Vod an Idea!

Vodafone's troubles in India don't look like they're ending soon

Batata is the Portuguese word for potato. The Portuguese were responsible for bringing the potato into India from the New World, so some Indian languages also used the word “Batata” for potato. One of these languages is Marathi, spoken in Mumbai, India’s financial capital that is situated on the West Coast.

One popular Mumbai snack consists of making potato mash, coating it in batter and frying. The snack is called Batata Vada.

BATATA is also the name by which one of India’s earliest telecom service providers was known. It was a collaboration between the Aditya Birla group, Tata Sons (both legendary Indian conglomerates) and AT&T. Now you might appreciate the acronym.

In 2002, the name was formally changed to Idea Telecom. This line from a 2002 article describing the name change might sound interesting:

According to analyst estimates, India will have 100 million cellular phone users by 2010. "In 2010, one in every six Indians between the age 6 and 60 will have a mobile phone. It will soon overtake landline telephony and right now is the fastest growing sector in the country," says Sanjeev Agha, President and CEO, Idea Cellular.

There were about 750 million cellular connections in India in 2010. Now there are more than a billion.

In 2004, AT&T sold its stake in Idea. In 2006, the Tata group also exited the venture, selling their shares to the Aditya Birla Group. In March 2007, Idea went public.

In 2008, the Indian income tax department sent a notice to AT&T, asking them to file returns in India on account of the money they made from the sale of their stake in Idea.

Around the same time that Idea went public, Vodafone entered India in a major way, acquiring a 67% stake in Hutchison Essar, at an enterprise value of $19 billion. The seller was Hong Kong based Li Ka-Shing’s Hutchison Telecom. Hutchison Essar, operating under the brand name Hutch, was among India’s biggest telecom operators at the time of the deal. It was soon rebranded as “Vodafone Essar”, and Vodafone bought out Essar in 2011.

Vodafone’s purchase of Hutch was a complex deal, involving both call and put options, and registered in the Cayman Islands for tax purposes. However, the Indian tax authorities decided to demand capital gains taxes anyway, demanding ₹220 billion (about $5 billion going by 2007 exchange rates), even amending some laws in 2012 to support this tax demand.

[Vodafone] decided to take the roundabout route; its subsidiary exchanged cash for shares with a similar holding company for Hutchison Essar, in far off Cayman Islands. Having sewn up the deal entirely offshore, where the Indian tax authorities had no say, Vodafone then proceeded to make Zoozoo advertisements .

The deal started a ‘wherever you go, we will follow’ saga of the IT department chasing the company. The Supreme Court ruled in 2012 that Vodafone’s actions were “within the four corners of law” .

It also advised Indian taxmen to “look at” the transaction instead of “looking through” it to attribute motives to the deal. What the Indian government saw however was over ₹20,000 crore in unpaid taxes, interest and penalty slipping out of its hands.

The dispute continues.

As if all this troubled history in terms of mergers and acquisitions and tax disputes wasn’t complex enough, in 2018, Vodafone and Idea merged to form India’s largest telecom company. Vodafone was the largest shareholder in this merged entity, followed by the Aditya Birla Group.

The merger took place in the middle of a massive price war launched by Reliance Jio (which has been in the news recently for lining up investor after investor), which launched operations in 2016.

The merger, like many other mergers between massive companies, didn’t go well. Between September 2018, when the merger was finalised, and November 2019, the merged entity lost one-fourth of the 400 million plus users it had at the time of merger.

As if the tax troubles faced earlier by AT&T and Vodafone were not enough, Voda-Idea was hit with a fresh claim in October 2019, with the Supreme Court of India demanding it pay up ₹400 billion (around $6 billion) as license fee and spectrum usage charges.

The Hindu Business Line gives a good account of AGR (Adjusted Gross Revenues), and the dispute between the telecom operators and the government:

[…] the government in 1999 gave an option to the licensees to migrate to the revenue sharing fee model.

[…] mobile telephone operators were required to share a percentage of their AGR with the government as annual license fee (LF) and spectrum usage charges (SUC).

[…] The LF and SUC were set at 8 per cent and between 3-5 per cent of AGR respectively, based on the agreement.

The dispute between DoT and the mobile operators was mainly on the definition of AGR. The DoT argued that AGR includes all revenues (before discounts) from both telecom and non-telecom services. The companies claimed that AGR should comprise just the revenue accrued from core services and not dividend, interest income or profit on sale of any investment or fixed assets.

The matter was under litigation between 2005 and 2019, ending with the Supreme Court judgment in 2019 that stipulated that AGR referred to total revenue, and not just revenues from core services. This demand put Voda-Idea, already reeling from Jio’s price war and loss of subscribers, in a rather tough spot.

In November 2019, Vodafone CEO Nick Read stated that the Indian venture was on the verge of collapse thanks to this fee demand.

Vodafone, which owns 45% of Vodafone Idea, wants a two-year delay on spectrum payments and lower license fees and taxes. It’s also calling for the spectrum payments demanded by the court to be spread over 10 years and is asking for a waiver on interest and penalties.

Read and Vodafone Chairman Gerard Kleisterlee met Indian government officials in September and set out the relief proposals, arguing that Vodafone was the largest foreign direct investor in the country. A government committee is considering the request and Read said he expects to hear more in the coming weeks.

The matter is ongoing. In May, Vodafone decided to value its India investments at zero thanks to the losses and the fee demands.

British telecom giant Vodafone PLC, which owns a majority stake in Vodafone Idea, blamed its share of losses related to its Indian arm on the adverse legal judgements by the Supreme Court, and decided to value its Vodafone Idea shares at zero.

Besides, the British operator said it would have an additional potential exposure of Rs 8,400 crore for the contingent liabilities of the Indian telecom company.

Then, later in May came the news that Google might buy a 5% stake in Vodafone-Idea. We had written about it a few days back, in the context of Facebook’s investment in Jio and Amazon’s rumoured investment in Airtel.

Vodafone Idea’s stock price recovered marginally following that announcement. However, this two year price chart should put things in perspective.

The story is not over yet. Last week, the Supreme Court directed telecom companies to submit their last 10 years’ of financials, in view of calculating their fees payable. Nobody knows where this will lead.

Given the extraordinary stream of bad luck that has hit Vodafone in India, both before and after the merger, one wonders if some numerology might have helped. What if they had named the merged entity Batata Voda? :)