B ankin g a n d f i n a n c e

MERGERS & ACQUISITIONS (M&A) IN INDIAN

TELECOM INDUSTRY- A STUDY
Mergers and Acquisitions (M&A) are strategic tools in the hands of
management to achieve greater efficiency by exploiting synergies and growth
opportunities. Mergers are motivated by desire to grow inorganically at a fast
pace, quickly grab market share and achieve economies of scale.
The author is a member of the Institute
and working with Bharti Airtel Limited as

I
Principal Finance Officer (Corporate and
National Accounting). He can be reached
ndia has become a hotbed of telecom mergers at sanjoybanka@rediffmail.com.
and acquisitions in the last decade. Foreign
investors and telecom majors look at India as
one of the fastest growing telecom markets in the
world. Sweeping reforms introduced by
successive Governments over the last decade
have dramatically changed the face of the
telecommunication industry. The mobile sector has
achieved a teledensity of 14% by July 2006 which
has been aided by a bouquet of factors like
aggressive foreign investment, regulatory
support, lower tariffs and falling network cost
and handset prices.
M&A have also been driven by the
development of new telecommunication
technologies. The deregulation of the industry
tempts telecom firms (telcos) to provide bundled
products and services, especially with the
ongoing convergence of the telecom and cable
industries. The acquisition of additional products
and services has thus become a profitable move
for telecom providers.

REGULATORY FRAMEWORK
M&A in telecom Industry are subject to
various statutory guidelines and Industry specific
provisions e.g. Companies Act, 1956; Income
Tax Act, 1961; Competition Act, 2002; MRTP
Act; Indian Telegraph Act; FEMA Act; FEMA
regulations; SEBI Takeover regulation; etc. We
will cover some of these regulations hereunder

— Sanjoy Banka
 guidelines on merger of licences in February
2004. The im-portant provisions are state below:
which are unique to the telecom industry.
 Prior approval of the Department
TRAI Recommendations of Telecommunications will be
necessary for merger of the licence.
Telecom Regulatory Authority of India (TRAI)
is of the view that while on one hand mergers  The findings of the Department
encourage efficiencies of scope and scale and of Telecommunications would normally be
hence are desirable, care has to be taken that given in a period of about four weeks from
monopolies do not emerge as a consequence. the date of submission of application.
TRAI had issued its recommendation to DoT in l Merger of licences shall be restricted
January 2004 regarding intra circle Mergers & to the same service area.
Acquisitions which were accepted by DoT and
stated below. l There should be minimum 3
operators in a service area for that
DoT Guidelines service, consequent upon such
Department of Telecommunications (DoT) merger.
can be credited with issuing a series of liberalis- l Any merger, acquisition or
ing initiatives in telecom sector which has led to restructuring, leading to a monopoly
phenomenal growth of the Industry. Based on market situation in
recommendations of TRAI, DoT issued

