Vodafone Group Plc has agreed to pay $460 million more to acquire the 33 per cent stake held by the Essar Group in Vodafone Essar Ltd (VEL). The final agreement, signed between the two companies in Mauritius on Friday, takes the total value of the deal to $5.46 billion compared to $ 5 billion announced earlier.
As a result of this deal, Vodafone has withdrawn its application with the Authority for Advance Ruling after the Essar Group agreed to pay the withholding tax on the $5.46 billion deal.
Vodafone has therefore made a net payment of $4.58 billion to the Essar Group, after deduction of withholding tax of $0.88 billion. “While Vodafone and Essar Communications (Mauritius) Ltd continue to believe that no tax is due on this transfer, it was viewed as prudent to deduct and pay withholding tax on a without prejudice basis,” said a press statement. Essar Group has retained rights to claim a refund of the withholding tax after following due process.
This payment has no link to the $2.5 billion tax notice issued to Vodafone Plc for its transaction with Hutchison Whampoa in 2007. Vodafone Plc continues to oppose that notice and the Supreme Court is expected to hear the case filed against the Indian tax department on July 19.
The British company had separately filed an application with the AAR to check if it had to pay withholding tax on the transaction with Essar. The deal is structured in two parts. In the first tranche Vodafone has paid $3.32 billion for the 22 per cent stake in VEL held by two Essar Group subsidiaries after withholding tax of $0.88 billion. The transfer of these shares from Essar to Vodafone was completed in two tranches on 1 June 2011 and 1 July 2011.
In the second part Vodafone will pay $1.26 billion relating to the remaining 11 per cent stake in VEL held by Essar Communications Holding Ltd. This payment will be made by 15 February 2012. It is expected that 1.35 per cent of the shares in VEL will be transferred to an Indian investor to ensure Vodafone’s continued compliance with Indian foreign direct investment rules. For this Vodafone is in talks with a number of players including Mr Analjit Singh who already owns a minority stake in the mobile company.
“Further, the two companies agreed that all outstanding claims between them are terminated, and that all future claims have been renounced. The parties have also agreed to cooperate fully in seeking all regulatory approvals necessary for the completion of these transactions,” said a Vodafone press release. Essar has relinquished all of their board seats in VEL. Once the entire deal is completed, Vodafone will directly hold 74 per cent stake in the Indian venture.
The settlement puts an end to a four year long uneasy partnership between the two companies as they haveb been on opposites sides on a number of issues. It also signals the exit of another Indian promoter to exit telecom. The Ruias were among the first to take mobile service licences after the Government had opened up the sector in 1992.
Mr. Shashi Ruia, Chairman Essar Group said, “We were one of the early entrants in the telecom space in 1995 and we are really pleased that Vodafone Essar has grown to become one of the premier telecom companies in the country with over 140 million subscribers.”