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Situation critical: Vodafone's future in India in doubt after court ruling

The unit effectively contributes nothing to the British company’s share price, Read said after Vodafone Plc’s September quarter results were announced in London.

ET Bureau|
Updated: Nov 13, 2019, 10.48 AM IST
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Vodafone likely to liquidate Indian venture unless Govt provides relief on mobile spectrum fees
Vodafone likely to liquidate Indian venture unless Govt provides relief on mobile spectrum fees
MUMBAI: Vodafone Group chief executive Nick Read described the status of its joint venture in India as “critical” in the wake of a Supreme Court order that left the telecom company facing thousands of crores in additional statutory dues. The unit’s “carrying value” had been reduced to zero, he said, while also citing “unsupportive regulation (and) excessive taxes.”

Read said the Vodafone Group won’t infuse any further equity into Vodafone Idea Ltd (VIL), having written down the value of its joint venture with the Aditya Birla Group to zero after the Supreme Court ruling on adjusted gross revenue (AGR).

The unit effectively contributes nothing to the British company’s share price, Read said after Vodafone Plc’s September quarter results were announced in London.

“It’s a very critical situation,” Read said, when asked if it made sense for the Vodafone Group to remain in India without any government relief package for the sector.

“The government has stated its desire not to end up with a monopoly.” Vodafone has sought a waiver of interest and penalties on the dues, among other relaxations.

Ravaged by a three-year price war since the entry of Reliance Jio in late 2016, Vodafone India, once India’s No. 2 telco, was forced to merge with third-ranked Idea Cellular, an Aditya Birla Group company.

But the merger, in which the UK telco holds a 45% stake, hasn’t helped, with the new entity reporting quarterly losses of nearly Rs 5,000 crore under continuing price competition, despite a recent Rs 25,000 crore equity infusion by both parents via a rights issue.

“Financially, there’s been a heavy burden through unsupportive regulation, excessive taxes and on top of that we got the negative Supreme Court decision,” Read said, adding that India had been “a very challenging situation for a long time.”

The Supreme Court order of October 24 ruled that non-core items should be included in computing AGR. It left the telco facing over Rs 28,000 crore in additional licence fee dues, besides more than Rs 11,000 crore in spectrum usage charge dues. Vodafone Idea’s revenue in the June quarter was Rs 11,300 crore.

“Significant uncertainties exist in relation to VIL’s ability to generate the cash flow that it needs to settle, or refinance its liabilities and guarantees as they fall due, including those relating to the AGR judgement,” the Vodafone Group said in its earnings release. “VIL is seeking relief from the Indian government, including, but not limited to, granting a waiver of interest and penalties relating to the AGR judgement.”

Read said VIL also wants a twoyear delay on spectrum payments and lower licence fees and taxes.

The telecom giant said VIL was one of the main reasons it made a loss in the six months to September.

“Loss, for the financial period, of 1.9 billion Euros primarily reflects losses in relation to Vodafone Idea post an adverse judgment against the industry by the Supreme Court in India,” said the group in its statement.

Vodafone's operating loss from the India business widened to 692 million Euros in April-September from 133 million Euros in the same period last year. Vodafone India will announce its results on November 14.

Following the court ruling, its guidance now “excludes recharges from India, a drag of 0.1 billion Euro on the group’s free cash flow and Indus Towers dividends (a drag of 0.15 billion Euro on our free cash flow).” Excluding India, Vodafone Group raised its full fiscal year outlook.

The group said it had reduced the “carrying value” attributed to VIL to nil at September end, compared with over 2,802 million Euros in May. “The group’s carrying value was 1,392 million Euros at 31 March 2019 and in May 2019, the group invested 1,410 million Euros via a rights issue,” the company said.

As the group had no obligation to fund VIL’s losses, it has recognised its share of estimated VIL losses arising from both its operating activities and those in relation to the AGR judgement to an amount that is limited to the remaining carrying value of VIL, which is therefore reduced to nil.

As part of the merger pact, the two sides had agreed a mechanism for payments between the UK telco and VIL, subject to the crystallisation of certain identified contingent liabilities in relation to legal, regulatory, tax and other matters, including the AGR case, and refunds relating to Vodafone India and Idea Cellular.

Any future payments by the group to VIL as a result of this agreement will only be made after satisfaction of contractual conditions.

“Having considered the possible future developments for VIL, the group has concluded that there are significant uncertainties in relation to VIL’s ability to settle the liabilities relating to the AGR judgement and has not assessed a cash outflow under the agreement to be probable at this time,” the company said. “The group’s potential exposure under this mechanism is capped at Rs 84 billion (1.1billion Euro).”

The Vodafone Group is still involved in a decade-old Rs 20,000 crore dispute with the Indian government over withholding taxes pertaining to its acquisition of Hutchison Whampoa’s stake to enter India in 2007. The matter is under international arbitration.

Vodafone Group’s latest statements come amid speculation about the telecom giant remaining in India. The group has previously denied reports that it will exit the country. The market value of the merged unit has fallen 87% in the past 12 months.

The group also highlighted its position as a 42% owner of Indus Towers, which when sold will also bring in significant value.

“The value of the group’s 42% shareholding in Indus Towers Limited is, in part, dependent on the income generated by Indus from tower rentals to major customers, including VIL,” it said. “Any inability of these major customers to pay such amounts in the future may result in an impairment in the carrying value of the group’s investment in Indus.”

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