Vodafone Idea hogged all the news early yesterday because before markets opened, the company announced they'll be converting part of the debt they owe to the government into equity.
The stock fell more than 20% on this news because of the huge dilution shareholders will face.
As part of the rescue deal offered by the government to telecom companies, they were offered a 4 year moratorium period for repaying their spectrum and AGR dues to the government. After 4 years, the telcos would have the option to convert the interest amount into equity and thus give the government a share in the company.
And that's what Vodafone Idea has opted for. The interest amount owed to the government is Rs 16,000 crores, and shares of VI worth that much will now be issued to the gov.
This will make the government the largest shareholder in the company with a ~36% stake. Existing shareholders will thus be diluted, and this includes the Vodafone Group as well as the Birlas.
Shares to be issued to the government were priced at Rs 10 each, and seeing this the stock price also came tumbling down from ~Rs15 to close at 11.85.
Even after doing all this, VI still has a lot of liabilities. The principal amount to be paid for AGR dues + spectrum dues to the government is over Rs 1.70 lakh crores!
The other telecom company to opt for the same offer has been Tata Teleservices. They have chosen to convert Rs 850 crores of interest payable into equity, thus giving the government a 9.5% stake in their company.
Now whether this is good or bad for the telecom sector, only time will tell.
On one hand, we can see the results of the government running a telecom company by looking at the state of BSNL and MTNL (it's not good).
On the other hand, some experts are saying that this might be better from a regulation/policy perspective since now the government's money is at stake and so they could bring an end to the ultra-low prices we've seen over the past few years, which have arguably caused this mess.