Vodafone in India

PRAISE be to the Indian legal system! Businessmen do not say that very often but Vittorio Colao, the boss of Vodafone, may have uttered something along those lines on January 20^th after the firm’s four and a half year odyssey through the Indian courts came to end. At risk had been a basic assumption used in takeovers the world over, and also, for the British mobile telecoms firm, at least a couple of billion dollars. That was what that the local tax authorities argued Vodafone was liable to pay due to its 2007 takeover of an Indian mobile outfit majority owned by Hutchison Whampoa, a Hong Kong conglomerate (which is still India’s biggest ever in-bound acquisition). India’s supreme court overruled an earlier court judgement and Vodafone was exonerated.

No doubt exceptionally clever Indian lawyers can create exceptionally complicated arguments for why Vodafone has just got away with murder. But the original accusation looked odd. For a start, it is incredibly rare for any capital gains tax to be paid in any takeover anywhere in the world, providing both parties are industrial buyers, rather than financial firms (and even then a tax bill is rare). The last case your correspondent can think of is when Cable & Wireless, another British telecoms firm, paid some capital gains on the sale of its mobile phone business in 1999 to Deutsche Telekom. But the working assumption back then was that it was the result of C&W’s serial imbecility, not a vital point of justice. (Any other examples on a postcard, please.)

Second, even if the Vodafone/Hutchison India transaction was liable for tax, it seemed barmy that the bill for the capital gain should be imposed on the buyer, Vodafone, rather than the seller, Hutchison (which, typically, had made out like a bandit).

Some Indians may rightly point out that these rules of thumb do not seem particularly steeped in logic and instead are really precedents from the Western world. Perhaps, they might argue too, India, as a rising power, is entitled to invent whatever tax code it deems appropriate. Nor need it necessarily respect the niceties of the system of offshore holding companies that all global businesses use. The Vodafone deal involved a Dutch subsidiary of the British firm buying a Cayman entity owned by Hutchison. Yet all this seems just a tad hypocritical, since many of the takeovers by Indian firms of foreign ones, which are cheered patriotically at home, have exploited exactly the same set of de-facto global rules.

Take the 2007 acquisition by an Indian-controlled Singapore-entity’s British subsidiary of a British firm that had earlier “merged” with a Dutch one (its own auditors hinted that it was really a takeover). Welcome to Tata Steel’s acquisition of steel firm Corus, which incurred no capital gains tax. Alternatively, try the 2010 takeover of the Dutch-registered African assets of a Kuwait-domiciled firm by the Dutch-registered vehicle of an Indian one. That describes Bharti Airtel’s tax-free acquisition of part of Zain, another mobile phone company. Both these deals were viewed in India not as dastardly fiscal evasions but as triumphs—although spare a tear for shareholders of the acquiring firms, both of which overpaid.

Overpayment is of course something Vodafone knows lots about: it has already written down its Indian acquisition. Tax was not the only problem. A price war broke out soon after the deal closed and India’s mobile telecoms licensing system descended into corruption and farce, problems Vodafone is still grappling with. Many other big acquisitions in India by foreign firms have turned out to be value destroying-too (as our special report last year on Indian business detailed). Still, outsiders now are free to spend wildly on acquisitions in India without having to be mugged by the taxman as well as reality.