Vodafone Idea equity

THE decision by Vodafone Idea to opt for the Department of Telecommunications’ rescue plan linked to equity sends out confusing signals. The mounting debt of nearly Rs 2 lakh crore may be a key factor behind the telecom operator offering 35.8 per cent equity to the Government of India against the dues — related to spectrum auction instalments and adjusted gross revenue payments — but it is unclear as to what the Centre hopes to achieve by handholding a stressed company, especially when its own track record with BSNL and MTNL has been far from encouraging. A better explanation is expected than the intent to avoid the negative cascading effect of a large-scale default.

While the message through the heavy-lifting could be to prevent the telecom sector from becoming a duopoly of Reliance Jio and Airtel, Vodafone Idea would need to thrive and not merely survive. The brutal response by the markets notwithstanding, the general belief in the industry circles is that Vodafone Idea will now have more room to raise external funds and benefit from the cash flows to catch up with the competition. Improving network quality and investing in new technologies would score high on the priority list. Uncertainty, however, remains on its ability to meet enhanced payments to the government after the moratorium period ends.

Clarity is needed on concerns about the government’s role going forward. Will this bailout be enough, and does it have the financial bandwidth to invest regularly in a sector driven by big-ticket technological innovations? The telecom major claims the government has no desire to run the company, so the possibility of a public sector approach to board governance would not arise. The counter-argument could be that the government, by becoming the largest shareholder in the struggling telco, will have interest in protecting the equity value of the company, and that would require some level of management control. At stake is the taxpayer’s money. The roadmap needs to be spelt out clearly.

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