₹3,390 crore at stake for debt mutual funds in Vodafone Idea’s AGR blow

Mumbai/ New Delhi: The Supreme Court’s dismissal of pleas to review its judgement on Adjusted Gross Revenue (AGR) is not only a setback for telecom companies who have to pay the government more than ₹1 trillion in dues—now, mutual fund investors are worried about a debt default by Vodafone Idea.

The verdict means Bharti Airtel has to pay up ₹35,586 crore and Vodafone Idea half a trillion rupees by 24 January.

Although all telecom companies will take a hit from the judgement, debt-laden Vodafone Idea is likely to find it particularly tough to make the repayments, said market watchers. Bharti Airtel is perceived to be in a far stronger position to pay the amount, while Reliance Jio has to pay a relatively minuscule ₹60 crore.

Debt mutual funds have a combined exposure of ₹3,390 crore to Vodafone Idea, according to data from Rupeevest, a mutual fund distributor.

Among the asset management companies (AMCs) holding the paper, Franklin Templeton AMC has the highest exposure, but others like UTI and Nippon India also have significant investments in the company.

“If the government or Supreme Court does not grant relief, the ability of Vodafone Idea to pay its AGR dues by the 23 January, midnight looks doubtful,” said Bhavik Dand, a Mumbai-based independent financial adviser.

Franklin took a write-down on its exposure to Vodafone Idea, which led to a drop of 4-7% in its funds overnight. The AMC has also restricted inflows into the affected schemes to ₹200,000 per day to curb speculation.

Sometimes punters try to take advantage of a sharp drop in net asset value (NAV) in anticipation of a subsequent recovery.

Franklin India Ultra Short Bond Fund, Franklin India Short Term Income Plan, Franklin India Low Duration Fund, Franklin India Credit Risk Fund, Franklin India Dynamic Accrual Fund and Franklin India Income Opportunities Fund have exposures of 4-7%.

The highest fall in NAV was in Franklin Low Duration Fund at 6.87%. The AMC has taken this write-down before any official downgrade by a credit ratings agency, which would have mandatorily triggered a write-down to NAVs as per a table issued by the Association of Mutual Funds of India (Amfi).

In case of UTI, the exposure is the highest as a percentage of scheme assets in UTI Credit Risk Fund at 17.55% ( ₹254 crore).

Investors in Franklin debt schemes may not like to exit now because of the sharp decline in the value of their holdings. In case of Nippon India Mutual Fund, the exposure is in closed-end Fixed Maturity Plans, which means that investors cannot exit until maturity of the schemes.

However, they have the option of selling units to the secondary market, but liquidity tends to be very poor as very few FMP units have been traded. Investors in UTI and Aditya Birla Mutual Fund schemes have the option of exiting. However, Deepali Sen, founder, Srujan Financial Advisors LLP, cautioned against doing so.

“Investors in the affected schemes may want to continue with their investments unless they have urgent need for the money. In one AMC the mark down on the scheme has already been done.”

“The other AMCs may proactively write down their exposure on any day and, hence, you don’t know what NAV you will get. In the next year or so, the NAV might even recover,” she said.

“As a rule I do not recommend credit risk funds which assume huge risk for a few percentage points of returns,” she added. “Investors should also check the applicable exit load and tax implications before leaving.”

Vodafone Idea’s stock dropped 25% on Friday following Thursday’s ruling. But its market cap of ₹12,614 crore is a small fraction of its net debt of ₹1.02 trillion.

“With the Aditya Birla and Vodafone groups unwilling to infuse equity in Vodafone Idea, we see a strong possibility of Vodafone Idea going for bankruptcy,” Credit Suisse said in a note.

“Further, we believe there is limited scope for government help given the involvement of the Supreme Court,” it added.

The probability of relief measures being offered by the government to telecom operators struggling to pay a combined dues of ₹1 trillion appears low, analysts said.

The 14-year old tussle started when telecom operators challenged the way the department of telecommunications (DoT) calculated AGR, based on which they pay licence fees and spectrum charges. Licence and spectrum charges are calculated at 8% and 3-5% of AGR, respectively.

The 24 October court order upheld the government’s definition of AGR as all revenues of a licence holder, including those from non-core telecom operations such as rent, dividend and interest income.

This dealt a body blow to Bharti Airtel and Vodafone Idea, which were already battling cheap tariffs from Jio and large debts on their books.