Govt weighs legal options after losing Vodafone tax arbitration case

 

The government is weighing its legal options after losing the high-profile international tax arbitration case against Vodafone as it looks to limit damages not just in this matter but also in case of a separate lawsuit with Cairn Energy goes against it.

Last month, an international arbitration court ruled that the Indian government seeking Rs 22,100 crore in taxes from telecom giant Vodafone using retrospective legislation was in "breach of the guarantee of fair and equitable treatment" guaranteed under the bilateral investment protection pact between India and the Netherlands.

Finance Ministry sources said the government will decide on challenging the award before a court in Singapore - which was the seat of the arbitration, after taking legal opinion.

While the cost implication in the case is limited to having to pay Rs 85 crore to Vodafone in legal cost, what is weighing on the government mind is a separate arbitration involving UK's Cairn Energy plc.

If a separate arbitration panel were to hold a demand for Rs 10,247 crore in taxes using the same retrospective legislation as illegal, the government will have to pay Cairn as much as USD 1.5 billion (Rs 11,000 crore).

This is the amount equivalent to the value of shares of Cairn that the government had sold to recover a part of the tax demand. It also includes the dividends and tax refund seized.

Sources said Vodafone International Holding (a Netherland company) had in February 2007 bought 100 per cent shares of Cayman Island-based company CGP Investments for USD 11.1 billion to indirectly get 67 per cent control of Hutchison Essar Ltd - an Indian company.

The Tax Department felt the deal was designed to avoid capital gain tax in India and so imposed a tax demand, which was rejected by the Supreme Court in 2012.

To stop abuse and plug theloophole of such indirect transfer of Indian assets, the government in 2012 amended the law to make such transfers taxable in India, they said adding Vodafone was slapped with a fresh demand which the firm contested through international arbitration.

The tax demand on Cairn Energy, they said, is different as it pertains to alleged capital gains the firm made on transfer of Indian assets to a new company and listing it on bourses.

Dheeraj Nair, Partner, J Sagar Associates, said the government "should challenge the (Vodafone) award since this award will have persuasive value in other treaty arbitrations which concern the retrospective tax measures".

"Any party dissatisfied with the award has a right to challenge it, therefore such challenge is justified," he said.

Sonam Chandwani, Managing Partner at KS Legal & Associates, however, said "as the Permanent Court of Arbitration situated in The Hague had passed the award in favour of Vodafone, there lies no further authority for putting up appeal".

"The government can only go back to the Permanent Court of Arbitration on some technical point, but that will not serve any purpose," she said.

Since the Indian Arbitration Act obliges the government to implement a foreign tribunal award, Vodafone can ask for the same in case the award was challenged in Indian courts, she said.

"However, in the present scenario, since all the property, both tangible and non-tangible of Vodafone, lies outside India it will be difficult for the government to procure the same," she said.

She said in the case of Cairn Energy, India in order to procure the retrospective taxes has already expropriated all their investment.

"In circumstances such as when the Permanent Court of Arbitration gives a decree in favour of Cairn, the government of India still has the option to procure the desired retrospective taxes via grounds such that taxation is not covered under any bilateral investment protection treaty and as such cannot be arbitrated. It is challenging the jurisdiction of such panels to adjudicate on a tax matter," she said.

Nair said the government certainly has the option not to appeal in Vodafone but do so in the case of Cairn as each case is independent and brought under a different treaty, which gives different protections.

Cairn's claim is under the India-UK treaty whereas Vodafone's claim was under the India-Netherlands treaty.

While Nair said there would not be any additional negative impact on investor sentiment as they recognise that challenge proceedings are part of the norm, Chandwani said appealing against an international arbitration award will disincentivise the investors.

"Any investor will start contemplating on investing in such countries as any dispute arises the government of such countries might not comply with the international order, putting the investors to losses. It creates hindrance in the ease of doing business in such countries and thus discourage them to make any investments to indulge in any form of funding," she said.

SC dismisses Vodafone's plea against levying one-time spectrum charges

The Supreme Court on Monday dismissed a petition filed by Vodafone against the levy of one-time spectrum charges (OTSC).

Senior advocate Abhishek Manu Singhvi, appearing for Vodafone, told a bench of Justice Arun Mishra and Justice MR Shah that the charges are related to the adjusted gross revenue (AGR).

"Don't pay anything... not this, not AGR. You will still not be touched," Justice Mishra said while dismissing the plea.

