Vodafone to invest £1 bn in 3G in India

It has not made any returns on its India investments over the last four years, thanks to a hypercompetitive market and the regulatory flux.

But British telecom company Vodafone has drawn up an ambitious plan that entails mega investments and induction of a new Indian partner or an initial public offer.

Vodafone is  looking at investing "anywhere between £500 million and £1 billion (Rs. 3,625-Rs. 7,250 crore)" in 3G services in 2011, Vittorio Colao, the 49-year-old chief executive of Vodafone Plc, said.

In India, for routine business review and meetings with Essar, its current joint venture partner in Vodafone Essar, Colao said 2011 would be a critical year for Vodafone's evolution in India.

Calling it the "junction year between phase I and phase II of Vodafone's India growth story", he said the company expects to complete the purchase of Essar's stake in its joint venture in six months.

Vodafone Essar is the joint venture between Vodafone and Essar, where the former holds 67 per cent controlling interest while Essar holds the residual 33 per cent.
Colao, a self-confessed "digital optimist", thinks the future for Vodafone looks good in India.

The contribution of data to the revenue will increase to 26-30 per cent from the current five per cent.

The company is also facilitating this growth by playing an active role in reduction of prices of 3G-enabled smartphones.

Currently, the price of smartphones is around $85 per unit (Rs. 3,791), and Vodafone is keen to bring it down to below $50 (Rs. 2,230).

It has already initiated talks with Chinese handset makers for these devices.

On the IPO plans, Colao said: "We can see a future of different ownership structure and will consider around the end of the year whether we would be listing the company. We still have Analjit Singh as local partner and will consider the listing. I do not know when the listing will take place, but it will bring in another phase of maturity into the company," said Colao.

Vodafone directly holds 42 per cent in the telecom business. The rest is held by Indian shareholders Analjit Singh and IDFC. Last year, the company took impairment on the asset value of its Indian business by $2.3 billion (Rs. 10,258 crore).

But since then, Vodafone's business has been improving in India, and in 2010, it became cash positive.

What hurts Colao, however, is even before it could make a penny of the investment, the Indian tax authorities slapped Rs. 11,218-crore case, claiming capital gains on Vodafone for its 2007 transaction.

Colao remains categorical that as a buyer of an asset, Vodafone is liable to paying no tax.

"Going after the buyer just because he is around is like slapping the wrong child to punish others. That's not a good indication of the (taxation) principle and I am hopeful the judiciary will look at it as a wrong methodology test case," he said.

Can there be a compromise with the tax man? Colao remained diplomatic, saying: "Settlement is a speculation. The moment there is a phone call from New Delhi, I will take it, if there is any."

On the strained relationship with Essar, he did not comment.

"I never publicly talk about the discussions we have with partners. There are financial angles, relationship angles and disputes," he conceded.

He said the promoters of the Essar group are good businessmen and hard negotiators.

"They are very good with money. If they had thought that the fair market value of their stake is higher than the underwritten put option value agreed to four years ago, then they would have opted for that mechanism," he said.

Last month, Essar exercised its underwritten put option for its 22 per cent stake for $3.8 billion, which Vodafone claims gives them the right to exercise the call for the residual 11 per cent as well.

The relationship between the two has strained considerably with Vodafone accusing Essar of trying to wrongfully influence the fair market value of its stake in the joint venture.

Colao emphasised he did not foresee any problem with the Reserve Bank of India while buying out Essar from the venture.

Most legal experts said, based on Indian rules, RBI may raise objections with the structuring of the call and put option as the value of the shares held by Essar in its overseas entity, Essar Communication Mauritius Ltd, is at a 50 per cent premium when compared to the value is held in the onshore entity, Essar Telecommunications Holdings.

Therefore, many expect that Vodafone may have to shell out an additional $700 million (Rs. 3,122 crore) for the share buyback.

Colao, however, said he was "not particularly concerned" about the matter and would be happy if Essar or any Indian regulator asked for a fair market valuation exercise to value the joint venture. In any case, he does not foresee the total payout to exceed $5 billion already accounted for.

Analysts say Essar may have clinched a good deal in line with the current market conditions where telecom stocks have underperformed. Many analysts would even go to the extent of saying that Essar's 33 per cent would on Tuesday fetch only $2.5 billion.

Colao has a four-pronged policy prescription - auction of spectrum, even 2G, in bulk irrespective of circles; stop discriminating between CDMA and GSM technology; let market forces trigger consolidation and do not put a cap on the number of players per circle or on their market share.

"India needs a phase of free consolidation. After which, one can have a rethink," he said.