Tax liability, IPO next on Vodafone agenda

Having broken up with the Essar conglomerate — a relationship that was souring fast — British telecommunications firm Vodafone Group Plc is now ready to reap the returns of a slowly improving Indian telecom sector, one of the fastest growing in the world.
The fortunes of India’s highly competitive telecom sector is in the throes of a turnaround, but Vodafone which runs the third largest mobile telephony firm in India, has its own share of troubles so sort out.

Although not very difficult to solve, of immediate concern for Vodafone is complying with Indian foreign direct investment regulations that caps foreign partner’s equity holding at 74%. The proposed transaction would push Vodafone’s holding to 75.4%, tad above the permitted limit.

“Analjit Singh and IDFC together hold about 24.6% equity in our Indian operations,” said Simon Gordon a London-based Vodafone Group spokesperson. “So either one of the existing Indian investors could absorb the additional equity or we will find a new investor before the transaction is completed by November.”

Among other near term concerns include the tax liability on the $5billion Essar transaction, part of which is being done between overseas entity reminiscent of the original 2007 transaction that brought Vodafone to India and is now being debated in India’s highest court.

Of the 33% equity holding that Vodafone intends to buy back from its Indian partner Essar, only about 11% is held by resident entities while the remaining two third is held by non-resident entities believed to be based in tax haven Mauritius.
Vodafone believes there

is no tax liability on that part of the transaction. Vodfaone has and and still holds a similar position regarding the $11 billion transaction in 2007 when it entered India by buying 67% ownership in Hutchinson Essar.

Indian tax authorities are demanding nearly $3 billion in taxes and the matter is pending at India Supreme Court.
To its credit, Vodafone has approached India’s Authority for Advance Rulings under the ministry of finance which can give binding rulings on tax liability of proposed transactions.

“Typically at least six months are taken for an application to be processed and for the authority to give a ruling,” said Ravishankar Raghavan, principal, tax group at corporate law firm Majmudar & Co. “But given the binding nature of its rulings, it is highly desirable in transaction of such nature to approach them to avoid uncertainties in the future.”

If the transaction is deemed taxable, Raghavan estimates the liability to be as much as 10.5% of $3.8billion valuation of the 22% equity held by Essar’s offshore subsidiary.

On the brighter side, Vodafone Group is considering initial public offering (IPO) to raise capital from Indian stock exchanges by listing the Indian operations here.

“We are not able to provide details of how soon we may opt for an IPO but market conditions would definitely be a big factor,” Gordon said.
Market conditions, telecom sector analysts say, may take more time to be more conducive.

“While telecom sector is beginning to turn positive after the tariff war and new streams of revenue expected to flow from new data services using 3G technology, it is still likely to take at least a year or so for the new revenue model to mature and the market to recognise it,” said an analyst with a domestic brokerage who did not want to be named as he does not track Vodafone. “But operationally, the key performance indicators of Vodafone are second only to Bharti Airtel and the company is set to benefit in the medium term.”