December 2006 The Chartered Accountant 927

B ankin g a n d f i n a n c e
ers and
fixed
the
wireless
given
subscrib
service
ers.
area,
shall not l Cons
be eque
permit- nt
ted. upon
Monopol the
y market merg
situation er of
is licen
defined ces,
as the
market merg
share of ed
67% or entity
above of shall
total be
subscrib entitl
er base ed to
within a the
given total
service amo
area, as
unt
of
on the
spect
last day
rum
of
held
previous
by
month.
the
For this
merg
purpose,
ing
the
entiti
market
es,
will be
subje
classifie
ct to
d as
the
fixed
condi
and
tion
mobile
that
separate
after
ly. The
merg
category
er,
of fixed
the
subscrib amo
ers shall unt
include of
wire-line spect
subscrib rum
 shall y
not beco
exce mes
ed a
15 “Sig
MHz nific
per ant
oper Mark
ator et
per Pow
servi er”
ce (SM
area P)
for post
Metr mer
os ger,
and then
categ the
ory exta
‘A’ nt
servi rules
ce &
area regul
s, ation
and s
12.4 appli
MHz cabl
per e to
oper SMP
ator s
per woul
servi d
ce also
area appl
in y to
categ the
ory mer
‘B’ ged
and entit
categ y.
ory TRA
‘C’ I has
servi alrea
ce dy
area clas
s. sifie
l In d
case SMP
the as
mer an
ged oper
entit ator
 havi has
ng enhanced the
mark FDI limit in
et telecom
shar sector to
e 74%. The key
provisions of
grea
these
ter
guidelines are
or
as follows:
equa
l to  The total
30% composi
of te
the foreign
relev holding
ant includin
mark g but
et. not
limited
In addition
to M&A
to
guidelines, investm
DoT has also ents by
issued Foreign
guidelines on Institutio
foreign equity nal
participations Investor
and s (FIIs),
management Non-
control of resident
telecom Indians
companies. (NRIs),
The National Foreign
Telecom Currenc
Policy, 1994 y
(NTP 94) Converti
provided
ble
guidelines on
Bonds
foreign equity
(FCCBs
participation
),
and as
revised by
America
NTP 99 n
permitted Deposit
maximum ory
49% cap on Receipt
foreign s
investment. (ADRs),
Recently by Global
its order no. - Deposit
842- ory
585/2005- Receipt
VAS/9 dated s
1st February, (GDRs),
2006 DoT converti
ble
preferen
investme
ce
nt in
shares,
Indian
proporti
promoter
onate
s/invest
foreign
ment
compani
es
including
their
holding
compani
es, etc.,
referred
as FDI,
should
not
exceed
74%.
The 74%
investme
nt can be
made
directly
or
indirectly
in the
operatin
g
company
or
through
a holding
company
and the
remainin
g 26 per
cent will
be
owned
by
resident
Indian
citizens
or an
Indian
Compan
y (i.e.
foreign
direct
investme
nt does cee
not will
exceed be
49 requi
percent red
and the to
manage discl
ment is ose
with the the
Indian statu
owners). s of
It is also such
clarified forei
that gn
proportio
holdi
nate
ng
foreign
and
compone
certif
nt of
y that
such an
the
Indian
forei
Compan
gn
y will
also be
inves
counted tmen
towards t is
the withi
ceiling of n the
74%. ceilin
However g of
, foreign 74%
compone on a
nt in the half
total yearl
holding y
of Indian basis
public .
sector l The
banks major
and ity
Indian Direc
public tors
sector on
financial the
institutio Boar
ns will be d
treated inclu
as
ding
‘Indian’
Chair
holding.
man,
l The Mana
licen ging
 Direc India
tor n
and com
Chief pani
Exec es
utive may
Offic be
er perm
(CEO itted
) as
shall long
be as
resid com
ent petiti
India on is
n not
citize com
ns. prom
The ised
appoi as
ntme defin
nt to ed
these belo
positi w:
ons “No single
from company/leg
amon al person,
g either directly
resid or through its
ent associates,
India shall have
n substantial
citize equity
ns holding in
shall more than
be one licencee
made Company in
in the same
cons service area
ultati for the
on Access
with Services
serio namely;
us Basic,
India Cellular and
n Unified
inves Access
tors. Service.
l The ‘Substantial
merg equity’ herein
er of will mean
equity of l The
10% or
Licen
more’. A
cee
promoter
shall
company/Leg
also
al person
cannot have ensu
stakes in re
more than that
one any
LICENCEE chan
Company for ge in
the same shar
service area” ehold
Some ing
exceptions shall
have been be
provided to subje
this
ct to
guideline.
B ankin g a n d f i n a n c e
laws relating
to issuance
all and
necess allotment of
ary shares to
statutor foreign
y entities are
require contained in
ments. The Foreign
As per Exchange
recent news Management
reports, the (Transfer or
Government Issue of
wants to arm Security by a
itself with person
power to residing out
block FDI in of India)
case the Regulation,
investment 2000 issued
from by RBI vide
GSR no.
companies
406(E) dated
or countries
deemed 3rd May,
undesirable, 2000. These
even if it is regulations
within the provide
approved general
limit. This is guidelines
on issuance
a positive
of shares or
step due to
securities by
increasing
an Indian
security
entity to a
concern
person
India is
residing
facing but
outside India
has led to
or recording
apprehensio
in its books
n that the any transfer
new law will of security
be used to from or to
block such person.
investment
RBI has
from certain
issued
parts of the
detailed
world.
guidelines on
FEMA foreign
Guidelines investment in
India vide
The
“Foreign
foreign
Direct
exchange
Investment
Scheme” hence
contained in foreign
Schedule 1 of investme
said nt can
regulation. As be made
per the FDI in
scheme, telecom
investment in sector
telecom upto
sector by 74% cap
foreign without
investors is
prior
permitted
approval
under the
of RBI.
automatic
route within l In
the overall case
sectoral cap ,
of 74% inve
without RBI stme
approval. The nt by
salient forei
features of gn
FDI scheme inve
as applicable stor(
to telecom s) in
sector is as an
follows: India
 Industries n
which do telco
not fall is
within likely
the ambi to
t of exce
Annexur ed
e A can sect
issue oral
shares cap
under of
automati 74%,
c route then
to they
foreign shou
compani ld
es (Para seek
2). Since appr
telecom oval
sector is of
not listed (FIP
in B)
Annexur Forei
e A gn
Inve
 stme
nt
shareho
Prop
lder to
osal
another,
Boar
so long
d.
as the
(Par
transfer
a 3)
is in
l FDI complia
sche nce of
me FDI
per scheme
mits and the
auto regulati
mati on.
c (Regula
appr tion 9)
oval l How
of ever,
trans if the
fer of shar
shar es
es are
from being
one trans
forei ferre
gn d by
a
pers
on
residi
ng
outsi
de
India
to a
pers
on
resid
ent in
India,
it
shall
be
subje
ct to
adhe
renc
e to
pricin
g
 guide . In
lines, case
docu of
ment unlist
ation ed
and comp
repor anies
ting , fair
requi valua
reme tion
nts of meth
RBI. od as
Appli presc
catio ribed
n by
seeki erstw
ng hile
RBI Contr
appr oller
oval of
is to Capit
be al
mad Issue
e in s
Form shoul
TS 1. d be
(Reg adop
ulatio ted
n 10 and
B) shoul
l The d be
issue certifi
price ed by
of a
shar Chart
e ered
shoul Acco
d be unta
work nt.
ed (Para
out 5)
as l FDI
per sche
SEBI me
guide also
lines stipul
in ates
case the
of norm
listed s on
comp divid
anies end
balan balan
cing, cing
wher guide
eby lines
the are
cumu appli
lative cable
amo to
unt comp
of anies
outflo inclu
w on ded
acco in
unt Anne
of xure
divid E of
end FDI
for a sche
perio me
d of and
7 telec
years om
from indus
com try is
menc not
eme inclu
nt of ded
prod in
uctio said
n or anne
servi xure.
ces (Para
shoul 6)
d not l In
exce case
ed prefe
cumu renc
lative e
amo shar
unt es
of
are
expo
issue
rt
d to
earni
a
ng
forei
durin
gn
g
inves
those
tor,
years
the
. The
rate
divid
of
end
divid
 end a)
shall The
not India
exce n
ed comp
300 any
basis shoul
point d
s report
over the
the detail
Prim s of
e recei
lendi pt of
ng consi
rate derati
of on to
SBI, RBI
prev within
ailing 30
on days
the of
date recei
of pt
Boar and
d b)
meet The
ing India
wher n
e comp
such any
issua shoul
nce d
is subm
reco it
mme report
nded of
. issua
(Par nce
a 7) and
l The allot
report ment
ing of
requir share
emen s in
t are Form
conta FCG
ined PR
in along
regul with
ation nece
9 viz. ssary
 certifi n
cates Com
from pany
the may
Com
also
pany
issue
Secre
tary shar
and es on
the Right
Statut s
ory basis
Audit or
or of issue
the
bonu
Com
s
pany.
shar
l An
es
India
B ankin g a n d f i n a n c e
in listed
telecom
(Regulati
companies
on 6A); like Bharti,
subject Reliance
to Communicati
complian on, Shyam
ce of Telecom,
VSNL, Tata
condition
Teleservices
s of FDI (Maharashtra
scheme ) Limited,
and etc. These
sectoral guidelines
cap. have been
recently
amended by
 FDI scheme
SEBI and
by citizen notified
or entities
vide of Pakistan and
BangladeshSO(regulation No. 5) primarily on
security concerns.
807(E) dated In the recent past, DoT
has also delayed its
26.05.2006. approval to an
Egyptian
company’s The
investment in Hutch India on
similar highlights
grounds. of the

