What clearing vendor dues via equity means for firms

ET Intelligence Group: In a rare move by a listed company, Vodafone Idea's board in its meeting on Thursday approved the preferential allotment of equity shares at an issue price of ₹14.80 amounting to ₹2,458 crore to two of its key vendors - European equipment suppliers Nokia and Ericsson - in a bid to repay their dues. Nokia will be issued 102.7 crore equity shares worth ₹1,520 crore and representing 1.48% of the post-issue capital of Vi. Ericsson will be issued 63.3 crore equity shares worth ₹938 crore, representing 0.91% of post-issue shareholding of the company. The share price of Vi closed 2.25% lower at ₹16.07 on Thursday.

Stock market gains made by Vi's vendor ATC Telecom - the Indian arm of American Tower Corp - seem to have prompted more vendors to opt for such an arrangement of clearing their dues. This March, ATC Telecom had opted to convert convertible debentures into equity shares worth ₹1,440 crore. It offloaded these shares at a total value of ₹1,840 crore in April.

Shares of Vi have more than doubled in the past year, potentially giving confidence to the management and vendors to ink more debt repayment pacts.

Vi's move to dilute equity to clear vendor dues has been typically used by startups and cash-strapped companies. In India, it has been adopted by unlisted companies and startups. For instance, in 2016, Air India had proposed a plan to convert ₹10,000 crore worth of debt into equity through its sustainable structuring of stressed assets or S4A scheme. Food delivery company Zomato had introduced a programme where it gave equity to select restaurant partners in lieu of outstanding bills.



"The usual method of raising equity would be either a rights issue, a follow-on public offer, a preferential issue or a QIP, but vendors being issued equity is very unusual," said Ketan Dalal, managing director, Katalyst Advisors. "It would most likely be 1-2 large vendors who have a long-term relationship with the company, whose fortunes are intertwined with the company and who believe in the long-term sustainability of the company".

However, there are several issues involved in such an arrangement. "It would lead to dilution of the promoter holding and involve the vendor taking equity risk. It also indicates a cash flow strain by the issuing company. Depending on the quantum of shares issued, it would likely result in redrawing the relationship between the major shareholders, as also vis-a-vis the incoming shareholder. Additionally, the relationship of the supplier now having transformed into a shareholder would put the related party transactions under greater scrutiny," Dalal said.

Arriving at a fair valuation could also become a contentious issue in such arrangements as issuing new shares would dilute the ownership of existing shareholders.

In the case of Vi, post the equity issuance to Nokia and Ericsson promoters will hold 37.3% stake and the Government of India 23.2%. The company rolled out a follow-on public offer of ₹18,000 crore in April. Additionally, an entity from the Aditya Birla Group-one of its two promoters, made an equity infusion of ₹20.7 billion on preferential basis in May. These funds are to be used for capex and to grow the subscriber base. It becomes important for the company to clear pending vendor dues to be able to place fresh orders.

For the March quarter, the company posted a revenue of ₹10,606 crore and an Ebitda margin of 41%. Interest outgo was ₹6,247 crore and net loss at ₹7,674 crore. As of March-end, the company's total debt owed to banks and financial institutions stood at ₹4,040 crore and optionally convertible debentures at ₹160 crore.

The company is expected to incur a capex of ₹50,000-55,000 crore over the next three years for expanding 4G coverage, launching 5G services and growing the enterprise business.

Motilal Oswal Financial Services said in a recent report that the telco still has debt of ₹2.1 lakh crore with an annual instalment of ₹43,000 crore from FY26 onward.