The telecom sector of India is under constant scrutiny since the last 3 years. The inception of JIO into the telecom industry has shaken the entire working method of the telecom industry. Since then there have been multi0le exits from various telecom service providers from India and there are just 3 major companies left now. JIO, Airtel and Vodafone Idea. These companies have been serving the Indian people with telecom services and that too under a lot of stress. Vodafone Idea is one of the most stressed companies. The company has suffered many blows due to customer loss happening from JIO’s penetration.
Above this the AGR Dues have been bleeding the company’s chances for staying up float. There have been multiple events when VI has missed the deadlines for interest payment. This has happened due to lack of new investments into the company and higher interest payment leading to lack of liquidity.
To get rid of the high amount of AGR dues and spectrum instalments the company offered the Government to buy equity stake in place of the dues. This will not only reduce the loan amount but also benefit the company in terms of low interest payments. However the share prices of the company dropped due to multiple reasons.
Reasons for a Dip in Share price of Vodafone Idea
The share prices of the company opened at 13.40 Rs flat and then made a high for 13.60 Rs. Later on the company’s share price started draining off and ended at 11.75 Rs per share. The low created for the day was 11.40 Rs. However the move is a positive sign for the company but the effect can be more dreadful as the shares issued to the government are at a face value of 10 Rs per share. Hence all the shares are issued to the government informing of equity at 10 Rs per share. The stake of the government in the company would be approximately 35.8%. This will have a direct effect on the promoter’s stake in the company.
The equity stake offer also leaves the holding companies with a loss in stake holding. The Aditya Birla Group previously had 18.48% stake in the company. This would come down to 17.8%. Also the share of Vodafone in the company would come down to 28.5%. The move has directly given majority in hands of the government authorities and this means that Vodafone Idea can be considered as a government company hypothetically.
Another major reason for the share price drop is the fear of change in working patterns. Also the fear of the government system getting applied inside the company’s management. The latency in the government’s way of working may result in heavy losses for the firm as seen in BSNL business. Basically the government of India till date has failed to run any telecom company. Thus the fear of Vodafone Idea getting out of business is another major reason.
Advantages of the Stake Sale
The direct advantage noticed in the procedure is no AGR dues for the company and no outstanding high interest payments. Also the government believes that once the loan issue goes away the company can become sufficient to pull in new investments. This will open up areas of expansion for it.
On the other hand the government intervention into the telecom segment can get a price stable atmosphere as well. This would result in no exploitation towards customers even in the case of three major companies in the field. Also for stakeholders it is a good deal as the long term future of the company can be seen secure if the management remains independent of government working procedure intervention.
The Tata group has been the winner of 2021 with maximum returns in every company without any breach of law. Tata Teleservices is among one of the highest return givers of the year with more than 3000% return till date in the last 1 year. The share went from 8.35 Rs to 290 Rs in just 1 year. Like Vodafone Idea this company also has a high amount of outstanding AGR dues to be paid to the government.
It is also opting to sell its stake of AGR Dues (by conversion of equal amounts of dues into equity) to the government. Hence a heavy plunge can be noticed in the firm. Due to the huge bull rally the company can suffer a heavy bloodshed given its government equity decision.
However there is no assumption applicable into stock markets as the entire story remains in hands of shareholder’s demand and supply equilibrium. This is definitely a good move for the company to get rid of the internet payments. On the other hand has multiple obstacles in its way of progress given the government intervention. The results will be visible in the opening market of 12th Jan, 2021. The sale is equivalent to 9.5% stake of the company.