Vodafone Idea, India's third-largest service provider, has undoubtedly been given a reprieve, with the government acquiring a 35.8% stake in the company. However, the operator will need to clear pending dues within a four-year moratorium to limit the government's involvement.

The Indian administration finds itself sitting on Vodafone Idea's board after offering to take equity to cover interest owed on payments for spectrum and dues on adjusted gross revenue (AGR), currently postponed by the moratorium.

While the government has indicated that it doesn't want to be actively involved in the running of the service provider, this may change if Vodafone Idea is unable to repay the monies owed over the next four years.

Figure 1: Party line: With the Indian government now owning 35.8% of Vodafone Idea, will it also now control the operator?
(Source: Amlan Mathur / Alamy Stock Photo)

If this happens, the government will be able to increase its holding in the company, and emerge as its single largest stakeholder.

Then the administration would own three stressed telcos – Vodafone Idea, Bharat Sanchar Nigam Limited (BSNL) and Mahanagar Telephone Nigam Limited (MTNL).

Game of two halves

This would reduce the Indian telecom market into a duopoly, a fate it is trying hard to avoid by offering the moratorium and other equity options in the first place. Further prospective investors might be reluctant to invest in a company where the administration is a major stakeholder.

Up till now, Vodafone Group was the largest stakeholder with a 44.3% stake, while Aditya Birla Group held 27.7%. Vodafone Idea recorded a loss of INR72300 million ($971.7 mn) in the recently declared Q3 results. This breaks down now to 28.5% held by Vodafone and 17.5% by Aditya Birla.

It is now imperative for Vodafone Idea to clear liabilities of INR1590 billion ($21.31 billion), which includes spectrum and AGR dues.

According to brokerage and investment firm CSLA, the four-year moratorium helps by providing cash flow savings of INR803 billion ($10.76 billion) until FY 2025.

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This will not be enough to repay the entire amount – and the company also requires funds to acquire 5G spectrum and invest in building 5G networks.

The company needs to increase the tariff to clear debt and emerge as a competitive telco. Vodafone Idea increased rates in November 2021, which helped increase ARPU from INR109 ($1.46) in the second quarter to INR115 ($1.54) in the December quarter.

The ARPU will go up for all private telcos, including Vodafone Idea, as they upgrade 2G subscribers to 4G over the next few months. Vodafone Idea's subscriber base is declining and any dramatic tariff hike will increase the churn further.

While the government's stake provides some help, it is clearly not the ultimate solution.

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— Gagandeep Kaur, contributing editor, special to Light Reading