SEBI amendmen
Takeover t are as fol-
Guidelines lows:
SEBI l No
takeover acqui
guidelines rer
called who
Securities toget
and her
Exchange with
Board of pers
India ons
(Substantial
actin
acquisition of
g in
shares and
conc
takeover)
ert
Regulations,
with
1997 are
applicable to him,
listed Public who
companies holds
and hence 55%
would be or
applicable in more
case of M&A but
less unlist
than ed,
75% but
of has
the obtai
shar ned
es or listin
votin g of
g 10%
right of
s of issue
the size,
targe then
t the
com limit
pany of
shall 75%
acqui will
re by be
hims incre
elf or ased
throu to
gh 90%.
pers Regu
ons lation
actin 11(2)
g in l If an
conc acqui
ert rer
unles who
s he toget
mak her
es a with
publi perso
c ns
anno actin
unce
g in
ment
conc
as
ert
per
with
the
him,
regul
who
ation
holds
s.
55%
Furth
or
er, if
more
a
but
targe
less
t
than
com
75%
pany
of the
was
share
s or publi
votin c
g anno
rights unce
of the ment
targe as
t per
comp
any
is
desir
ous
of
cons
olidat
ing
his
holdi
ng
while
ensur
ing
that
Publi
c
Holdi
ng in
the
targe
t
comp
any
does
not
fall
belo
w the
permi
tted
level
of
listin
g
agre
emen
t he
may
do so
only
by
maki
ng a
 g
capit
the
al of
regulatio
the
ns.
comp
Further,
any;
if a
or b)
target such
company other
was lesse
unlisted, r
but has perce
obtained ntage
listing of of
10% of votin
issue g
size, capit
then the al as
limit of woul
75% will d
be enabl
increase e the
d to acqui
90%. - rer to
Regulati incre
on ase
11(2A) his
holdi
l The
ng to
mini
the
mum
maxi
size
mum
of
possi
publi
ble
c
level,
offer
while
to be
ensur
made
ing
unde
the
r
requi
Regu
reme
lation
nt of
11(2
mini
A)
mum
shall
publi
be
c
lesse
share
r of
holdi
a)
ng as
20%
per
of the
listin
votin
g
 agre cognisance of
emen a merger
t. perceived as
potentially
Competitio anti
n Laws competitive
Competitio and it can
n also enquire
Commission until one year
of India (CCI), after the
established in merger has
2003, holds taken place.
statutory Once CCI has
responsibility been notified,
for ensuring it must decide
free and fair within 90
days of
competition in
publication of
all sectors of
details of the
the economy.
merger or
The
else it is
Competition
deemed
Act, 2002 has
approved.
provided for a
The CCI can
liberal regime
allow or
for mergers,
disallow a
whereby
merger or can
combinations
allow it with
exceeding the
certain
threshold
modification.
limits fall
Most of the
within the
operative
jurisdiction of
provisions of
CCI. The
Competition
threshold
Act have still
limits are
not been
quite high.
notified.
Most
competition THE
laws in the CONTOUR
world require S OF M&A
mandatory IN
prior TELECOM
notification of
M&A are
every merger
also referred
to the
competition
as Corporate
authority but
Marriages
under Indian
and
law it is
Alliances.
voluntary. Mergers can
However CCI be across
can also take same or
suo motu similar
product lines.
In many taxation
cases parlance
mergers are where a
initiated to profit making
acquire a company
competing or merges with
complement a loss
ary product. incurring
A reverse company to
merger is take
another advantage of
scenario in tax
B ankin g a n d f i n a n c e
scale with
phenomenal
shelter. benefit to the
A acquirers in
horizontal terms of
merger higher
(mergers profitability,
across same and better
product valuations.
profile) adds
to size but Takeo
the chances vers
for attainment genera
of profit lly
efficiency are have
not very high. three
On the other typical
hand a patter
vertical ns:
merger
a) In the
(entities with
different first
product mode
profiles) may l, the
help in invest
optimal or
achievement acqui
of profit res a
efficiency. contr
Say a mobile olling
operator stake
acquires a in the
national long acqui
distance red
company and comp
thus saves any
IUC charges. and
In telecom retain
Industry, s it as
most of the a
acquisitions separ
were ate
horizontal entity
which helped
. This
the acquirers
is the
to expand the
simpl
area of their
est
operation and
mode
customer
l with
base quickly.
the
These
provided intent
economies of to
avoid has
the retain
legal ed
hurdl most
e for of the
mergi acqui
ng red
the comp
comp anies
any (Ush
into a
the Marti
paren n-
t Kolka
comp ta,
any. Fasc
This el-
route Gujar
also at,
gives Aircel
the Digili
acqui nk –
rer a Hary
flexibi ana,
lity to Rajas
sell than
off and
the UP
opera East,
tion Sterli
on a ng
stand Cellul
alone ar-
basis Delhi,
later Escot
on, in el -
case Punja
the b) as
merg separ
er is ate
not legal
succe entiti
ssful. es.
This b) In
mode the
has seco
been nd
follow mod
ed by el,
Hutch the
ison, acqui
which rer
merg e for
es sever
the al
acqui entiti
red es
comp and
any integ
with rate
the all
pare oper
nt ation
after s
acqui seam
ring lessl
contr y into
olling a
stake singl
. This e
mod legal
el entity
requi . This
res mod
comp el
letion has
of been
merg follo
er wed
form by
alitie Bhart
s i,
with whic
due h has
appr merg
oval ed
of most
High of
court the
s and acqui
also red
from entiti
DoT. es
It has with
the the
adva pare
ntag nt in
e of due
avoid cours
ing e of
statut time.
ory c) The
comp third
lianc mod
el
entai
of the
ls
purc target
hase company
of on stand
asse alone
ts basis
without
purchasi
ng the
company
as a
whole. In
some
cases,
where
the
licences
were
cancelle
d by DoT
due to
default,
such
compani
es sold
the
telecom
assets
and
custome
r
databas
e to the
acquirer,
who
could
easily
integrate
the
same
into his
existing
licence
and
strength
ened his
network
and
custome
r base at
a
 nominal Australia.
cost. We now
The need to
seller understand
company some of the
which predominant
was objective of
stripped takeovers in
of telecom
licence sector,
as well which can
be
as
summarised
telecom
as follows:
network
was  Acquisiti
ultimatel on of
y wound licences
off. or
geograp
THE hical ter
ALLURE ritory;
OF M&A
IN l Acqu
TELECOM isitio
n of
India’s spec
telecom trum;
liberalisation
was noticed l Acqu
by Global isitio
investors in n of
1995 when telec
the om
Government infra
permitted struc
entry of ture
foreign and
telecom netw
operators ork;
through
Joint l Acqu
venture isitio
route. Some n of
of these cust
global omer
giants base
included to
Vodaphone, achi
AT&T, eve
Hutchison
an
Whampoa,
econ
Telekom
Malaysia, omic
and Telestra base
 ; foreign
investors
l Acq
where
uisiti
teledensity
on of
ranges from
bran
40% to
d
100%. On the
valu
other hand,
e;
the
l High teledensity in
er Indian market
oper is currently
ating hovering at
profit 14% like a
(EBI low hanging
TDA) fruit. The
marg rural
in; teledensity is
l A almost
com negligible at
binat about 3%.
ion India’s young
of and middle
abov class market
e. offers
tremendous
Market
scope for
access:
market
There has
expansion
been almost
and new
saturation of
business. For
demand in
example,
the home
even after 15
market of
years
majority of

December 2006 The Chartered

Accountant 931
B ankin g a n d f i n a n c e
problems,
poor voice
of economic
quality and
reforms, sale
call dropping.
of most
GSM
consumer
operators
durable
initially get
goods has not
4.4 MHz of
exceeded Rs.
spectrum
60 million,
while CDMA
whereas
operators get
telephone
2.5 MHz
penetration
spectrum. In
has already
case of GSM
crossed the
operators
Rs. 120
with 10 lakh
million mark
or more
and is all set
subscribers,
to cross 150
they are
million mark
eligible for 10
by December
MHz
2006 and Rs.
spectrum,
250 million
while CDMA
mark by
operators get
2010. This
5 MHz for 10
huge
lakh
expansion is subscribers.
possible only Since CDMA
with higher technology
focus on rural carries the
telephony, voice in
bridging the small
digital divide packets, it
and higher can carry
allocation of about five
network and times more
funds to rural traffic and
areas which hence has a
are not so lower
rewarding in spectrum
terms of allocation.
ARPU.
However,
Spectrum as the
: Spectrum is number of
turning out to mobile users
be the is growing at
biggest an amazing
bottleneck rate of 4
for Indian million per
mobile month),
operators as spectrum is
they face falling short
network of
requirements may not be
. Thus, the conversant
foreign with local
investors conditions.
prefer to Network roll
acquire an out involves
existing Right of way
operation to (ROW)
ensure ready approvals,
availability of coordination
spectrum, with local
instead of government
applying for departments,
a new acquiring BTS
licence and BSC
where sites on
spectrum rentals,
allocation acquiring
from DoT is municipal and
really a local
challenging approvals to
task. The set up tower
Government and antenna,
is also taking ob-taining
effective electrical
steps to get connection for
approx 40 the sites,
MHz import of
spectrum equipment,
vacated from installation of
Indian tower,
defense equipment
services and shelter,
which will SACFA and
give a fresh TEC
lease of life approvals,
to spectrum integra-tion of
starved various sites
market. This and final
will be a key launch of
driver for all services in a
future M&A geographical
in India. area etc.
Network Generally the
roll out: time to
Network roll
out is a night-
mare for
telecom
operators. It
is more
complex for a
foreign
operator who
 competent
local leaders
roll out a
and dangles
network in a
incentives
circle takes
and awards
minimum 6 to align their
months to 1- personal
year time. interest with
The industry that of the
is also resort- merged
ing to site and entity.
infrastructure Premium is
sharing with placed for
other target
operators to companies
reduce its which have
capital strong
expenses and management
op-erating team in
expenses place, lower
cost and manpower
optimise base and
profitability. higher
Human employee
productivity.
Resource:
The Some
benchmarks
dovetailing of
human used in this
regard are –
resources of
the acquired Number of
customers
company into
the culture of per
employee,
parent
company has Revenue per
employee
significant
importance per month
etc. Majority
in any M&A
deal and can of the
telecom
even spoil a
deal if not companies
resort to
properly
managed. It outsourcing
of routine
is now an
established and non core
activities and
principle that
local leaders reduce
number of
decide the
success or “on roll
employee” to
failure of a
cross attract better
valuations.
boarder deal.
The savvy Hence, it is
essential to
acquirer
retains make an
assessment partners has
of the off roll become
and popular,
outsourced brand value
staff involved plays an
in a telecom important
operation to role in
ascertain the valuation.
true Better
operational margin
efficiency possibility:
and real Across Asia-
manpower Pacific, be it
cost. China,
Brand Indonesia,
value: In Philippines,
most cases, Thailand or
where the Australia,
acquisition is operating
for majority margins
control, the (EBITDA)
foreign average 40%
investor is - 60%, which
likely to are
introduce its considerably
own brand in higher than
India instead the mid-30%
of local for Indian
brand. telecom
Hence, operators.
generally no The EBITDA
value is margin of
placed on Bharti Airtel at
brand related 37% is the
expenditure highest
amortised or among all
any goodwill. telecom
However, operators
where the whereas for
investor other
takes operators it
minority ranges from
stake and 11% to 25%.
the brand Thus, the
stabilised by scope for
the enhancing
controlling margins is
local fairly

