Mumbai: Vodafone Group Plc, the world’s largest mobile telephony company by number of subscribers, sees 2011 as a crucial bridge year between joint ownership with the Essar Group and the spurt that could eventually turn the Indian market into one of its top three globally.

Also hanging in the balance is the resolution of a $2 billion (Rs8,940 crore) tax claim slapped on it by the Indian income-tax department for its $11.1 billion acquisition of the Indian operations from Hutchison Whampoa Ltd back in 2007, which is expected to be resolved this year.

Challenges ahead: Vodafone Group CEO Vittorio Colao. Saanskrut Kumar/Mint

“The sense of the whole visit is that 2011 is a junction year between 2009-2010, when we built on success of the company, and 2012-2013, which is the new phase when we will have full data infrastructure, different ownership and hopefully more friendly regulation so that in India, Vodafone moves from phase I to II—from Vodafone 1.0 to Vodafone 2.0, which will be based on data and on services," Colao said in an interview in Mumbai on Tuesday.

Colao, who took over as CEO from Arun Sarinin June 2008, said, however, that the company can move into phase II only after the successful resolution of pending issues. These include complying with Indian foreign direct investment (FDI) regulations that mandate a maximum ownership of 74% by a foreign entity in a telecom company based in India. Vodafone will buy out Essar’s 33% stake in the joint venture by November, but this will take its stake over the prescribed limit. It has already parked some stake with Indian partners, Analjit Singh, founder and chairman of the Max India Group, and Infrastructure Development Finance Co. Ltd.

One of the options is to list the Indian entity of Vodafone in the domestic market to comply with the 74% FDI rule, Colao said.

“We need to see how things evolve between now and the end of the year. Once things are in place, then you can start thinking about the story, but we can’t think of starting this exercise without these things falling in place," he said. “The other thing is to continue to do well in the market and continue to invest in 3G (third-generation), and create a very strong brand that has appeal not just to investors, but also customers."

Colao sees data driving the next phase of expansion in the world’s fastest growing mobile phone market. India, with 791.38 million mobile phone subscribers, is also the world’s second largest market by subscribers. Vodafone currently has 16.54%, or 130.92 million subscribers in India, making it the No. 3.

“There’s only 5-6% (data) penetration in the country and there’s no reason why it shouldn’t go to 26-30% like in other emerging markets," he said.

Still, there are challenges that continue to exist in doing business in India. One of these challenges is what he calls the “unbelievable" squeezing of assets to keep everything low cost. “That’s good for Vodafone because we learn and then we replicate it in other places like South Africa, Egypt and Turkey," he said.

Far more challenging is the unpredictability of the regulatory environment.

“In a data world, we need a lot of spectrum and you need to be very efficient in using the spectrum. It’s not like calls where you can squeeze voice and at the end of the day, they go through," he said. “In a data session, if it stops, you stop. Therefore, I think you need a different kind of an industrial approach of more spectrum and fewer players."

On the relationship with the Essar Group, Colao said there have been no recriminations from Vodafone’s side and that the whole deal has been dramatized by the media.

“They are a very successful industrial family who’ve diversified into three or four sectors and are making a huge amount of money, and at this point these sectors are more important to them than this one," he said. “They had certain protection on their exposure and thanks to the regulatory environment, unfortunately the value has declined. That was good for them, they were protected and there’s no recrimination from our side."

Queried on whether he had learnt the art of negotiating from his Indian partner, pat came the reply: “I’ve learnt a lot from my Indian partners." He didn’t elaborate.