The Department of Telecommunications (DoT) had sought to levy a one-time spectrum charge on telecom service providers.

This comes after the telecom companies paid their AGR dues to the Central government after the apex court pulled them up for violating its earlier order and not paying the money on time.

Vodafone Idea's total AGR dues, as estimated by the DoT stand at Rs 53,038 crore, which includes Rs 24,729 crore of spectrum dues and Rs 28,309 crore as the license fee. On the other hand, Bharti Airtel's total AGR dues reportedly amount to Rs 35,586 crore.

Vodafone wants to make a new, good beginning in India: CEO Read tells govt

Vodafone Global CEO Nick Read has told the government that the company wants to make a new and good beginning in India, according to sources.

Read -- who met Finance Minister Nirmala Sitharaman and Telecom Minister Ravi Shankar Prasad separately on Friday -- sought government assistance to keep Vodafone Idea afloat, the sources added.

Sources said during his meeting, Prasad made it clear that the government is against a monopoly in the telecom sector, and wants Vodafone Idea to survive and remain invested in India.

The sources said the minister conveyed India's growing economic clout and its attractiveness to foreign investors, as also the enormous size of its market.

The minister pointed out that the company has 30 crore subscribers in India and that the telecom market presents huge opportunities.

India wants fair competition, the minister is learnt to have told the Vodafone CEO.

Sources said Read also acknowledged that the AGR issue should have been addressed long back by the company.

Relief measures for telecom firms are work in progress, government sources said, adding Vodafone Idea will have to pay at least the principal amount of its AGR dues at the earliest.

India outlook critical, seeking govt relief in various forms: Vodafone

The Vodafone Group on Wednesday said the outlook for Vodafone Idea remains critical as the firm seeks relief from the Indian government in the wake of an “adverse judgement” by the Supreme Court on the issue of adjusted gross revenue (AGR).

“In October, the Supreme Court gave an adverse judgement in [AGR] case against the industry. The outlook for Vodafone Idea remains critical,” read a statement issued by the company, which revealed its earnings in the December 2019 quarter. “Vodafone Idea is actively seeking various forms of relief from the Indian government to ensure that the rate and level of payments it makes… is sustainable and it can meet its other commitments as they fall due,” it added.

The British telecom giant said the Department of Telecommunications had in November granted a two-year spectrum moratorium. “In January, the Supreme Court rejected the review petition filed by VIL and other industry participants in relation to the AGR judgement. Both VIL and Bharti Airtel have subsequently filed modification petitions, which are expected to be heard imminently, to request the Court to order the DoT to determine a payment schedule in relation to AGR dues and other reliefs,” it said.

Vodafone revealed Wednesday that it would cost about ^200 million ($221 million) over five years to remove Chinese group Huawei’s equipment from core 5G European activities. “We have now decided, as a result of the EU (recommendations) and the UK government’s decision, to take out Huawei equipment from the core,” Vodafone CEO Nick Read said in a third quarter conference call to reporters.

“It will take around five years to implement at a cost of approximately ^200 million,” he added, stressing that the cost would mostly apply to its European activities outside of Britain. The UK government decided last month to exclude Huawei from core parts of the 5G network and also to cap its share of the market at 35 per cent, insisting that “high risk vendors” would be excluded from “sensitive” activities.

Vodafone pleads for govt relief after posting worst quarterly loss in India

After posting the worst quarterly loss in India’s corporate history, Vodafone Group Plc’s besieged local venture is appealing for urgent relief from the government to help avert a collapse.

Vodafone Idea Ltd. took a one-time charge related to a $4 billion demand from the government for overdue fees, leading to a net loss of 509 billion rupees ($7.1 billion) in the three months through September, the company reported Thursday after the market closed.

Formed by the merger of the US-based firm’s local unit with billionaire Kumar Mangalam Birla’s Idea Cellular Ltd., hasn’t reported a profit since the deal was announced in 2017.

“The company’s ability to continue as going concern is dependent on obtaining the reliefs from the government,” Vodafone Idea said in a statement late Thursday. It is “in active discussions with the government seeking financial relief,” it said.

Saddled with $14 billion of net debt, Vodafone Idea is fighting for survival after India’s top court last month ordered it to pay fees the government said were due from prior years. Vodafone Chief Executive Officer Nick Read told reporters this week in London that the situation was “critical” and unless India eases off on its demands, the venture may be headed for liquidation.

