Days after communications minister Jyotiraditya Scindia said further dues of Vodafone Idea would not be converted into equity, Bharti Airtel has sought conversion of its dues of around Rs 40,000 crore into equity under the same telecom reforms package. While the government will evaluate the merits of the proposal, it is in no position to outrightly deny the request, explains Banasree Purkayastha
Provisions under which Airtel wants equity conversion
Last week, Bharti Airtel sprung a surprise by requesting the department of telecommunications (DoT) to convert its deferred adjusted gross revenue (AGR) dues of around Rs 40,000 crore into equity, in line with the relief given to debt-ridden Vodafone Idea by the government . An equity conversion would translate into the government picking up 3-4% stake in Bharti Airtel. Analysts said that such a stake would be relatively easy to offload in the secondary market at a profit, given Airtel’s stable fundamentals and healthy stock performance.
The September 2021 telecom reforms package provided telecom operators a four-year moratorium on statutory dues like AGR and spectrum payments till the year 2021, though interest would accrue during this period. As part of it, the government also allowed telcos to convert the interest on their deferred dues into equity. While Vodafone Idea opted for both, moratorium and equity conversion, Airtel had opted only for moratorium. DoT officials have said that each equity conversion request will be assessed on a case-by-case basis, suggesting no automatic approvals.
How the government helped Vodafone Idea with its dues
In March this year, the government decided to convert Rs 36,950 crore of Vodafone Idea’s spectrum dues into equity, raising its stake from 22.6% to 48.99%. In February 2023, it had converted Rs 16,133 crore of interest dues into equity and became Vodafone Idea’s largest shareholder with 33% stake. That move was intended to signal stability and attract investors, and it was somewhat successful. A Rs 18,000-crore follow-on public offer diluted the government’s stake to 22.6%. Vodafone Idea started showing signs of revival after the fund-raise exercise, but that clearly wasn’t enough. Doubts about its long-term viability persist. The government has given a clear signal that it will not increase its stake in Vodafone Idea beyond the current 49% nor inject any fresh capital, as it does not want to turn it into a state-run entity.
How Airtel stands to benefit
Industry observers said Airtel’s move is strategically timed, especially considering the upcoming expiry of the moratorium period. Repayments on the deferred dues are scheduled to begin from September this year. If the government does agree to convert Airtel’s dues into equity, the firm would have cleared its full liability, saved on interest cost, and would be able to deploy funds for network upgradation and expansion. Airtel has already taken substantial steps to strengthen its financial position. Last month, it pre-paid Rs 5,985 crore to the government, fully settling its liabilities from the 2024 spectrum auctions. With this, its outstanding spectrum debt is Rs 52,000 crore, including the dues from 2021 and 2022 auctions. It has cumulatively pre-paid Rs 66,665 crore in spectrum liabilities as of now, significantly reducing its average interest burden.
How much does VI owe the govt?
Vodafone Idea’s total debt to the government stands at Rs 2.27 lakh crore as of Q3FY25, comprising Rs 1.57 lakh crore in spectrum dues and Rs 70,300 crore in AGR liabilities. The conversion of Rs 36,950 crore into equity is a fraction of this burden. Post-moratorium, it has to pay the government Rs 43,000 crore annually from FY28 to FY31. That would require an increase in its average revenue per user (Arpu) from Rs 163 in Q3 FY25 to over Rs 380 by FY28, a 138% hike. This is critical not only to meet these dues but also to fund a sustainable capex of Rs 10,000-15,000 crore annually. However, Vodafone Idea has been facing a shrinking subscriber base — 18% now — while Airtel and Reliance Jio’s market shares are around 34% and 40% respectively.It’s 5G rollout began only this March while its two rivals have completed theirs.
What happens now
Airtel’s request for equity conversion of its AGR dues has put the government in a quaint position. Since it has rescued Vodafone Idea twice, it would be difficult to ignore Airtel’s application. But given Airtel’s strong financial position, it can ask Airtel to offload some stake in the open market to raise funds. And if it agrees to Airtel’s request, that could open the floodgates for requests by other telecom operators like Reliance Jio. The 2021 reforms package allows telcos to convert the interest on their deferred dues (both AGR and spectrum) into equity. While Reliance Jio does not have AGR dues, it does have spectrum dues. In such a scenario, if not the letter of the reforms package, the spirit of it would certainly get violated as the government would end up having equity in every telecom firm.
Further, there is always the possibility that Vodafone Idea may again knock at the government’s doors as payment deadlines come closer. Bound by its reforms and a desire to preserve a three-player private market, the government now has to make some difficult decisions.