Uday Kotak Criticizes VIL's Move To Issue Preferential Shares To Vendors

The board of VIL approved the issuance of shares on a preferential basis, priced approximately 35 per cent higher than the company's follow-on offer price, with a mandatory six-month lock-in period.

Uday Kotak ( Image Source :X )

Veteran banker Uday Kotak criticised the practice of issuing "equity to creditors to repay their debt" one day after Vodafone Idea disclosed its plan to allocate Rs 2,458 crore in preferential equity to vendors Ericsson and Nokia as partial payment of dues.

In a post on X (formerly Twitter), without directly mentioning Vodafone Idea, Kotak wrote, “Financial markets create money out of thin air? A model for companies in financial difficulty: issue equity to creditors to repay their debt. If the stock is well traded, the creditor can sell in the market and get paid by investors. What is that story about Peter and Paul?”

The phrase ‘what is that story about Peter and Paul’ is an apparent reference to the age-old saying of robbing Peter to pay Paul.

Financial markets create money out of thin air? A model for companies in financial difficulty: issue equity to creditors to repay their debt. If the stock is well traded, the creditor can sell in the market and get paid by investors. What is that story about Peter and Paul?

— Uday Kotak (@udaykotak) June 14, 2024

Kotak's views sparked significant discussion on social media, as the post's message resonated with several internet users. “While this mechanisms don’t create physical currency, they expand the amount of spendable money in the economy, affecting liquidity, investment, and overall economic activity,” wrote one of the X users.

The statement came just a day after debt-laden telecom company Vodafone Idea announced that it would issue shares worth Rs 2,458 crore to Nokia India and Ericsson India, settling a portion of their outstanding dues. The board of Vodafone Idea Ltd (VIL) approved the issuance of shares on a preferential basis, priced approximately 35 per cent higher than the company's follow-on offer price, with a mandatory six-month lock-in period.

"The Board of Directors of Vodafone Idea Limited today approved preferential allotment of about 166 crore equity shares of face value of Rs 10 each, at an issue price of Rs 14.80 per share, for an aggregate consideration of up to Rs 2,458 crore, to two of its key vendors, Nokia Solutions and Networks India Private Limited and Ericsson India Private Limited," the telco's filing states.

The filing added, "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."

Nokia and Ericsson intend to subscribe for up to Rs 1,520 crore and Rs 938 crore, respectively, which will be finalised after the approval by VIL shareholders at the Extraordinary General Meeting scheduled for July 10, 2024.