Rival Bharti Airtel Ltd. also posted a record net loss on Thursday after market hours, highlighting the financial stress of Indian operators stuck with high levels of debt while facing a price war unleashed by billionaire Mukesh Ambani’s Reliance Jio Infocomm Ltd. and more recently, the adverse court verdict on fees.

Bharti Airtel and Vodafone Idea shares gained Friday in Mumbai trading on optimism the government may provide help for the companies and as operating results showed some strength.

A government panel is considering deferring payments due by March 2021 and March 2022, an official said last month. It will also consider cutting spectrum fees and other charges, said another official, who asked not to be identified, citing disclosure rules.

Bharti Airtel’s shares rose as much as 9.1% Friday, while its 5.65% perpetual notes also advanced. The company’s “mobile performance was robust,” and grew from the preceding quarter, Saurabh Handa, an analyst with Citigroup Inc. in Mumbai wrote in a report. Vodafone Idea climbed as much as 10%, after dropping as much as 19% earlier in the day.

In its Oct. 24 verdict, the Supreme Court of India ruled in favor of the government’s method of calculating operators’ revenue, a decision that means carriers must pay about $13 billion combined -- mostly license and spectrum fees built up over years. Bharti Airtel owes $3 billion, while Reliance Jio needs to pay 130 million rupees, the least, since it has only been in business since 2016.

The finance ministry won’t back down from collecting the amount, which needs to be paid within three months as per the court order, an official with knowledge of the matter said this month.

The demands comes as Vodafone Idea and Bharti Airtel faces intense competitive pressure from Jio, which swept into the No. 1 spot by users earlier this year. The upstart controlled by Asia’s richest man barreled into India’s wireless market three years ago with free calls and cheap data, acquiring about 380 million users.

Jio’s entry drove some incumbents to bankruptcy, while others like Vodafone and Idea merged. But the pressure on earnings continued.

Bharti Airtel, whose parent counts Singapore Telecommunications Ltd. as an investor, had a net loss of 230.4 billion rupees for three months ended September, it reported Thursday. Billionaire Sunil Mittal is also one of Bharti Airtel’s biggest investors.

Losses at Bharti Airtel forced SingTel to also make such a hefty provision that it slipped into a quarterly loss for the first time.

Vodafone Idea said Thursday it took a one-time charge of 256.8 billion rupees.

‘Fragile State’

Bharti Airtel continues to engage with the government, Gopal Vittal, the company’s chief executive officer for India and South Asia operations, said in a statement.

“We are hopeful that the government will take a considerate view in this matter given the fragile state of the industry,” said Vittal.

To ease the pressure on its Indian venture’s finances, Newbury, US-based Vodafone, which owns about 45%, has said it wants a two-year delay on spectrum payments and lower license fees and taxes. It’s also called for the bandwidth fees demanded by the court to be spread over 10 years.

“If you don’t get the remedies being suggested, the situation is critical,” Vodafone CEO Read said on Nov. 12. “If you’re not a going concern, you’re moving into a liquidation scenario -- can’t get any clearer than that.”

Opt For Insolvency

Earlier, Read said Vodafone would refrain from plowing more money into India. The other venture’s other partner, Birla, won’t inject fresh equity and will opt for insolvency if the government doesn’t provide relief, the Economic Times reported Thursday, citing people it didn’t identify.

For its part, Reliance Jio has insisted its two smaller rivals can and should pay up on time.

India had a dozen independent carriers two years ago, and just three non-state operators are left standing today. The only clear winner has been Jio, which is backed by the deep pockets of Ambani’s sprawling energy-to-petrochemicals empire.

Vodafone top brass seeks 2-year moratorium on deferred spectrum payment

With the telecom sector reeling under acute financial stress, Vodafone Group Chairman Gerard Kleisterlee and CEO Nick Read on Monday met Telecom Secretary Anshu Prakash, as the company sought a two-year moratorium on deferred spectrum payments, and other relief measures.

Vodafone Group officials also met Commerce and Industry Minister Piyush Goyal during the day.

Speaking to reporters after a meeting with the telecom secretary, Kleisterlee said the British telecom giant -- which is invested in the Indian telecom services market through Vodafone Idea -- had "good discussions as always" with the government.