932 The Chartered Accountant

December 2006
B ankin g a n d f i n a n c e
been
consistently
significant in liberalising
Indian entry norms
market and making
since market
Government access
levies, easier for
licence fees, foreign
etc. are investors
likely to with the
come down ultimate
to give objective of
further fillip benefiting
to consumers.
teledensity.
The THE
Government VALUATION
is also OF A
providing TELECOM
Universal LICENCE
Service George
Obligation Bernard
(USO) Shaw had
support to once said,
operators to “Economists
expand their know the
network in price of
rural areas. everything,
The but the
foreign value of
investors nothing.”
continue to This saying
look at India is aptly
to spread reflected in
their market. case of
In the initial telecom
years, the valuation
number of also. The
operators in acquirer
each circle pays hefty
were limited valuation to
to four which acquire an
was a major entity and
entry barrier. the
Further the “Business
entry fee for value”
acquiring a placed is
licence was much higher
also high. than
But over the “Accounting
years, the value”.
DoT has The local
promoters partners to
strive hard to unwilling end
enhance the users. These
enterprise cards are not
value of their likely to yield
project by much
adopting a revenue to
multi the operator,
pronged but just
strategy. retained as
This involves customers to
a careful show an
incubation of inflated
network subscriber
across the base and
entire circle, fetch higher
hiring a valuations.
strong The
management Investment
team, banker has to
installing decide what
robust billing is being
system, well valued – a)
oiled channel
Whether its a
partner
valuation of
network and
company’s
above all, an
equity or its
aggressive
assets; b)
selling
Whether the
strategy to
company is
build a
being valued
critical mass
as a going
of customer
concern with
base. In their
all its assets
aggression
and liabilities
to inflate
enterprise or is under
value, some liquidation; or
operators c) Is it a
end up valuation of
creating minority
“phantom interest or a
subscribers”
to attract
better
valuation.
Phantom
subscribers
refer to low
value
prepaid
cards, which
are sold by
channel
 key
performance
Controlling
metrics to
stake; d)
evaluate the
Whether the
EV are:
valuation of
a) EV /
entity on per
EBIT
sub base is
DA
appropriate;
e) Whether ratio:
the This
EV/EBITDA ratio
ratio is in line reflec
with Industry ts
trend. The list numb
of these er of
factors is years
endless. the
unit
Enterpris
has
e value (EV)
to
refers to the
market yield
capitalisation opera
of a ting
company profit
plus debts. (EBIT
When an DA)
investor to
acquires a return
company, it the
takes over basic
not only the invest
assets of the ment
company, made
but also by
assumes the the
liability to Inves
pay the
tor.
existing
This
debts and
ratio
liabilities of
is in
the
the
company.
Thus, natur
Enterprise e of
value is the PE
sum total of ratio
all fair value from
of assets the
and the viewp
liabilities of oint
the acquired of a
entity. The retail
 inves to
tor gene
and rate
varie reve
s nue
from to
Indus retur
try to n the
indus inves
try. In tmen
telec t
om price
Indus paid
try, by
most the
of the acqui
deals rer.
struc In
k in one
the way
past it can
coupl be
e of liken
years ed to
have pay-
been back
at perio
EV/E d.
DITD EV/R
A even
ratio ue
of 6- ratio
10 is on
times an
. aver
age
b) EV/R five
even or
ue less.
Rati
c) Per
o:
subs
This
cribe
ratio
r EV
indic
(EV/n
ates
umb
num
er of
ber
acqui
of
red
year
subs
s
cribe
requi
rs):
red
This
ratio criber
repre as
sents again
value st
place netw
d by ork
the rollou
acqui t
rer which
on costs
subs even
criber less
s than
acqui 1/3rd
red cost
along @
with US$
comp 100.
lete As
netw we
ork would
and see
infras later,
tructu the
re. per
Smar subsc
t riber
acqui rate
rers varie
on s
the from
looko US$
ut 400
prefe to
r to US$
pay a 1000.
premi A
um comp
for any
takin earni
g ng
over highe
an r
existi Avera
ng ge
opera Reve
tion nue
say Per
US$ User
450 (ARP
per U) is
subs likely
 to ue,
com type
mand of
better circle,
per avera
subs ge
criber life
rate. cycle
A of
better custo
rate mer,
is subsc
also riber
depe acqui
ndent sition
on cost,
other qualit
factor y of
s like custo
Chur mers
n etc.
ratio, An
VAS indica
reven tive

