason for the government to refrain from getting into telecom businesses. I am sure the government will think through this and is aware of its handicaps in running telecom operations and being competitive against the private sector operators like Reliance Jio Infocomm Ltd. and Bharti Airtel Ltd.
If the government ends up acquiring this stake eventually, they should try and sell their stake to someone who can amass the requisites to sustain this business and make it competitive.
The government will have to think out-of-the-box. There are still a couple of years before the equity conversion happens and the government policies during this period can spruce up the attractiveness of the third operator. Converting government debt to equity is an out-of-the-ordinary situation that is clearly nobody’s choice – neither the government’s nor Vodafone Idea’s. But the situation is such that the amount of capital required to be competitive is just not available given VIL’s current balance sheet and business.
Also, being an active shareholder cannot be the government’s preferred route and it has expressed so. But, tomorrow, if the existing promoters don’t want to run the company anymore, somebody has to catch the can. Who does so at that time is a matter of debate. The government knows that running this is not its skill and will find a via-media where it should either induct professional management or sell its stake to maybe a private equity entity or a strategic investor. The government trying to run it, even by default, may not be a good outcome.
Packaging The Stake For Future Investors
We cannot reach the destination and then find a via-media to suddenly eject. That may be haphazard and knee-jerk. There is a road to be travelled from now till the debt-to-equity conversion date.
Good decisions by the government during this period can be catalysts to attract investment for VIL and raise the probability of the government selling their equity to someone capable of making VIL’s business sustainable. Of course, VIL will have to raise prices and lift up the ARPUs. I hope the Vodafone Idea promoters and management steer the ship well till then!
Sanjay Kapoor is a telecom industry expert and entrepreneur. He is the erstwhile CEO of Bharti Airtel India and South Asia and chairman of Micromax.
The views expressed here are those of the author, and do not necessarily represent the views of BloombergQuint or its editorial team.