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Indian business may need restructuring

Indian business may need restructuring
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First Published: Fri, Aug 14 2009. 11 34 PM IST
Updated: Fri, Aug 14 2009. 11 34 PM IST
New Delhi: The merger of India’s Bharti Airtel Ltd and South Africa’s MTN Group—if and when it happens—will end up being more complicated than everyone expects it to be.
That’s because Bharti Airtel will have to restructure its operations in India once (and if) it signs the deal to eventually merge with Johannesburg-based MTN so as to separate its Indian operations from the global entity. This is necessary if it wants to avoid paying licence fees on the merged company’s global revenues, say two senior government officials who did not want to be identified.
Executives at Bharti declined comment on the issue.
On 25 May, the Sunil Mittal-promoted Bharti Airtel and MTN announced that they had restarted negotiations that could lead to an eventual merger. If a merger does happen, the resulting entity would become the third largest telco in the world, after Vodafone Group Plc. and China Mobile Ltd, with nearly 200 million subscribers and $20 billion (Rs96,600 crore) in revenues.
The deal entails a highly complex share swap and cash transaction. If and when a merger happens, the merged entity will have to restructure its India-based telecom business and bring this under an Indian entity.
To be sure, others, notably Vodafone Group, have done the same thing before.
“They would have to restructure their India-based telecom services and have an Indian entity much like Vodafone has in India,” said a senior government official, who spoke on condition of anonymity because he is not authorized to speak to the media.
“That will not be difficult for them to do. They would have already taken this into account before going into discussions of the deal,” he added. “The difference is that Vodafone bought into India, whereas in this case, it is Bharti that is going into another country. It (Bharti-MTN) is exactly reverse of the Vodafone case.”
The Vodafone case is actually simpler. In May 2007, Vodafone acquired the 67% stake Hutchison Telecommunications International Ltd held in Hutchison Essar Ltd. Subsequently, the firm was renamed Vodafone Essar Ltd. It is this firm that pays the revenue share, according to the same official.
It will not be difficult for Bharti to form a subsidiary and transfer the Indian telecom business to this subsidiary, said Girish Vanvari, who heads the mergers and acquisitions and tax practice at audit and consulting firm KPMG. But he is apprehensive of the implications of the move. “Holding companies do not enjoy best valuations.”
The transfer of licences to a subsidiary will require several approvals, including those from the department of telecommunications (DoT) and Indian courts, according to a second Indian government official who, too, did not want to be identified.
According to DoT, all revenues of a telco, including service tax and interconnection charges, have to be factored into the adjusted gross revenue (AGR). Under Indian law, telcos are given licences and radio waves in return for a revenue share calculated on the basis of AGR.
India’s telcos pay between 6% and 10% of AGR to the government, depending on the service areas in which they operate. They also pay between 2% and 5% of AGR as spectrum fee. Last fiscal year, Bharti Airtel paid a total of Rs3,582.17 crore as spectrum and licence fee, up 38.6% from Rs2,583.82 crore in 2007-08.
The transfer of the Indian licences to a subsidiary could also raise other issues, said KPMG’s Vanvari. “There will also be the fact that certain tax holidays that can be availed by the telecom operators are not allowed to be transferred.”
Bharti and MTN have given themselves till 31 August to close the deal. A critical board meeting of MTN is scheduled for 18 August.
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First Published: Fri, Aug 14 2009. 11 34 PM IST