This topic of “Government Shareholding in Vodafone Idea” is important from the perspective of the UPSC IAS Examination, which falls under General Studies Portion.
- The telecom sector has been facing adverse circumstances as a consequence of policy action and also inaction.
- The beginning of this decline can be traced back to 2016 when the tariff wars started. This was compounded by the verdict in the AGR case.
- To address the sector’s mounting financial stress, the government announced a series of measures in 2021. Among these measures is a 4 year moratorium on spectrum and AGR dues. Another key highlight of the measures is the option of converting the interest on deferred liabilities into equity.
- Recently, Vodafone Idea decided to opt for this option to convert its interest obligations (valued at 16,000 crore INR) into equity.
What does this move mean?
- This means that the government would acquire a 35.8% stake in Vodafone Idea and would become the largest shareholder of the company.
- As a consequence, the Indian government would own stakes in several telecom operators in the country- a unique position similar to that of the Chinese government.
- It also means that the shareholding of Vodafone Group would be diluted to 28.5% and that of Aditya Birla Group would be diluted to 17.8%.
- This choice by Vodafone Idea suggests that the promoters’ efforts to bring in strategic investors or to raise funds haven’t yielded results.
Why is government stakeholding being criticized?
- When a company is converted into a state-owned enterprise, a lot of factors create a drag on its growth, such as red tapism, political interference, mutually conflicting objectives like profit and social obligations, unionized workforce, etc.
- A PSU is subjected to excessive oversight i.e., monitoring by the CAG, CVC, the Parliament and its various committees.
- Decision making becomes a constrained affair and the company’s everyday management becomes inefficient. As a consequence, the profits are bound to take a beating. Eg: the overall net profit of operating PSUs declined 34.6% between 2018-19 and 2019-20.
- It is ironical for the government to acquire stakes in a private telecom company, especially when the government has been reiterating its intention to divest its stakes in public sector units. Eg: the recent announcement of a major privatization move by selling Air India to Tata Sons
- Government stakeholding in Vodafone Idea translates into the same type of limitations faced by other public sector telecom companies like BSNL and MTNL, at an operational level.
- There are implications for healthy competition in the telecom sector and also implications for consumers.
- This move will ease the company’s cash flow issues but Vodafone Idea is expected to face other challenges going forward, such as raising funds for spectrum acquisition during the upcoming 5G spectrum auctions. There is a concern that this move may hinder capital raising.
- Investor sentiments can be gauged from how the shares of Vodafone Idea fell 20.8% in reaction to the recent announcement about the decision to opt for the conversion option.
Why is this not a bad idea?
- Though the government is set to become the biggest shareholder in the company, Vodafone Idea would remain a private entity. A company is considered as a PSU/ PSE only when the state owns a 51% stake (or more) in it.
- Consider the case of Maruti Suzuki:
- It started as a PSU in 1982. The Indian government held a 74% stake in it and Suzuki (Japan) held the rest.
- Following liberalization, the government sold a part of its stakes to Suzuki. This led to both entities holding equal stakes in the company.
- The government’s 49.74% equity did not blunt the competitive edge of the company for it remained a leading player in the automobile sector throughout the 1990s.
- By the time the government decided to hand over the controls to Suzuki in 2002, the company was values at 4,339 crore INR. Today, it is valued at 2.46 lakh crore.
- Consider the case of Hindustan Zinc Ltd. (HZL):
- HZL was privatized in 2002 with the government’s sale of its 26% stake to Sterlite Industries.
- The government sold another 19% to Sterlite in 2003. At that time, HZL was valued at 1,400 crore INR, as per the reserve price set by the government.
- The government continues to own some 30% equity in HZL. Yet, there hasn’t been any adverse impact on the company’s fortunes.
- Today, HZL is the country’s only integrated producer of lead and zinc. It is valued at 1.4 lakh crore INR.
- These and several other examples show that government owning a minority stake in a company isn’t a problem.
- The conversion will help the company reduce its debt burden in the region of 1.9 lakh crore INR. This is expected to strengthen the company.
The government has been treating the telecom sector as a cash-cow and using it for much-needed cash. There are concerns that the sequence of adverse events, since 2016, have irreversibly crippled the goose that laid golden eggs. The government taking commanding stake in VIL is expected to have further significant implications for competition in the sector.