December 2006 The Chartered

Accountant 933
B ankin g a n d f i n a n c e
Forty
million).
Enterpri
se value M&A –
can also CASE
be STUDIES
comput The first
ed by M&A deal in
multiplyi India was the
ng the sale of
subscrib Mumbai
er base licence by
of the Max group to
compan Hutchison
y with Whampoa
the per group of
subscrib Hong Kong.
er rate. The deal
For fetched over
exampl half a billion
e, if the dollars for
subscrib Max group
er base and was
of a touted as a
major
telecom
success for
operator
Indian
is
entrepreneur
1,00,00
in telecom
0
venture. This
custom
followed a
ers and series of M&A
the in subsequent
applicab years as
le per stated
subscrib hereunder.
er rate Some of the
for this other high
categor profile deals
y of were
operator Vodaphone’s
is US$ acquisition of
400, 10% equity in
then the Bharti in 2006
indicativ for US$ 1
e billion, Maxis
enterpri acquisition of
se value Aircel at
will be enterprise
US$ value of US$
40,000, 1 Billion, Birla
000 Group’s
(US$ acquisition of
Tata’s stake Hutchison
in Idea Telecom for
Cellular. US$ 560
Interestin million.
gly some of Somewhere
the high along the way
profile Max group
investors again picked
who had up a small
sold their stake of
stake 3.16% in
around year Hutch and
2000 are resold it to
now Essar Group
reentering in October
India like 2005 for US$
Telekom 147 million.
Malaysia Max India has
(exited India staged
in 2000 from another
Kolkata comeback in
licence and Hutch by
recently acquiring an
acquired 8.33% from
49% stake in Kotak
Spice Mahindra
Telecom) Bank for Rs.
and 1,019 crore in
Vodafone 2006. This
(exited India second return
in 2003 from to the telecom
RPG business
Cellular reflects the
Chennai and buoyant
recently conditions in
acquired tele-com
stake in sector.
Bharti). The table
The author on the next
also closely page gives
followed the a bird’s eye
sell-off, ac- view of
quisition, major M&A
resale and deals in
reacquisition India and
by Indian Pro- the key
moters as a indicators
case study. In like per sub
April 1998, value,
Max group enterprise
had sold its value etc.
stake in
Mumbai
licence to
 whether only
a Mobile
The
service
valuation of
provider or
state owned
an integrated
Bharat
telecom
Sanchar player (like
Nigam Bharti and
Limited Reliance)
(BSNL) is etc.
estimated to Valuation is
be US$ 30 generally
Billion one of lower in case
the highest in the acquirer
India. On a takes a
global scale, minority
China Mobile stake as
has emerged against
as the controlling
world’s most stake.
highly valued Similarly,
telco with valuation
enterprise also suffers if
value of US$ the target
131.46 company is
billion, not listed and
followed by hence has
Vodaphone lower
at US$ liquidity (as
123.11 billion in case of
as on July Idea, Hutch
2006. etc). As a
From the thumb rule,
table, suggested by
readers can one
find that economist,
average the
valuation per differential
subscriber for non
ranges from liquidity of
US$ 400 to non listed
US$ 550 entity could
which in turn be as high as
is based on a 20% -25%.
variety of While
factors most of the
including GSM
Average operators
ARPU, type resorted to
of circle, M&A in
competition order to
in the circle, achieve
Category of growth,
operator— Reliance
Infocomm issues, while
did not go by that time
for the
inorganic merchant
route and bankers who
instead have
rolled out a assisted in
green field the
project. This acquisition
was also may have
due to the left the
fact that scene.
Reliance Some of
had these due
adopted diligence
CDMA areas are:
technology
and was Strategic
able to roll and
out the Business
network at due
much lower diligence:
cost as This includes
compared careful
to GSM analysis of
network. current
market share,
DUE planned
DILIGENC market share,
E AND quality of
DIAGNOSI existing
S customer
The due base,
diligence revenue mix,
exercise average
gives the ARPU in the
investor a service area,
deep insight per minute
into financial revenue
and (RPM),
operational review of
is-sues of marketing
the target strategy,
company. If customer
these issues care
are not philosophy,
properly ability of
analysed, it existing
can lead to channel
serious inte- partners to
gration promote

934 The Chartered Accountant

December 2006
 B ankin g a n d f i n a n c e

Major M&A deals in Indian telecom

sector
Company/Servic Yea Per
e % Buyer Seller r Deal
Indicative sub
Enterpris
Name Stake size e value
sold (US$) value (US$)
(US$)
Orange, Mumbai 41% Hutchison Group, Hong Max Group, Delhi 1998 560 Mn 1.36 Bln NA
Kong
Hutch, India 8.33% Max India Kotak Mahindra, 2006 225 Mn - NA
India
Hutch Essar, India 5.1% Hutchison Group, Hong Hinduja 2006 450 Mn 9 Bln NA
Kong
Hutch Essar 3.17% Essar Group Max India 2005 146 - 570
Mln
Command 100% Hutchison & Indian Usha Martin & 2000 - 138 Mln
Cellular, Others
Kolkata Group,
Idea Cellular 48.14 Aditya Birla Group Tata Group 2005 NA 2 Bln 400
%
Modi Telestra, 100% Bharti Group, India B.K.Modi and 2000 NA 160 Mln
Telestra
Calcutta
Bharti 9.3% Private Investors Warburg Pincus NA 873 Mn NA 1000
Bharti Airtel 10% Vodaphone Bharti Group 2005 1.5 bln 16 Bln 1000
Aircel, Chennai 79.24 Sterling Group, Chennai RPG Group 2003 210 Cr
%
Aircel, TN, 74% Maxis, Malaysia Sterling Group 2006 750 Mn 1.07 Bln 496
Chennai
and NE
Spice, (Punjab 49% Telekom Malaysia, NA 2006 178 Mn 363 Mln -
and
Bangalore) Malaysia
Reliance CDMA - Qualcomm, San Diego, Reliance Infocomm 2002 - 10 Bln -
US
BPL Mobile and - Promoters 2005 1.15 NA -
BPL Bln
Cellular
can be interfaced with the system of acquirer, the
the services and withstand competition, reason for
upgrade status of billing system, does it interface
low performance of the target company, synergies with financial systems), customer care system
which are likely to be enjoyed on acquisition, (database structure in
likelihood of entry of new competitors in the
licenced area, strategic initiatives needed to
establish market leadership etc.
Technological & Integration issues: The
technical due diligence includes review of technical
aspects, telecom network technology adopted etc.
This helps the investor to find out the quality of
network assets, whether the coverage is adequate
or not, their maintenance and upgrade status,
status of integration of various systems like switch,
non compatibility of existing network equipment if
any with the current system of acquirer resulting
their obsolescence and write offs, value added
services, billing system (Whether the billing system

customer care system, its interface with switch
for seamless flow of data on activation through
front end, customer grievance resolution
mechanism, ease of customer interaction from
call centre, reporting mechanism for pending
customer queries and its escalation), IT system,
order fulfillment process, etc.
Financial & Commercial due diligence: The
financial due diligence is likely to give deep insight
into operations, which otherwise would not be
December 2006 The Chartered Accountant 935
possible. Some key issues to be analysed under
this head would include: accounting policies on
intangibles and deferment, contingent liabilities
disclosed and undisclosed, statutory and workmen
dues, finance cost and possibility of debt
restructuring, capital structure, vendor and other
dues and reason for delayed or non payment, list
of all contracts and agreements and the review of
all rates and terms, possibility of renegotiation of
major commercial agreements and quantification
of possible saving, details of
B ankin g a n d f i n a n c e
required,
approvals
pending taken and
export their renewal
obligations status, Minute
under EPCG books of
rules, details AGM, EGM,
of bank Board and
guarantees committee
issued, meetings,
pending cost review of
saving shareholders
measures agreement,
initiated in Memorandum
the and Articles,
company, statutory
internal clearances for
control all
measures investments
and made till date,
processes, review of all
internal audit major
reports, fixed agreements
assets (with lessors
verification for
reports, BTS/BSC/MS
valuation C sites,
reports if collection and
any, etc. recovery
agents,
Secretaria
channel
l & Legal due
partner
diligence:
agreement,
The acquirer
roaming
also carries a
agreements,
detailed legal
network
due diligence
services
of the various
providers,
approvals
VAS services,
obtained by
DoT licence
the target
agreement),
company to
listing of all
understand
legal cases
possible
filed by and
instances of
against the
violations if
company and
any and the
current
quality of
status, list of
statutory
statutory
compliances.
compliances,
This includes
list of all
a review of
statutory
statutory
liabilities
approvals
(status of
payment of to unearth
various dues startling facts
like PF, ESI, and assist the
licence and investment
spectrum banker to
charges, revise the
interconnect valuation.
payments, From the
liquidated acquirer’s
damages if perspective,
any levied by some change
licensor), list management
of all IPR problems can
rights, IPR be avoided by
violation solving them
issues etc). before the
Human deal closes.
Resource For example,
issues: The if the due
investor diligence
analyses the reveals that
average the workforce
salary of the of the target
employees, company is
ratio of inflated, then
outsourced he may insist
employee to for its
total rationalisation
employees, as a
salary range precondition
vis a vis to deal
Industry trend closure.
and chances
of salary
increase to be
made. The
investor also
tries to find
out whether
any Golden
Parachute
has been
issued to
senior
management
which has to
be borne by
the merged
entity.
The
results of due
diligence
exercise help
 acted as
catalyst to
WHETHE stupendous
R M&A IN growth in
INDIAN teledensity to
TELECOM 14% in 10
WERE years (1995
SUCCESS -2006), as
FUL against 2%
A merger in 48 years
to be (1947-1994)
successful of
should create independenc
new e. According
capabilities, to a study
offer better conducted by
value the reputed
proposition to
international
agency,
the combined
OVUM on
entity’s
“The
customers
economic
and above all
benefits of
enhance
mobile
shareholders’
services in
value.
India” on
Empirical
behalf of
studies prove
Cellular
that M&A
Operators’
brings with it
Association
the
of India, it
advantage of
was found
synergies to
that mobile
the operators
sector has
and in
generated
majority of
3.6 million
cases results
jobs directly
in immense
or indirectly
increase of and the
shareholders same will
value. M&A in rise by at
Indian least 30%.
telecom Similarly the
industry has Mobile
also benefited industry
other contributes
stakeholders over Rs. 145
i.e. billion per
customers, annum by
Indian licence fees,
economy and spectrum
society at fees, import
large. duties, taxes,
M&A have etc. Taking
the OVUM mean
findings on achievement.
the base of Indian
48 million promoters
subscribers who
in January commenced
2005, COAI their telecom
has operation on
estimated a small scale
that at a in few
mobile circles,
subscribers gained
base of 200 immensely
million in on sale of
2007, the their stake to
industry foreign
would investors. In
contribute fact, some of
over 10 the world’s
million jobs largest
and over Rs. telecom
500 billion companies,
annual who have left
revenue to India with a
the bitter
Government. experience a
From few years
foreign ago like
investors’ British
perspective, Telecom,
they have Vodaphone,
immensely France
gained from Telecom,
investing in Telekom
India. As per Malaysia,
recent news, Telestra
out of Australia are
Hutchison’s all set to
total global return even
revenue of as minority
Rs. 13440 shareholders
crores, over on
45% comes witnessing
from India telecom
which is no success
story.

