Vodafone India, formerly Vodafone Essar and Hutchison Essar, is the third largest mobile network operator in India after Airtel and Reliance Communications. It is based in Mumbai, Maharashtra and which operates nationally. It has approximately 146.84 million customers as of November 2011.
On July 2011, Vodafone Group agreed terms for the buy-out of its partner Essar from its Indian mobile phone business. The UK firm paid $5.46 billion to its Indian counterpart to take Essar out of its 33% stake in the Indian subsidiary. It will leave Vodafone owning 74% of the Indian business, while the other 26% will be owned by Indian investors, in compliance with Indian law. On 11 February, 2007, Vodafone agreed to acquire the controlling interest of 67% held by Li Ka Shing Holdings in Hutch-Essar for US$11.1 billion, pipping Reliance Communications, Hinduja Group, and Essar Group, which is the owner of the remaining 33%. The whole company was valued at USD 18.8 billion. The transaction closed on 8 May, 2007. It offers both prepaid and postpaid GSM cellular phone coverage throughout India with good presence in the metros.
Vodafone India provides 2.75G services based on 900 MHz and 1800 MHz digital GSM technology. Vodafone India launched 3G services in the country in the January-March quarter of 2011 and plans to spend up to $500 million within two years on its 3G networks
In 1992, Hutchison Whampoa and its Indian business partner – Max Group, established a company that in 1994 was awarded a licence to provide mobile telecommunications services in Bombay (now Mumbai) and launched commercial services as Hutchison Max in November 1995. In Delhi, Uttar Pradesh (East), Rajasthan and Haryana, Essar Group was the major partner. But later Hutch took the majority stake.
By the time of Hutchison Telecom’s Initial Public Offering in 2004, Hutchison Whampoa had acquired interests in six mobile telecommunications operators providing service in 13 of India’s 23 licence areas and following the completion of the acquisition of BPL Mobile that number increased to 16. In 2006, it announced the acquisition of a company (Essar Spacetel — A subsidiary of Essar Group) that held licence applications for the seven remaining licence areas.
Initially, the company grew its business in the largest wireless markets in India — in cities like Mumbai, Delhi and Kolkata. In these densely populated urban areas it was able to establish a robust network, well known brand and large distribution network – all vital to long-term success in India. Then it also targeted business users and high-end post-paid customers which helped Hutchison Essar to consistently generate a higher Average Revenue Per User (ARPU) than its competitors. By adopting this focused growth plan, it was able to establish leading positions in India’s largest markets providing the resources to expand its footprint nationwide.
In February 2007, Hutchison Telecom announced that it had entered into a binding agreement with a subsidiary of Vodafone Group Plc to sell its 67% direct and indirect equity and loan interests in Hutchison Essar Limited for a total cash consideration (before costs, expenses and interests) of approximately $11.1 billion.
Hutch was often praised for its award winning advertisements which all follow a clean, minimalist look. A recurrent theme is that its message “Hi” stands out visibly though it uses only white letters on red background. Another successful ad campaign in 2003 featured a pug named Cheeka following a boy around in unlikely places, with the tagline, “Wherever you go, our network follows.” The simple yet powerful advertisement campaigns won it many admirers. Ads featuring the pug were continued by Vodafone even after rebranding. The brand subsequently introduced ZooZoos which gained even higher popularity than was created by the Pug. Vodafone’s creative agency is O&M while Harit Nagpal was the Marketing Director during the various phases of it’s brand evolution.
1992: Hutchison Whampoa and Max Group establish Hutchison Max
2000: Acquisition of Delhi operations and entry into Calcutta (now Kolkata) and Gujarat markets through Essar acquisition
2001: Won auction for licences to operate GSM services in Karnataka, Andhra Pradesh and Chennai.
A ‘You and I’ print advertisement of Hutch featuring Cheeka (dog)
2003: Acquired AirCel Digilink (ADIL — ESSAR Subsidiary) which operated in Rajastan, Uttar Pradesh East and Haryana telecom circles and rebranded it ‘Hutch’.
2004: Launched in three additional telecom circles of India namely Punjab, Uttar Pradesh (West) and West Bengal.
2005: Acquired BPL Mobile operations in 3 circles. This left BPL with operations only in Mumbai, where it still operates under the brand ‘Loop Mobile’.
2007: Vodafone acquires a 67% stake in Hutchison Essar for $10.7 billion. The company is renamed Vodafone Essar. ‘Hutch’ is rebranded to ‘Vodafone’.
2008: Vodafone acquires the licences in remaining 7 circles and has starts its pending operations in Madhya Pradesh circle, as well as in Orissa, Assam, North East and Bihar.
2011: Vodafone Group buys out its partner Essar from its Indian mobile phone business. It paid $5.46 billion to take Essar out of its 33% stake in the Indian subsidiary. It left Vodafone owning 74% of the Indian business.
Vodafone acquires Essar’s Stake
On March 31, 2011, Vodafone Group Plc announced that it would buy an additional 33% stake in its Indian joint venture for $5 billion after partner Essar Group exercised an option to sell the holding in the mobile-phone operator. The deal will raise Vodafone’s stake to 75%. Essar will exit the company after it implemented a put option over 22% of the venture. Vodafone exercised its call option to buy an 11% stake.
In 2007, Vodafone granted options to Essar that would enable the conglomerate to sell its entire stake for $5bn, or to dispose of part of the 33 per cent shareholding at an independently appraised fair market value. In January 2011, Vodafone objected to Essar’s plans to place part of its 33% stake in India Securities, a small public company. Vodafone feared the move would give an inflated market value to Vodafone Essar. It had approached the market regulator SEBI and also filed a petition in the Madras High Court.
