Vodafone said on Thursday it will buy Essar Group's stake in a local subsidiary, giving it the maximum allowable equity share of a mobile phone company allowed by Indian law.
The deal resolves a dispute between Essar and Vodafone over the value of the stake.
Vodafone bought directly and indirectly through Indian partners a 67 percent stake in Vodafone Essar in 2007 from Hutchison Telecommunications International. Essar held the remaining 33 percent.
Under an agreement between Vodafone and Essar signed at the time, Essar had an option to sell its 33 percent share in Vodafone Essar to Vodafone for US$5 billion, or an option to sell between $1 billion and $5 billion worth of Vodafone Essar shares to Vodafone at an independently appraised fair-market trading value.
Vodafone said Essar Group has exercised its underwritten put option over 22 percent of Vodafone Essar. Following Essar Group, Vodafone exercised its call option over the remaining 11 percent of the joint venture, resulting in a total cash payment of $5 billion.
Final settlement is expected no later than November, Vodafone said. Vodafone’s published net debt figure already includes the $5 billion payment, it added.
Indian rules currently limit foreign equity to a maximum of 74 percent of a telecommunications services company. Vodafone, which currently directly holds 42 percent of the equity in the company, will after the acquisition hold 75 percent of the equity, a Vodafone spokesman said.
However, to comply with government rules, Vodafone will likely induct a local partner to hold about 1.4 percent of the equity to be compliant, the spokesman said. Indian partners hold the remaining 24.6 percent of the equity.
Vodafone’s investment in India has run into rough times. The company took a £2.3 billion (US$3.3 billion) charge for the Indian operation in May last year, citing “intense price competition."
The company also faces a US$2.5 billion bill from India’s Income Tax department, which holds that under Indian rules Vodafone should have deducted tax in 2007 before paying Hutchison.
India's income tax rules require that tax should be deducted before a payment is made to a foreign company or non-resident for assets in India. Vodafone contests the claim, saying that it is not liable to pay tax on the transaction that was executed outside the country by two foreign companies.
Essar did not comment on the Vodafone statement about the sale of its stake in the joint venture, although some sources confirmed the deal in private.
Earlier this year, Essar proposed merging Essar Telecommunications Holdings, the company that holds part of the stake in Vodafone Essar, with India Securities Ltd (ISL), a listed Essar Group company, to determine the true market value of its stake.
Essar said it adopted this route as Vodafone had blocked an initial public offering of Vodafone Essar last year. Vodafone opposed the merger proposal, saying that it could artificially increase the price Vodafone may have to pay to buy out Essar’s stake in the joint venture. It said it had no objection to Essar holding an initial public offering for its stake in the joint venture.
The merger proposal may now have to be withdrawn by Essar, according to a source close to the situation. The merger proceedings are scheduled for a hearing on Friday at the Madras High Court, the source said.