VSNL - What a bonus!

VSNL, the monopolistic international telephony (ISDs) service provider has announced a bonus share issue of 2:1. This is the first time VSNL has ever announced such an offer to the investors. The proposal assumes significance in the light of the new telecom policy guidelines being framed to increase competition in the industry by opening up long-distance services. It is a general practice for any company to issue bonus shares when it gets huge profits. Is that so with VSNL? What are the reasons for this offer? Doesn’t it dilute the equity structure of the company?

At last, the government has decided to allow the aspiring National Long Distance Operators (NLDO) to carry intra-circle traffic and inter-circle traffic. The applicants have to pay an entry fee of Rs.100 crore (a one-time, non-refundable entry fee) and the license is valid for 20 years extended for 10 years since then. They also have to pay four refundable bank guarantees of Rs.100 crore each which shall be given back on completion of each phase subject to fulfilling the network roll out obligations. (An operator has to set up 15% of the network in the first 2 years followed by 40% in 3 years and 80% in four years and 100% by the 7th year failing which the bank guarantee would be forfeited). Apart from this, the applicant should also submit a financial bank guarantee of Rs.20 crore, one year after signing the license agreement or before commencement of the service. Also the companies have to pay 15% of their turnover - 10% contributing as revenue to the government and 5% to the Universal Obligation fund (UOF). The UOF would be used for the high cost and less remunerative rural and remote services.

The companies to enter the NLD sector need to have a combined promoter’s networth of around Rs.2,500 crore and paid up capital at Rs.250 crore. In a nutshell, the criteria for the companies to enter the NLD sector announced by the government are as under:

To go deep into the telecom business. As on today, DoT’s business is comprised of - local and intra-state services, which involve 84 per cent of the total capital required but contributes only 45 per cent to the revenues. The other two businesses are inter-state telecom and the international services, which together account for only 16 percent of the capital but contribute 55 percent to the revenues.

The long-distance service (STDs) cannot be provided unless the provider has access to the customer. This access is provided by the local service provider, who has got the link from the customer's premises to his nearest telephone exchange, and also a link from that exchange to the long-distance exchange and the transmission facility.

Coming back to VSNL’s case. The government has recently indicated that VSNL would be losing its monopoly much before its scheduled time of 2004. At this juncture, the company started thinking about its abyss future. After understanding that there would be many entrants soon into the international service sector and even into internet businesses, VSNL has set a gear to enter the domestic long-distance telephony sector.
Thus the company enters the downstream business of its operations and the operational readiness for the service is already in place. At present, VSNL has a nationwide network of routers to carry international call traffic. The software has been programmed to prevent domestic long distance calls from going through. VSNL will have to reprogram existing software to enable the calls to go through in a short period. The company is also expected to begin work on setting up a regional hub for routing international traffic in association with British Telecom.

Long-distance telephony is normally the cash cow for any telecom service provider. With 16 earth stations already in place, VSNL has the requisite infrastructure to enter this sector. Moreover VSNL is in the process of setting up a `Super Internet' based on a complex 320,000 km fibber-optic submarine cable network, scheduled to connect 175 countries through 265 landing points. VSNL (landing party) would terminate and originate traffic coming in and out of India through its own envisaged network without being dependent on DoT. Also, when the international project is completed in 2003, VSNL would benefit because the network will support voice and data transmission at super speeds ranging from 320 gbps (Giga bytes per second) to 1 terabit per second.

In August 2000, VSNL’s board of directors met almost thrice to decide about this issue. Though it was decided at 1:1 earlier, ultimately it was confirmed at 2:1 bonus issue. i.e, for every share held, 2 additional shares of VSNL would be issued. But the time of declaring the bonus shares is absolutely inappropriate. NLD business is quite lucrative and VSNL’s foray into this business makes more sense. However, the bonus issue of 2:1 dilutes the equity structure from its existing Rs.85 crore to Rs.285 crore, thus getting the eligibility of meeting the minimum paid up equity of Rs.250 crore. The authorized capital also has been increased from Rs.100 crore (divided into 10 crore shares of Rs.10 each) to Rs.300 crore. But just for the sake of meeting this target, how far the issue of bonus shares in 2:1 ratio is justified is the question the investors have to be observe.

K.Venu Babu

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