Essar to exit joint venture for $5.46 bn; both share withholding tax burden.
Vodafone Plc and Essar have finally brought the curtains down on their acrimonious relationship by deciding to part ways amicably.
While the British company on Friday agreed to acquire the Indian group’s 33 per cent stake in Vodafone Essar for $5.46 billion (Rs 24,297 crore), both also agreed to share the burden of the withholding tax that they have agreed to pay under protest.
The withholding tax that they have to fork out is $880 million or Rs 3, 916 crore (Essar’s contribution will be $480 million or Rs 2,136 crore) for the offshore part of the deal. Vodafone, which had filed a petition in the Authority for Advance Rulings in the income tax department for a clarification whether it had to pay tax on this portion of the deal, on Friday withdrew the application.
Under the deal, which is in two parts (offshore as well as onshore,) Essar Communications (Mauritius) will sell its 22 per cent holding in Vodafone-Essar for a net payment of $3.2 billion (Rs 14,240 crore), after deduction of withholding tax of $880 million.
Indian Securities Ltd, an Essar company, will sell another 11 per cent stake which it holds in Vodafone-Essar for $1.26 billion (Rs 5,607 crore). The transaction will be completed by February 15, 2012.
Under the agreement in 2007, which was cleared in May this year, Vodafone was supposed to pay $5 billion for the 33 per cent stake. However, under the new deal, Essar has taken a hit of $480 million, which is its share of payment for the witholding tax.
In simple terms, it means the Ruias will get only $4.52 billion (Rs 20,114 crore) instead of the earlier agreed amount.
However, as part of the agreement, the money paid as withholding tax, in case of a refund, will go the Essar group and Vodafone will have no claim on it.
This again means that while the Essar group has taken a risk by sharing the withholding tax burden, it will make $5.46 billion if the government refunds the money.
Witholding tax has been a contentious issue for Vodafone as it is fighting a legal battle with the income tax authorities, which have slapped a tax claim of $2.5 billion (Rs 11,125 crore) for capital gains on its transaction with Hutchison. Vodafone had earlier bought Hutchison’s 67 per cent stake in Hutchison-Essar, which was later named Vodafone-Essar. The case is now in the Supreme Court.
In a press statement on the deal, the two partners said. “Essar will use part of the cash — $3.32 billion (Rs 14,774 crore) — to repay its loans in Essar Communications.” This company has a loan of $3.9 billion (Rs 17,355 crore), out of which some has already been paid. With this, it will become a debt-free company. However, Essar executives said they would decide later what they would do with the onshore money of $1.2 billion once it comes in 2012.
A senior Vodafone official said: “After the regulatory approval and subsequent closing of these transactions, Vodafone will own 74 per cent of Vodafone Essar directly via its subsidiaries. The remaining 26 per cent will be controlled by Indian shareholders.”
Vodafone is also talking to Analjit Singh, its current Indian partner, and some other investors to pick up a 1.5 per cent stake in the company so that it does not breach the telecom foreign direct investment cap of 74 per cent.
“We were one of the early entrants in the telecom space in 1995 and are really pleased that Vodafone Essar has grown to become one of the premier telecom companies in the country with over 140 million subscribers. We have also enjoyed an extremely successful relationship with Vodafone and we wish them all the success in the future,” said Shashi Ruia, the chairman of the Essar group.Vodafone said both the parties had agreed that all outstanding claims between them would be terminated and that all future claims had been renounced. “The parties have also agreed to co-operate fully in seeking all regulatory approvals necessary for completion of these transactions.”