936 The Chartered Accountant

December 2006
B ankin g a n d f i n a n c e
a
c
ACCOUN c
TING o
ISSUES u
The n
accounting t
issues i
arising in n
any M&A g
include
merger –
accounting
by the p
acquirer, o
treatment of o
goodwill l
and i
reserves of n
the g
acquired
company, o
treatment of f
Goodwill/ca
pital i
reserve n
arising on t
M&A, e
c
r
h
e
o
s
i
t
c
e
o
r
o
f
p
u
t
r
h
c
e
h
a
m
s
e
e
t
h
m
o
e
d
t
h
o
o
f
d
, d
s
a
c f
c o
o r
u
n i
t n
i v
n e
g s
t
f m
o e
r n
t
s s
h
a m
r a
e d
e
o
f i
n
p
r I
o n
f d
i i
t a
s n
/
l o
o p
s e
s r
e a
s t
i
a n
n g
d
c
d o
i m
v p
i a
d n
e y
n .
A o
c
c r
o e
u f
n e
t r
i r
n e
g d

S a
t s
a
n b
d u
a s
r i
d n
e
1 s
4 s

c c
l o
a m
s b
s i
i n
f a
i t
e i
s o
n
a )
m
a i
l n
g t
a o
m
a t
- w
t o
i
o c
n a
s t
e
( g
a o
l r
s i
e t
s h
e
f
o n
r a
t
t u
h r
e e

p o
u f
r
p m
o e
s r
e g
e
o r
f
a
a n
c d
c
o b
u )
n
t a
- m
i a
n l
g g
a
a m
) a
t
a i
m o
a n
l
g i
a n
m
a t
t h
i e
o
n n
a
i t
n u
r
e is not
applicable.
o In order
f to apply
pooling of
p interest
u method (in
r case of
c merger
h scenario)
a five
s conditions
e have to be
. fulfilled i.e.
a) transfer
A of all assets
S and
liabilities to
1 transferee
4 company b)
provides that 90% of
in case of shareholder
amalgamatio s of
n in the transferor
nature of company
merger, should
pooling of become
interest shareholder
method is to of transferee
be applied, company
whereas for c) Cons
other cases idera
purchase tion
method is to for
be applied. purc
This hase
standard is shoul
appli-cable d be
only if two or paid
more entities by
are merged issue
to form a of
new entity. equit
In case of y
takeover of shar
majority e of
interest trans
which does feree
not yield to comp
formation of any
a new d) Conti
merged nuati
entity, AS 14 on of
 busin
ess
IFRS 3
of
prohibits
the
pooling of
acqui
interest
red
method and
comp
permits only
any
purchase
and
method of
e) No
accounting by
adjus
the acquirer
tmen
in M&A. With
t to
be issuance of
mad IFRS 3, IAS
e for 22 stands
asset withdrawn.
s and The
liabili significant
ty changes
taken introduced by
over. IFRS 3 are as
Sinc follows:
e in
most
of
the
telec
om
acqui
sition
s,
condi
tions
No.
(B)
and
(C) are
generally
not
applicable,
the
purchase
method is
applied for
takeovers.
 In June,
2001, the US
Financial
Accounting
Standards
Board
(FASB)
adopted two
new
accounting
standards: rtisat
FAS 141 ion
‘Business of
Combinations good
’ and FAS will
142 ‘Goodwill and
and Other
l in
Intangibles’
most
which was
case
applicable for
business
s,
combinations annu
from 1 July al
2001. These testi
introduced ng
major for
changes in good
US will
accounting as impa
follows: irme
l a nttes
tingr
ban
ather
on
than
pooli
amor
ng
tisati
(i.e.
on,
merg
for
er
acqu
acco
ired
untin
intan
g);
gible
all
asse
busi
ts
ness
with
com
indef
binat
inite
ions
lives.
are
to be Takeove
treat rs in Indian
ed telecom
industry
as
have seen
purc
following
hase
common
s accounting
(i.e. and
acqu financial
isitio issues:
ns);
l In
l no telec
amo om
 acqu cost/
isitio book
ns, valu
good e
will less
is accu
state mula
d at ted

