Promoters of Idea Cellular Ltd will invest Rs3,250 crore and the company plans to raise a similar amount to strengthen its balance sheet amid intense competition and before a planned merger with Vodafone India Ltd.

The board constituted a panel to evaluate ways to raise an additional Rs3,500 crore, a company statement said on Thursday. Following the equity infusion by Idea’s promoters, their stake in India’s third largest telecom operator will rise to 47.2% from 42.4% now. Vodafone India’s parent also plans to invest nearly Rs9,350 crore as part of the merger conditions.

The proposed capital raising by Idea, the sale of its standalone towers to American Tower Corp. and the potential sale of its 11.15% stake in Indus Towers Ltd will augment the firm’s long-term capital resources, Idea said in the statement.

The fund infusion was necessitated by the fact that Idea needed to expand its product offerings and strengthen its telecom infrastructure, said Mayuresh Joshi, a fund manager at Angel Broking Ltd.

“The competition in terms of a new entrant offering a better and a more efficient product necessitated the ramping-up of this investment. This clearly is an indication that the management is very hopeful that only a small group of players will remain," Joshi said.

The entry of Reliance Jio Infocomm Ltd in September 2016, with free services for almost seven months and cheap tariffs later, has eroded margins and impacted the revenue of rivals.

Vodafone India and Idea Cellular’s merger will potentially create the world’s second largest and India’s largest telecom firm. The merger is expected to be completed in the first half of 2018.

“At a time when the telecom industry is going through a challenging environment, this equity infusion by the group in Idea is another step towards reinforcing the group’s commitment," Idea Cellular chairman Kumar Mangalam Birla said in the statement.

Shares will be sold on a preferential basis to promoter group entities Birla TMT, Elaine Investments, Oriana Investments and Surya Kiran Investments at Rs99.50 each.

Idea’s shares rose 1.90% to Rs104.50, on a day the Sensex gained 0.52% to close at 33,969 points.

Idea said the issue is expected to be completed by early February. The proposal will need to be approved by shareholders and regulators.

As a result of the change in shareholding in Idea following the proposed capital raise, Aditya Birla Group (ABG) and Vodafone Group have agreed that ABG will buy a minimum of 2.5% of the merged entity from Vodafone, or such stake as required in order for ABG to ultimately own at least 26% of the merged entity, Vodafone said in a statement on its website.

“Consequently, Vodafone will receive minimum proceeds of Rs1,960 crore (€256 million) from such sale and Vodafone’s ownership in the combined entity is expected to be approximately 47.5% at completion," it said.

These changes to the capital structure were already contemplated in the scheme of arrangement for the merger. Vodafone’s stake in the combined entity in excess of 45.1% will not be subject to any lock-up after closing and Vodafone will be free to sell relevant shares without restrictions, the British company added.

The proceeds from this capital raise, in addition to the Rs7,850 crore of proceeds from the announced sale of Vodafone India’s and Idea’s standalone tower businesses, will be used to strengthen the balance sheet of the merged entity, Vodafone said.

According to the March agreement between Idea and Vodafone, Vodafone India’s contribution of net debt to the merged entity and Vodafone Group’s funding requirement will be dependent on Idea’s net debt at completion of the merger, as well as customary closing adjustments, but is not affected by proceeds received in relation to the announced disposals of Vodafone India’s and Idea’s standalone towers and a potential monetization of Idea’s 11.15% stake in Indus Towers, Vodafone said.

Vodafone will contribute Rs2,480 crore more net debt than Idea at the completion of the merger.