The final shareholding pattern post this deal was not provided by the company as it was not clear whether Vodafone’s stake would exceed the 74 per cent FDI limit. Indian laws don’t allow foreign companies to own more than 74% in a local mobile-phone operator. Vodafone has assured it will comply with local rules. Vodafone will have to sell that 1% to some Indian entity, or they’ll have to consider an initial public offering. Vodafone also said that final settlement is anticipated to be completed by November 2011. The completion of the deal would be subject to meeting certain conditions which include Reserve Bank of India’s permission as well as valuation of the deal.
Vodafone-Hutchison Tax Case
Vodafone was embroiled in a $2.5 billion tax dispute with the Indian Income Tax Department over its purchase of Hutshison Essar Telecom services in April 2007. It was being alleged by the Indian Tax authorities that the transaction involved purchase of assets of an Indian Company, and therefore the transaction, or part thereof was liable to be taxed in India.
Vodafone Group Plc. entered India in 2007 through a subsidiary based in the Netherlands, which acquired Hutchison Telecommunications International Ltd’s (HTIL) Hutchison Telecommunications International Limited stake in Hutchison Essar Ltd (HEL)—the joint venture that held and operated telecom licences in India. This Cayman Islands transaction, along with several related agreements, gave Vodafone control over 67% of HEL and extinguished Hong Kong-based Hutchison’s rights of control in India, a deal that cost the world’s largest telco $11.2 billion at the time.
The crux of the dispute had been whether or not the Indian Income Tax Department has jurisdiction over the transaction. Vodafone had maintained from the outset that it is not liable to pay tax in India, and even if tax were somehow payable, then it should be Hutchison to bear the tax liability.
In January 2012, the Indian Supreme Court passed the judgement in favor of Vodafone, saying that the Indian Income tax department had “no jurisdiction” to levy tax on overseas transaction between companies incorporated outside India.
Review petition in Supreme Court
In India, a binding decision of the Supreme Court/High Court can be reviewed in Review Petition. The parties aggrieved on any order of the Supreme Court on any apparent error can file a review petition. Taking into consideration the principle of stare decisis, courts generally do not unsettle a decision, without a strong case. This provision regarding review is an exemption to the legal principle of stare decisis.
Article 137 of the Constitution provides that subject to provisions of any law and rule made under Article 145 the Supreme Court of India has the power to review any judgement pronounced (or order made) by it. Under Supreme Court Rules, 1966 such a petition needs to be filed within 30 days from the date of judgement or order. It is also recommended that the petition should be circulated without oral arguments to the same bench of judges that delivered the judgement (or order) sought to be reviewed.
Furthermore, even after dismissal of a review petition, the SC may consider a curative petition in order to prevent abuse of its process and to cure gross miscarriage of justice.
On 17 February 2012, Govt of India moved the Supreme Court seeking a review of its verdict holding that the Indian Income Tax Department does not have jurisdiction to impose Rs.11,000 crore as tax on the overseas deal between Vodafone and Hutchison. On 20 March 2012, SC dismissed the review petition during an in-chamber proceeding saying the petition has no merit
- The Supreme Court dismissed on 20.03.2012 a government bid to review a $2.2 billion tax case won this year by British company Vodafone Group Plc , saying the petition had no merit.
After a five-year legal battle, Vodafone in January, 2012 won a Supreme Court verdict that it was not liable to pay any tax on its $11 billion acquisition of Hutchison Whampoa Ltd’s Indian mobile business, from which the government demanded a tax of $2.2 billion.
The Supreme Court ordered the government in January, 2012 to pay back to Vodafone with a 4-percent interest the money the company had deposited pending a final verdict. Last month the government filed a plea seeking a review of the verdict.
“We find no merit in the review petition. The review petition is, accordingly, dismissed,” a three-judge panel, led by Chief Justice S.H. Kapadia, said in a joint order. The same judges had ruled in favour of Vodafone in January, 2012.
However, Vodafone, the world’s biggest mobile phone carrier by revenue, still faces risks over the tax demand as India proposed in its budget retroactive changes in tax rules, prompting speculation the case could be reopened, although the government has denied it is looking to raise any fresh tax demand on Vodafone.
“This matter is closed as far as the current laws are concerned,” said Sudhir Kapadia, national tax leader at Ernst & Young. “But now if the government makes retrospective changes in tax rules through legislative intervention then it would reopen the entire issue.”
Vodafone said in a statement verdict “once again emphasises the legality and bona fides of the transaction”, adding it was looking forward to get back the 25 billion rupees it had deposited, pending a verdict.
Tough Indian Market
Vodafone is the largest overseas corporate investor in India but has come to symbolise the perils foreign firms face doing business in the country.
While its Indian unit became the country’s second-largest mobile carrier by revenue and third-largest by subscribers, Vodafone took an impairment charge of $3.6 billion in 2010 due to cut-throat competition and escalating spectrum costs.
It reached an agreement to buy out partner Essar group from their Indian joint venture, putting an end to their highly fractious relationship that had spilled over to the open.
Vodafone had argued in the tax case that Indian authorities had no right to tax the transaction between two foreign entities. Even if tax was due, the company had argued, it should be paid by the seller and not the buyer.
The Indian authorities had said the deal was liable for tax as most of the assets were in India and as per the local tax law, buyers have to withhold capital gains tax liabilities and pay them to the government.
The country’s federal budget included a proposal that, if passed by parliament, will allow India to retrospectively tax cross-border transactions in which the underlying assets are located in India. Tax professionals have said the potential law is likely to come in for challenge.
“This relief is temporary as the government has proposed retrospective amendment to the income tax law to tax this transaction,” said Hemant Joshi, Partner at Deloitte Haskins & Sells, referring to the Vodafone deal.
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