Minimising the fallout from a Vodafone Idea collapse – here’s what lenders and experts suggest

Minimising the fallout from a Vodafone Idea collapse – here’s what lenders and experts suggest
Vodafone Idea's collapse will have an impact on not just the lenders, but the Indian telecom industry as a wholeBCCL
  • It’s not just Vodafone Idea’s promoters who are sending out SOS to save the company from a collapse.
  • Banks suggest that the debt be converted into equity, which would take most of the stress off the books of the telco.
  • On the other side, experts suggest mitigating measures like roping in Airtel and Jio to continue services to Vodafone Idea’s subscribers on the telco’s infrastructure.
Vodafone Idea could be hurtling towards a collapse, but experts and lenders have some suggestions on how to minimise the damage from the demise of India’s third largest telco.

Despite Vodafone Idea struggling to keep its subscribers and increase its average revenue per user (ARPU) for a long time now, lenders of the telco want the government to devise a strategy to prevent it from going under.

According to a report in the The Economic Times (ET), Vodafone Idea’s lenders, led by the State Bank of India, met the Department of Telecommunications (DoT) on Friday last week to discuss the ongoing stress in the telecom sector.

Minimising the fallout from the collapse of Vodafone Idea

If Vodafone Idea ends up collapsing, the fallout would not be limited to only the lenders and the banks – the 270 million subscribers and the thousands of employees of telco would face the brunt of it, too.

Lenders and experts chime in on the possible options available in their hands and the government’s.

Converting debt into equity could help banks, and more importantly, the government

One of the suggestions made by the lenders include the possibility of converting Vodafone Idea’s debt into equity. This would make the lenders some of the largest shareholders in the company.

As things stand today, the Kumar Mangalam Birla-led Aditya Birla Group holds a 27.66% stake in the company, while Vodafone Plc., the British parent, holds a 44.39% stake. The rest is owned by the public.

According to the company’s latest financial statements, the equity has been wiped out thanks to piling losses. This means that the current value of the equity held by the shareholders is worth less than the losses accumulated by the company.

Currently, it owes the government ₹1.57 lakh crore in the form of spectrum dues and adjusted gross revenue (AGR) liability. Banks have an exposure of ₹35,000 crore, with State Bank of India leading with a debt of ₹11,000 crore.

Interestingly enough, despite losing millions of users every month, Vodafone Idea has not yet defaulted on its loans. Until it defaults, banks will not be able to take any action.

Banks’ exposure to Vodafone Idea:

State Bank of India₹11,000 crore
Yes Bank₹4,000 crore
IndusInd Bank₹3,500 crore
IDFC First Bank₹3,240 crore
Punjab National Bank₹3,000 crore
ICICI Bank₹1,700 crore
Axis Bank₹1,300 crore
HDFC Bank₹1,000 crore
Source: Nomura

All of this pales in comparison to the liabilities of Vodafone Idea towards the government. And this, the banks say, puts the government at much higher risk.

If and when the lenders proceed with the conversion plan, the government will likely become the biggest shareholder of Vodafone Idea.

“We are hopeful that DoT and the government will come up with a solution because they have significantly higher dues,” one of the lenders was quoted by ET as saying.

Roping in Airtel and Reliance Jio as caretakers of a post-collapse Vodafone Idea

In case Vodafone Idea ends up dying anyway, experts suggest the government could bring in the top two telcos, Airtel and Reliance Jio, as caretakers of the company.

This scenario is primarily aimed at reducing disruptions for the 270 million subscribers of Vodafone Idea.

Former Secretary of Telecom and Information Technology, R Chandrashekhar told Business Insider that this will be needed since Airtel and Jio are not equipped to take on 270 million subscribers overnight, due to infrastructure capacity and capability constraints.

Instead, Airtel and Jio could be asked to operate Vodafone Idea’s existing infrastructure to keep the services live for its subscribers.

This will also give Airtel and Jio the time to scale up their network infrastructure to take in the inevitable influx of subscribers.

Turning Vodafone Idea into a government company may not be wise, say experts

If Vodafone Idea’s debt is converted into equity, it could make the government one of largest shareholders of the company. If its holding crosses the 51% threshold, it would make Vodafone Idea a government company.

This, experts suggest, may not be wise.

“Converting Vodafone Idea into a government company, or merging it with a government company might probably be a remedy worse than the disease,” added Chandrashekhar, in an exclusive interview with Business Insider.

Sanjay Kapoor, former chief executive officer (CEO) of Bharti Airtel, alluded to culture clash.

“Bringing together an Indian company, a global company culture and a public sector company’s culture together, and managing the fate of those 1 lakh public sector employees – who in the private sector has the wherewithal to do it?”, asked Kapoor.


What if Vodafone Idea dies?

Birla is reportedly ready to give Vodafone Idea to the Indian government

Vodafone Idea sinks nearly 10% and Airtel tumbles a bit after India’s Supreme Court denies a discount on past dues