Vodafone to buy out stakeholders to fully own India unit

Vodafone won cabinet’s approval to buy 11% stake from Piramal Enterprises and Analjit Singh to own 100% of its India subsidiary

 

Vodafone, which entered India in 2007 by buying Hutchison Whampoa’s local cellular assets in a $11 billion transaction, directly and indirectly owns 84.5% of Vodafone India. Photo: Mint

Mumbai/New Delhi: Vodafone Group Plc received the approval of India’s cabinet to buy out minority shareholders in its Indian unit for Rs.10,141 crore as it seeks to tighten control over the venture.

Vodafone will buy about 11% in Vodafone India Ltd from Piramal Enterprises Ltd and businessman Analjit Singh to fully own the local unit, the government said on Thursday. Vodafone, which entered India in 2007 by buying Hutchison Whampoa’s local cellular assets in a $11 billion transaction, directly and indirectly owns 84.5% of Vodafone India, the nation’s second largest telecom service provider.

The transaction was approved by the Foreign Investment Promotion Board (FIPB) in December, but needed a final clearance from the cabinet. Vodafone Group had sought approval to raise its holding in the local unit to 100% after the government allowed foreign entities to fully own telecom companies in July.

Vodafone Group is counting on growth in Asia and Africa to offset a decline in revenue in Europe. Data usage in India, the company’s biggest market by number of subscribers, more than doubled as customers used their phones to access the Internet. The company’s India revenue grew 13% to €937 million in the December quarter.

“India is becoming one of our top four companies; it will be very quickly one of our top two,” chief executive Vittorio Colao told reporters on Thursday after reporting the company’s earnings. “We, of course, would be very keen to enhance the value of the Indian market.”

In the December quarter, Vodafone India’s mobile customers increased by 4.9 million to 160.4 million, an increase of 8.8% from a year ago. Data usage grew 117%, primarily due to a 38% increase in mobile Internet users and a 65% increase in usage per customer. As on 31 December, India had 45.7 million active data customers, including 5.2 million 3G subscribers.

Vodafone faces several challenges in India, including a series of tax disputes with the government.

The Bombay high court on Thursday directed the income tax appellate tribunal (ITAT) to hear a Rs.8,500-crore transfer-pricing tax dispute relating to the Indian unit of Vodafone Group from 21 February on a daily basis till a final order is passed.

The high court was hearing an appeal filed by the income-tax department challenging an interim ITAT order, which stayed a Rs.3,700 crore tax demand raised on Vodafone India Services Pvt. Ltd.

The high court has directed both Vodafone India and the tax authority to not seek any adjournments. This tax dispute, which is the first of the three transfer-pricing cases pending in the court, relates to a Rs.8,500-crore adjustment made by the income-tax department on Vodafone India.

Transfer pricing is the practice of arm’s length pricing for transactions between group companies based in different countries to ensure that a fair price—one that would have been charged to an unrelated party—is levied.

While ITAT stayed the tax demand in December for six months or till the plea is decided, it directed Vodafone India to deposit Rs.200 crore by 15 February. Vodafone India has also been told to provide corporate guarantees of Rs.3,500 crore. Following the ITAT order, the tax authority filed a rectification plea on 31 January asking the tribunal to lift the stay order.

The high court will now hear the income tax department’s original appeal after ITAT passes an order on the rectification petition filed by the tax department.

On Thursday, K. Setalvad, additional solicitor general representing the tax authority, said the “IT department has a substantial case against Vodafone India. The company should be asked to deposit at least Rs.540 crore till the case is decided”.

Vodafone India has so far deposited Rs.200 crore as per the ITAT order, said Harish Salve, a lawyer representing Vodafone India.

In February 2012, Vodafone challenged the jurisdiction of the income tax department in issuing a draft transfer pricing order that sought to add Rs.8,500 crore to its taxable income.

The tax authority’s draft transfer pricing order, issued in December 2011, relates to selling of Vodafone’s call centre business to an offshore entity.

The purchase by Vodafone International Holdings BV, a Dutch unit of the British telecom firm, of the Indian business operations of Hutchison Telecommunications International Ltd through the sale of a Cayman Islands-based firm called CGP Investments Ltd, a unit of Hutchison, in a $11 billion deal in 2007 is also embroiled in a tax dispute. The Indian tax department estimated the company’s liability at around Rs.11,000 crore for not withholding a part of the amount as tax while paying Hutchison.

In 2012, the Supreme Court ruled in favour of Vodafone and held that the deal was not taxable in India. To counter this, the government introduced a retrospective amendment to law to bring such indirect transfers of shares under the tax net. It also introduced a validation clause that effectively made Vodafone liable to pay tax in India, sparking protests from investors.

Vodafone and the government are in talks to settle the case.

Rahul Kumar

PGDM 1ST YEAR