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Friday, 02 December 2011 00:00
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Allowing 100% telecom FDI will also boost sentiment

 

As and when the government is able to prove Vodafone had violated FDI norms since Asim Ghosh and Analjit Singh were holding equity on its behalf—a fact that both Ghosh and Singh vehemently deny—it will take action. But the issue that arises out of the income tax department’s findings on this, reported by FE on Wednesday, is the irrelevance of restrictive FDI rules.

Briefly, the taxman argues that when the FDI rules were changed to allow 74% FDI in November 2005 (49% was allowed earlier), Hutchinson Telecom International Ltd found the foreign shareholding was above 74% since part of Indian partner Essar’s holdings were through foreign firms. Hutch then sold part of the equity to Ghosh/Singh who were Indians but, the taxman alleges, the money for this was raised on the basis of Hutch’s credit support, so the real control remained with Hutch. When Hutch sold out to Vodafone in February 2007, the taxman cites documents to prove, it guaranteed Ghosh/Singh would sell their stake to Vodafone at a pre-determined value. Later, in April 2007, the law was made more flexible. If a foreign firm X held 49% equity in firm Y which was controlled by an Indian, and Y invested 74% in firm Z, under the new law, the investment in Z would be considered Indian—earlier, 36.3% (0.49 x 0.74) would be considered FDI. But even under this law, the taxman alleges, the 74% FDI limit was violated since the firms in which Ghosh/Singh held a stake were still controlled by Vodafone and not by ‘Indians’.

Whether the allegations are right will be decided by the courts, but if Vodafone were to be 100% owned by foreigners, what difference would this make? Indian security agencies would still be able to ask it to tap phones subject to legal requirements or to suspend services or whatever, and it would still pay the same taxes in India. In any case, even when Essar was Hutch/Vodafone’s partner, it always maintained it was a ‘financial’ investor—a point made by Ajay Piramal now that he’s invested in Vodafone!—and not part of the day-to-day management. Ditto for Uninor where Telenor says Unitech is just a financial investor. Raising FDI limits to 100% would do away with the need for complex legal structures (and the need for Indian authorities to try to penetrate them!) and would do wonders for India’s pro-reforms image.

 

 

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