Robbing Peter to pay Paul? Uday Kotak on Vodafone Idea's deal with Nokia and Ericsson

Last evening, Vodafone Idea announced after a board meeting that it will issue preferential equity of 1.66 billion shares at Rs 14.80 per share to Finland’s Nokia and Sweden’s Ericsson, for a total of up to Rs 2,458 crore, to settle part of their pending dues.

This preferential allotment price is higher by 35% compared to the FPO price and comes with a lock-in of 6 months.

The decision has come under scrutiny because bills are being paid using equity. Shares of Vi have more than doubled in the last year, potentially giving confidence to the management and vendors for such a debt repayment pact.

Post this preferential issuance, the shareholding of Nokia and Ericsson in the company will be 1.5% and 0.9%, respectively.

"Nokia and Ericsson both have a long-term partnership with VIL, as key suppliers of network equipment, and this preferential allotment will enable VIL to clear part of their outstanding dues. It further bolsters VIL’s capex rollout for building a top quality 4G & 5G network to contribute towards India’s digital transformation," the telco said in a statement.

Vi's move to dilute equity to clear vendor dues has been typically used by startups and cash-strapped companies. It indicates a dilution of promoter holding, involves vendor taking equity risk, and also shows a strain on cash flow.

"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," Ketan Dalal, managing director, Katalyst Advisors, was quoted as being saying The Economic Times newspaper today.

"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," he said.