Cash-strapped telco Vodafone Idea was finally thrown a lifeline late last week, but it comes at a high price.

In a stock exchange filing on Friday (PDF), Vodafone Idea (Vi) confirmed it has been instructed by the government to convert into equity the INR161.3 billion ($1.95 billion) of interest it owes on spectrum and other licence fees at the pre-agreed rate of INR10 of debt per share. When the dust settles, the government will own around 33% of Vi, making it the company’s biggest single shareholder.

The swap was originally offered as part of a telecoms relief package drawn up in 2021. Vi took up the option in January 2022, but the conversion process stalled as the government pressured parents Vodafone and Aditya Birla Group to pump more money into the company.

According to an Economic Timesreport – which didn’t cite a specific source – the government has now been assured by Vodafone and Aditya Birla Group that they remain committed to Vi, and will bring in the funds necessary to service its upcoming debt obligations, and cover the expansion of its 4G network and its 5G deployment.

Friday’s disclosure sent Vi’s shares skyward from INR6.89 to a high of INR8.57. By wiping out almost $2 billion of debt in one stroke, and by bringing in a new shareholder in the form of the government, the operator’s future is looking far more secure, which should give lenders the confidence to refinance its debt.

However, giving up a third of the company in return for $1.9 billion of debt relief seems like a high price to pay given that Vi’s liabilities totalled nearly $7.5 billion at the end of September.

The government has reiterated during the course of this saga that it has no interest in running an operator. On the one hand, it means Vi won’t have to contend with the state trying to meddle with strategy and day-to-day operations, but on the other, it has just given away a third of the company to an investor that doesn’t promise to offer much in the way of strategic insight or expertise either.

What’s more, if and when Vi becomes financially able to stand on its own two feet again, chances are the government will head for the exit, book a healthy return on its stake, and then resume its practice of imposing various levies upon it.

Vi has been struggling for years now and talk of insolvency has waxed and waned during that time. And while the telecoms relief measures seem to have prevented a collapse, the debt-to-equity conversion – which has brought in a new major shareholder, assured existing creditors they will probably get their money back, and potentially reopened the door to new sources of liquidity – bears many of the familiar hallmarks of a bankruptcy reorganisation.

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