A customer at a Vodafone store in Mumbai. Photo: AFP

The Indian government will soon be the largest shareholder in troubled telecom company Vodafone Idea, as it has opted to convert interest on the deferred spectrum and adjusted gross revenue dues to equity.

In October 2021, the federal government announced a slew of measures to shore up the telecom industry, which has been reeling under low margins caused by price wars and massive tax dues.

One of the reforms was a four-year moratorium on the spectrum and adjusted gross revenue dues. The companies were also granted an option to convert interest on deferred liabilities into equity.

Rival Bharti Airtel decided to go for a four-year moratorium, but opted to pay the interest for its dues and not divest its stake. The market leader, Reliance Jio, decided to go for neither.

Vodafone Idea’s board decided to convert the full amount of interest – about 160 billion rupees – into equity. The shares would be allotted to the government at a par value of 10 rupees per share since the average price of the company’s share was below the par value on the relevant date that was fixed by the government under the reforms package.

In a stock exchange notification, the company said the conversion of liabilities into equity will result in dilution of all existing shareholders, including promoters. “Following the conversion, it is expected that the government will hold around 35.8% of the total outstanding shares of the company and the promoter shareholders would hold around 28.5% (Vodafone Group) and around 17.8% (Aditya Birla group) respectively,” the company added.

The promoters have also decided to amend shareholder agreements and articles of association to protect their governing rights. This amendment is necessitated following the dilution of promoter shareholding.

As of September 30 last year, Vodafone Idea had a gross debt of 1.94 trillion rupees ($26.26 billion) comprising a deferred spectrum obligation of 1.08 trillion rupees, adjusted gross revenue liability of 634 billion rupees and bank debt of 227.70 billion rupees.

The federal government’s four-year moratorium will enable it to conserve about 600 billion rupees. However, it will still need to raise funds to pay its bank loans, improve and expand its network and acquire spectrum for the 5G service that will be rolled out this year.

The company is in talks with a slew of local and international telecom vendors to buy gear for its 5G network. It is looking beyond traditional vendors such as Nokia and Ericsson and trying OpenRAN technology, that focuses on using vendor-neutral hardware and software based on open interfaces. The company has already used this technology for its 4G trials.

In the July-September quarter, Vodafone Idea’s consolidated net loss was 71.32 million rupees, as against a loss of 73.19 million rupees in the preceding quarter. Its average revenue per user is also improving on the back of a hike in telecom tariffs. However, it continues to lose subscribers to rival firms.