December 2006 The Chartered

Accountant 937
B ankin g a n d f i n a n c e
A Limited
and will
amortisat
be
ion and is
amortise
amortise
d over
d on
next 10
straight-
years
line basis
being the
over the
balance
remainin
period of
g period
licence of
of service
B, on
licence of
SLM
the
basis,
acquired
company l In
from the case
date of of
acquisitio chan
n. For ge of
example, bran
say A d and
Limited launc
acquired h of
B Limited “supe
at a rior”
purchase bran
consider d, the
ation of existi
US$ 1.5 ng
billion, as bran
against d
the book relate
value of
d
US$ 1
amor
billion on
tised
1st expe
August nses
2006.
and
The
good
licence of
will
B Ltd is
are
expiring
writ-
on 30th
ten
July
off
2016. In
fully.
this case,
For
US$ 500
exam
million is
ple,
the
goodwill when
in the Hutc
books of hison
 finall seen
y . For
decid exa
ed to mple
introd ,
uce upon
Hutc dem
h erger
Bran of
d on Relia
cons nce
olidat Infoc
ion of omm
its from
oper Relia
ation nce
s Indu
acros stries
s Limit
India, ed,
it had over
to US$
write 1
off all billio
the n
local were
bran writte
ds n off
like from
Or- the
ange, Bala
Fasc nce
el, Shee
Com t
mand whic
etc h
whic inclu
h ded;
were inter
am- alia,
ortise bad
d debt
earlie s,
r. recei
l Majo vable
r etc.
write l Chan
off of ge in
debt key
s is acco
also untin
 g also
polici junk
es of the
acqui existi
red ng
unit billin
in line g
with syst
the em
acqui leadi
rer’s ng to
acco majo
untin r
g write
polici off.
es, l Intelli
like gent
reven netw
ue ork
recog (IN)
nition syste
, m is
treat the
ment heart
of for
licenc credi
e fee t
paym moni
ent, torin
debto g
rs
and
man
provi
age
sionin
ment
g,
of
treat
prep
ment
aid
of
servi
activa
ces.
tion
In
reven
som
ue. e
l In case
man s, IN
y syste
case m of
s, a
the prefe
new rred
oper vend
ators or is
 instal
led
1) Carry
leadi
forward
ng to
of
junki
ng of losses
existi of the
ng IN acquire
syste d
m compan
and y.
its 2) Capi
resul tal
tant gain
write s on
off. sale
of
TAXATION
shar
Following es
are the by
major India
taxation n
issues in shar
any M&A ehol
deals ders.
including
telecom 3) Capi
sector: tal
gain
s on
sale
of
shar
es
by
forei
gn
shar
ehol
ders.
Carry
forward of
losses:
The
Income Tax
law relating
to carry
forward of
losses are
contained in
Section 72,
72A and a) Change in
Section 79 voting power
of the due to death
Income Tax of
Act, 1961. shareholder
While or arising out
Section 72 of gift to any
provides relative and
timeline for b) Change in
carry shareholding
forward of of an Indian
losses, subsidiary of
Section 79 a foreign
stipulated company
conditions arising due to
for carrying amalgamation
forward of or demerger
losses. of foreign
company.
Section 79
provides that Majority of
in case of M&A in
company in telecom
which public sector were in
are not respect of
substantially closely held
interested, no companies, in
loss incurred which public
in any prior were not
previous year substantially
shall be interested
carried and hence
forward and 51%
set off against beneficial
losses of the shareholding
previous year was attracted.
unless shares In most cases
carrying 51% of telecom
or more of acquisitions,
voting rights the control
are held was obtained
beneficially by by investing
same set of at indirect
shareholders level and
on last date of altering direct
financial year holding as to
as compared a minimum
to previous avoidable
year(s) in level. This
which losses was achieved
were by changing
incurred. The shareholding
exception at a level
provided are above the
direct holding Income Tax
level, so that Act
at least 51% depending
direct upon the
beneficial nature of
holding gain,
continued. whether it is
long term or
Capital short term.
gains
Section
The 112 provides
capital for taxation of
gains
long-term
arising from
transfer of capital gains
shares is (LTCG).
liable to However,
taxation Section 10
under the (38) in-

938 The Chartered Accountant

December 2006
B ankin g a n d f i n a n c e
months,
before it
troduced in
qualifies as
2004
long term.
provides for
full exemption However,
from Income majority of
Tax for long telecom
term capital holdings as
gains (LTCG) discussed in
provided a) this article
The capital are not listed
gain arises securities.
on transfer of Hence they
shares of are
listed public subjected to
companies; taxation
b) At the time under the
of transfer, regular
the provisions of
transaction is Income Tax
chargeable to Act. Thus in
secu-rities case of
transaction capital gain
tax (STT). In arising from
case of short sale of
term capital shares of
gains on unlisted
listed entities, the
securities taxation is as
(arising in follows: a) In
less than 12 case of short
months), on term capital
fulfilling same gain, the
conditions, gain is
Indian
included as
investor has
income from
to pay tax on
other
STCG @
sources/
business
10% u/s
Income as
111A. Twelve
the case
months
may be and
holding
charged to
period is
tax at full
appli-cable
rate; and b)
only for listed
In case of
securities, in
LTCG, the
case of
gain is liable
unlisted
to tax @
securities, the
20% u/s 112.
minimum
holding Section
period has to
10(23G)
be 36
 This eligibility
section was criteria. It is
introduced in pertinent to
1995 with an note that
objective of approval
promoting under this
investment in section is
telecom provided
sector by only to the
Indian and operating
foreign company
investors. which owns
Telecom telecom
operators, network and
whether infrastructure
listed or not and hence
were capital gain
required to exemption
get the was
approval of available in
Ministry of respect of
Finance u/s capital gain
10(23G) on arising on
submission direct
of requisite shareholding
details. In . In case of
case a indirect
telecom holding,
entity was routed
approved through
under this chain
section, the holding,
investors in benefit of
such entity this section
were would not be
entitled, inter available.
alia, tax Most of
exemption the
on long term telecom
capital, operators
interest on had
long term obtained
finance and
dividend.
The approval
was given by
Ministry of
Finance
(MOF) on
year-to-year
basis or for a
block of
years based
on satisfying
 emerged as
the favourite
approval u/s landing point
10(23G). for foreign
However investors for
this section FDI in Indian
has been telecom
withdrawn companies.
i.e. AY Mauritius
2007-2008 accounts for
after a 10- more than a
year period third of the
and aggregate
henceforth FDI inflows.
this India’s tax
incentive is treaty with
not available Mauritius
to the provides
telecom exemption
sector. from capital
Thus, gain arising
proper tax out of
planning for Investment in
Indian and India made
foreign by a
investors to Mauritius
save their resident
tax liability company. A
on future common
capital strategy
gains adopted by
liability foreign
pose a investors is to
great hold the
challenge. shares of
We will now Indian
discuss the operating
Mauritius company
angle, through
through Mauritius
which most based special
of the purpose
foreign vehicle
shareholdin (SPV). In
g are case of exit,
routed. these SPVs
are sold to
The
foreign
Mauritius investors who
connectio land in
n Mauritius.
The Board level
scenic changes are
Mauritius has made in such
SPV and new referred as
investors take AB) holds
control of the 25% share
SPV and capital of CD
nominate India Telecom
their Limited. AB is
representativ a 100%
e on the subsidiary of J
Indian Inc, USA. If J
telecom Inc wants to
company. In transfer its full
such a case, stake to
in another
accordance foreign entity
with DTAA say EF (UK)
with Plc, UK then
Mauritius, no AB will sell all
capital gains shares held in
tax is levied CD to EF. EF
on the foreign will lodge
investor. No shares of AB,
transfer is to the Indian
needed to be company for
recorded in registering
the register of them in his
transfer of favour. The
Indian capital gain
telecom arising to AB
company as on sale of EF
the same is an offshore
Mauritius transaction
SPV and will not
continues as attract capital
shareholder. gain taxation
Let us in Mauritius or
consider sale India due to
of direct DTAA with
holding in an Mauritius. The
Indian telecom directors
company by a nominated by
foreign AB are
investor. Say withdrawn and
AB (Mauritius) the new
Limited (an directors
SPV and nominated by
resident of EF will take
Mauritius and Board

