On the face of it, Vodafone Idea’s (VIL) decision to convert about Rs 16,000-crore interest dues payable to the government into equity may appear to be some sort of nationalisation, for this makes the government, with 35.8 per cent stake in the telecom major, the largest equity holder. The reality, however, is entirely different. For, even though the government has become the biggest equity holder in VIL, the company remains a private entity. A company is called a public sector undertaking (PSU) or enterprise (PSE) only when government owns 51 per cent or more stake in it.
Take the case of Maruti Suzuki, which began in 1982 as a PSU with 74 per cent help by the Indian government and the rest by Japan’s Suzuki for making a ‘people’s car’. After liberalisation, it ceased to be a PSU, with the government selling part of its stake to Suzuki, both holding equal stakes in the company. The government’s 49.74 per cent equity, however, didn’t blunt the company’s competitive edge, as it remained the leading player in the auto sector throughout the 1990s.
At the time the government decided to get out of it, its stake was valued at Rs 2,158 crore. But when it finally gave up its entire stake and handed management control to Suzuki Motor Corporation in 2007, the central government eventually received Rs 5,928 crore.
In 2002, when the government decided to hand over the control to Suzuki, the company was valued at Rs 4,339 crore. Today, the company is valued at around 2.46 lakh crore. Such are the benefits of privatisation.
Similarly, the government privatised Hindustan Zinc Ltd (HZL) in 2002, by selling its 26 per cent stake to the Anil Agarwal-owned Sterlite Industries. The next year, it sold another 19 per cent shares to Sterlite. As per the reserve price set by the government, HZL was valued at about Rs 1,400 crore at that time.
The government still owns about 30 per cent equity in HZL. This, however, has not had any adverse impact on HZL’s fortunes. In fact, today HZL, India’s only integrated producer of zinc and lead, is valued at around Rs 1.4 lakh crore.
There are other examples as well. They underline the fact that while government owning minority stake in a company is not a problem, government owning a majority stake and running it is. For when a company is a PSU, it entails a lot of baggage which becomes a drag on its growth—political interference, red tape, often mutually conflicting objectives (profit versus social obligations), unionised workforce. And, excessive oversight: a PSU is subjected to monitoring by the Comptroller and Auditor General of India (CAG), the Chief Vigilance Commission (CVC), Parliament and its committees.
When decision making is so constrained, it becomes extremely difficult to run a company efficiently. The overall net profit of operating PSUs during 2019-20 stood at Rs 93,295 crore as against Rs 142,666 crore during 2018-19, showing a decrease of 34.6 per cent. This is abysmal against capital employed in all PSUs—Rs 3,116,455 crore.
The stock market seems to have been rattled by the mistaken belief that now VIL will become a PSU. On Tuesday, when the announcement of the company selling its equity to government was made, the share fell by over 20 per cent. This happened when Vodafone Idea said in a regulatory filing, “… the board of directors, at its meeting held on 10 January, 2022, has approved the conversion of the full amount of such interest related to spectrum auction instalments and AGR dues into equity. The Net Present Value (NPV) of this interest is expected to be about Rs 16,000 crore as per the company’s best estimates, subject to confirmation by the DoT.”
This development was actually the fallout of a bailout plan the government had chalked out for the debt-ridden telecom major in September last year—the plan which gave the company some breathing space, providing it an opportunity to survive the crisis which was triggered primarily by the adjusted gross revenue (AGR) dues. The promoters, Vodafone Group and Aditya Birla Group—who had earlier refused to infuse equity—have shown inclination to put their money in the company.
VIL said, “The conversion [of government debt to equity] will therefore result in dilution to all the existing shareholders of the company, including the promoters. Following conversion, it is expected that the government will hold around 35.8 per cent of the total outstanding shares of the company, and that the promoter shareholders would hold around 28.5 per cent (Vodafone Group) and around 17.8 percent (Aditya Birla Group), respectively.”
Contrary to the general perception, the conversion will help VIL reduce part of its debt which is in the region of Rs 1.9 lakh crore. This will strengthen rather than weaken the company.
The author is a freelance journalist. The views expressed in this article are those of the author and do not represent the stand of this publication.
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