'Financial markets create money out of thin air?': Uday Kotak indirectly mocks Vi's shares-for-debt strategy

Uday Kotak, the founder of Kotak Mahindra Bank, recently expressed concerns on X about a growing trend among financially troubled Indian companies: issuing shares on a preferential basis to creditors, which he compared to a magician’s sleight of hand that seemingly creates money out of thin air.

Although he did not specifically mention Vodafone Idea (Vi) or its head, Kumarmangalam Birla, Kotak’s comments seemed to subtly criticize the telecom company, which had recently issued shares worth Rs 2,458 crore to its equipment vendors, Nokia and Ericsson, to partially settle outstanding dues.

With an issue price of Rs 14.8 per share, Nokia will receive an equity stake worth Rs 1,520 crore, while Ericsson will receive equity worth Rs 938 crore. After the issue, the shareholding of Nokia and Ericsson in the company will stand at 1.5% and 0.9%, respectively.

In his post, Kotak noted that issuing equity to creditors is one strategy for debt repayment when a company faces financial challenges.

He explained that if the stock is actively traded, creditors can sell their shares on the market and recover their money from investors.

"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 the story about Peter and Paul?" 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?

— Uday Kotak (@udaykotak) June 14, 2024

It’s also important to note that Vi has previously engaged in the shares-for-debt strategy. 

As of March 31, 2024, the company's total payment obligations to the government amounted to Rs 2,03,430 crore, including deferred spectrum payments of Rs 1,33,110 crore and adjusted gross revenue liabilities of Rs 70,320 crore.