December 2006 The Chartered

Accountant 939
B ankin g a n d f i n a n c e
holding in CD
India equal to
position in 20% and right
CD’s Board to nominate
of Directors. 1/5th of
Now we number of
will consider Directors on
sale of the Board of
indirect or CD India.
beneficial Since, this
holding. Say transaction
AB Mauritius does not
Limited (an involve
SPV and transfer of
resident of shares of an
Mauritius) Indian
holds 40% company, no
share capital Capital Gain
of CD India Taxation
Telecom liability arises
Limited. The in India.
shareholders India’s tax
in AB Limited
treaty with
are A, Inc US
Mauritius has
(51%) and B
been an eye
Limited,
sore with
Japan (49%).
Indian
if A Inc and B
revenue
Limited want
authority for
to reduce
long. The
their joint
controversy
holding to
started after
20% and sell
the Central
balance 20%
Board of
to a third
Direct Taxes
investor say
EF plc UK.
(CBDT)
Then A Inc issued a
and B circular (No.
Limited, will 789 dated
transfer their 13/4/2000)
holding in AB clarifying that
to EF Plc and a certificate
EF Plc will be of residence
inducted as issued by
another Mauritius will
shareholder constitute
of Mauritius sufficient
entity. Thus, evidence for
by investing accepting the
in AB status of
Mauritius, EF residence as
obtains a well as
beneficial ownership
for applying Bachao
the Andolan,
provisions of (2003) 263
the tax ITR 706).
treaty. The
There are
circular also
moves to
clarified that
bring the
the test of
Mauritian tax
residence
treaty at par
would also
with
apply to
Singapore
income from
capital gains
treaty
on sale of
whereby, a
shares. resident of a
Thus, FIIs contracting
which are state (read
resident in Mauritius)
Mauritius shall be
would not be deemed to
taxable in be a
India on shell/conduit
income from company
capital gains and
arising in exemption
Mauritius from Capital
country on Gains tax
sale of will be
shares. denied to
such a
The
company, if:
above circular
was declared
invalid and
quashed by
the Delhi High
Court (Shiv
Kant Jha
versus Union
of India,
(2002) 256
ITR 563). But
the Hon’ble
Supreme
Court
reversed the
decision of
the Delhi HC
and declared
the circular
valid
(Union of
India
versus
Azadi
 actin
g
a) Such
state
a
as
comp the
any is case
not may
listed be,
on a in
the
recog
imm
nised
ediat
stock ely
exch prec
ange edin
of the g
contr perio
d of
actin
24
g
mont
state; hs
or from
b) its the
total date
annu the
al gains
expe arise
nditu .
re on This
oper amendment
ation once
s in approved is
that likely to put
contr a spanner
actin in the
g investment
state plan of
is foreign
NOT investors
equa who have
long utilised
l to
the loophole
or
in DTAA
more with
than Mauritius
Rs. 5 without
millio sharing any
n in benefit of
the capital gain
resp either with
ectiv Governmen
e t of India or
contr Mauritius.
 It is likely gh
that foreign Mauri
investors, tius
who have base
used d
Mauritius as speci
a safe route
al
for Indian
purp
FDI,
ose
vehic
Mauritius le
accounts (SPV)
for more
.
than a
third of
the will take
aggregat necessary
e FDI steps to
inflows.
ensure
India’s
compliance
tax treaty
with of the
Mauritius proposed
provides guidelines
exemptio by a)
n from offloading
capital the
gain minimum
arising stake
out of required for
Investme listing on
nt in Mauritius
India based stock
made by exchanges
a and listing
Mauritius of their SPV
resident b)
company Maintaining
.A office
common infrastructur
strategy e and incur
adopted operational
by expenditure
foreign as per
investors proposed
is to guidelines.
hold the
shares of Licence fee
Indian on sale
operatin proceeds
g of licence:
comp
As per
any current
throu licensing
guidelines, revenue from
telecom handset sale,
operators Interest
have to pay revenue etc.
licence fee There is no
on Adjusted clarity
Gross whether the
Revenue sale
(AGR) which proceeds of
includes non a telecom
operating licence
revenue like

940 The Chartered Accountant

December 2006
B ankin g a n d f i n a n c e
based on a
legal opinion
will be believes that it
included is not covered
within the under the
levy of AGR definition of
and attract Adjusted
licence fee. Gross
In this Revenue, as
regard, let’s inter alia,
review the such revenue
case of do not accrue
Shyam out of
Telecom Ltd operation
(a DoT licenced or
licencee require to be
itself), Holding licenced by
company of DoT… The
Hexacom issue is
(Rajasthan covered under
Licence) who generic
sold its petition filed
Hexacom by
operation. The Association of
following Basic
extract from Telecom
the Annual operators
report of (ABTO) with
Public listed TDSAT
company contesting the
Shyam inclusion of
Telecom non telecom
(Year 2006, related
page 53) is service
self revenue in the
explanatory: AGR which is
“The company pending
sold its resolution. In
holding in HIL view of the
to Bharti legal opinion
Televenture obtained by
Limited for a the company
consideration and the above
of Rs 1751.87 petition filed
Million. …… by ABTO with
With respect the TDAST,
to Income the company
arising on is of the
transaction opinion that
referred no revenue
above, the share is
company payable from
sale of above
investments telecom
and has industry
accordingly include
made no following:
provisions in
its books of
l Busi
accounts.”
ness
Proc
EMERGIN ess
G outs
OPPORTU ourci
NITY FOR ng
CAs like
Fina
Mergers ncial
and reco
Acquisitions ncilia
in telecom tions
sector have ,
showered a Bills
boon for Proc
professional essin
s including g,
Chartered Colle
Accountants ction
and finance , Bill
community deliv
in general. ery,
As per an Payr
industry oll
estimate, outs
the telecom ourci
industry is ng,
likely to Cust
provide omer
cumulative refun
employment ds
at various and
levels to Cred
over 4,000 its,
Chartered addr
Accountants ess
to support and
its growth ident
plans. ity
Some of verifi
the catio
emerging n,
area of Reve
practice for nue
Chartered acco
Accountant untin
firms in g,
Back
end
l Man
com
age
plian
ment
t
Audit
resol
on
ution
telec
on
om
finan
Indu
cial
stry
issue
proc
s
ess
etc.
like
billin
g
proc
ess,
Rev
enue
Assu
ranc
e
proc
ess,
Colle
ction
and
Cred
it
contr
ol
proc
ess,
Bill
deliv
ery
and
retur
ned
bills
man
age
ment
.
l Assi
gnm
ents
on
Inter
nal
Cont
 rols telecom
and Industry.
Six-
CONCLUS
sigm
ION
a
impl India
eme needs a
ntati whopping
US$30 billion
on.
to meet 22%
l Certi teledensity
ficati target (250
ons million
unde telephones)
r by the end of
Inco 2007 as set
me by DoT.
tax Government’
law. s decision to
As the raise the
telecom foreign
operators investment
consolidate limit to 74% is
their op- expected to
eration, they spur fresh
are likely to round of
outsource mergers and
more and takeovers in
more India. The
operational sector has
and financial slimmed from
activities. more than 20
Chartered carriers to 5-6
Ac-countant major players
in 2006 and
firms which
telecom
have attained
pundits
economies of
believe that a
scale and
final round of
have
consolidation
knowledge
to churn the
base,
number of
operational
players is in
skills, IT
the offing.
savvy team,
The
cost effective
possibility of
manpower
realignment
support are
of
likely to see a
shareholding
vista of
structure in
opportunity
existing
ahead of
licences and
them in
entry of new
India’s
investors also
cannot be
Finally,
ruled out. The
the success
sector thus
of a merger
represents
hinges on
humongous
how well the
opportunity
post-merged
waiting to be
entity
tapped by
positions
Indian and
itself to
foreign
achieve cost
conglomerate and profit
s. efficiencies.
Critics As Robert C
claim Higgins of
telecom University of
mergers Washington
reduce points out
competition “careful
and valuation
promote and
monopoly. disciplined
In reality, negotiation
these are vital to
mergers successful
are part of acquisition,
a healthy but in
competitive business as
process in life, it is
and would sometimes
foster more
innovation important to
and bring be lucky
benefits to than smart.”
consumers. 

December 2006 The Chartered

Accountant 941