Asked about the speculations in the market that the company may not remain a long-term investor in India given the sectoral stress, Read asserted, "We are absolutely focused on the successful integration of our business between Vodafone and Idea."

Industry sources told PTI that demand for two-year moratorium on payment of spectrum bought in the past auctions, as well as the long-standing issue of GST input tax credit locked up with the government, also figured during the discussions on Monday.

The telecom sector has been battered by falling tariffs, eroding profitability, and mounting debt, in the face of stiff competition triggered by disruptive offerings of Reliance Jio, owned by Mukesh Ambani.

The industry has been seeking urgent relief measures for the troubled sector, entailing cut in levies like licence fee and spectrum charges, and release of GST input tax credit locked up with the government.

Billionaire Kumar Mangalam Birla, head of Vodafone Idea, had sent an SOS to the government earlier also for deferring statutory payments in a sector that was not generating enough cash to even service loans. Vodafone Idea has been seeking two-year moratorium on its annual spectrum payment citing debt and stress on balance sheet.

Vodafone and Idea participated in five spectrum auctions in 2010, 2012, 2014, 2015 and 2016 before merging their businesses in August 2018. In the auctions, Vodafone acquired spectrum worth Rs 79,343 crore: the highest in terms of value compared to bids made by other operators. Idea purchased spectrum worth Rs 63,597 crore in the auctions.

Industry observers note that Vodafone Idea has also lost substantial ground in the market over the past one year. The merger of the India unit of Vodafone Group and Idea Cellular was completed on August 31, 2018, and shares of Vodafone Idea that hovered at almost Rs 31 apiece on September 3, 2018, are now down at Rs 6.16 apiece (On Monday it ended 9.03 per cent higher than Friday's close).

Vodafone Idea's consolidated losses for the June 2019 quarter stood at Rs 4,873.9 crore.

Adding to its woes, the telecom department's apex decision-making body, Digital Communications Commission recently approved imposing a cumulative penalty of Rs 3,050 crore on Bharti Airtel and Vodafone Idea for not providing sufficient points of interconnection to Reliance Jio at the time of launch of services in 2016.

The penalty on Airtel and Vodafone worked out to be about Rs 1,050 crore each. In the case of Idea, it comes to about Rs 950 crore.

Amid intense competition in the telecom sector eroding market share and subscriber base of the company, Vodafone Idea, in August this year, announced that its CEO Balesh Sharma has stepped down due to "personal reasons". The company had accepted Sharma's resignation and replaced him with the representative of Vodafone Group, Ravinder Takkar.

Ravinder Takkar to take over Balesh Sharma as CEO of Vodafone Idea

The Board of merged telecom operator Vodafone Idea on Monday announced that it had accepted Balesh Sharma’s request to step down as chief executive officer (CEO) of Vodafone Idea for personal reasons.

Ravinder Takkar, currently Vodafone Group’s representative in India, will be appointed as his successor with immediate effect. Over the past one year, Vodafone Idea has continued to be plagued by rapidly falling stock prices, dropping from Rs 32 same time last year to Rs 5.99 on the BSE when markets closed on Monday.

Sharma will be taking up a new role with Vodafone Group, which will be announced later. He has been the CEO of Vodafone Idea since the completion of the merger of the two telcos in August 2018. Prior to that, he was the chief operating officer of Vodafone India. He has also overseen the successful integration of Vodafone Idea, resulting in the estimated timescale to complete the integration process.

Sharma has driven the strategy of the combined business since its formation and has also spearheaded the largest-ever equity raise in India.

Vodafone Idea has lately received considerable flak for failing to turn around the minimum recharge strategy that was introduced by both Vodafone Idea and Bharti Airtel around the same time last year. Airtel tapped the opportunity to improve average revenue per user and reduce subscriber churn, unlike Vodafone Idea.

Ravinder Takkar, an experienced global executive, is currently a Board member of Vodafone Idea and Indus Towers where he is responsible for all Vodafone Group interests in India, a role that he took on in 2017. Before that, Ravinder was the CEO of Vodafone Romania for three years and CEO of Vodafone Partner Markets in London. He has been with Vodafone Group since 1994 and brings a wealth of experience in the telecom industry having worked in several leadership positions across Vodafone’s operating companies over the past 25 years.

Ravinder has been involved in the Indian telecom industry since 2007 when Vodafone Group entered the Indian market. He has held a number of senior roles in strategy and business development and was the CEO of the enterprise business.