Vodafone buys 22% of India unit from Essar, remaining 11% to be transferred

Vodafone, World’s largest telecom operator by revenue, has bought 22% of its Indian joint venture Vodafone Essar from its partner, the Essar group, it said in a trading update today.

In all, Essar holds around 33% of the Indian company and has agreed to sell the entire stake for a cost of around $5.5 billion to Vodafone, including tax. In its update, Vodafone said 22% has been transferred and another 11% remains to be transferred.

“The transfer of these shares from ECL and ECom to Vodafone was completed in two tranches on 1 June 2011 and 1 July 2011,” Vodafone said, adding that the remaining “will be” disposed off in the coming months.

According to the statement, Vodafone seems to have already paid the Essar group, founded by Calcutta-based Ravi and Shashi Ruia, $3.3 billion (including tax expense) for the 22% stake, leaving $1.3 billion to be paid as the remaining shares are transferred. “This payment will be made by 15 February 2012,” it said.

Interestingly, Vodafone also said the transaction will see the an Indian shareholder (such as former CEO Asim Ghosh) increase their holding or even the entry of a new minority partner. “It is expected that at least 1.35% of the shares in VEL will be transferred to an Indian investor to ensure Vodafone’s continued compliance with Indian foreign direct investment rules,” it said.

Indian foreign investment rules prevent foreigners from owning more than 74% of any Indian communications company.

According to Vodafone statement during its buy out of Hong Kong based Hutchison Whampoa from the Indian company in 2007, it was acquiring a 67% economic interest. Technically, if it buys the remaining 33% held by Essar, its ownership would rise to 99%.

However, at the time of announcing the Essar deal earlier this year, it said: “Following regulatory approval and subsequent closing of these transactions, Vodafone will own 74% of VEL directly via its subsidiaries. The remaining 26% of VEL will be majority-owned and controlled by Indian shareholders.”

On the $2 billion tax notice slapped on it by Indian authorities for its 2007 buy-out of the Hong Kong based Hutchison Whampoa, it said it expects the Supreme Court to start hearing the case in the current quarter.

On a similar tax liability on its stake purchase from Essar, Vodafone seems to have made a compromise with the Indian authorities earlier this month.

“Vodafone International Holdings B.V., through its indirect, wholly owned subsidiary, Euro Pacific Securities Ltd., had sought confirmation from the Authority for Advanced Rulings (‘AAR’) in India on whether withholding tax was due in respect of consideration payable on the acquisition of Essar Group’s offshore holding in Vodafone Essar.

A ruling from the AAR was expected by the end of May 2011 but was adjourned until 1 July 2011, when the case was withdrawn. The withholding tax was paid on a “without prejudice” basis on 5 July 2011,” it said.