Vodafone Idea tumbles 21.55% on the bourses today; Here's why.

India’s third-largest telecom player in the private space today announced that its Board of Directors on January 10, 2022, has approved the conversion of the full amount of interest related to spectrum auction instalments and AGR Dues into equity.  

The decision was taken according to VI’s opting on October 18, 2021, for deferment of Spectrum Auction Instalments due up to 4 years and deferment of AGR related dues by 4 years. The deferment so exercised requires VI to convert interest that would accrue on instalment payment during the moratorium period into equity shares to be issued to the Government on a preferential basis.  

The company has estimated the net present value ( NPV) of the interest amounting to Rs 16000 crore and the price of the issue of equity shares to the Government has arrived at Rs 10 a piece.  

The relevant date for valuation of equity share for the above purpose was fixed as August 14, 2021, wherein the value arrived was below the par value, hence the issue price has been fixed at Rs 10 a piece.  

The conversion will 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% of the total outstanding shares of the company and that the promoter shareholders would hold around 28.5% (Vodafone Group) and around 17.8% (Aditya Birla Group), respectively. 

The conversion of Rs 16000 crore dues into equity means significant dilution. Moreover, the dilution will only result in deferment of dues for four years, while the overall liability will remain the same. The issue price of Rs 10 also has negatively impacted the market sentiment against Monday’s closing price of Rs 14.85, not forgetting the dilution is going to impact the float of the equity share. Market sentiment seems to largely ignore the presence of Government stake would ensure the long term survival of Vodafone Idea. 

The stock opened with a loss of nearly 10% today and was locked in the lower circuit limit. After breaking the circuit limit, shares fell further. At the time of writing, the stock was trading at Rs 11.65 with a loss of 21.55%.