MUMBAI -- Shares of beleaguered Vodafone Idea, India's third-largest telecom, surged Friday as investors welcomed New Delhi's plan to scrap a retrospective tax law, a move that likely would benefit the British parent.
Vodafone Idea shares closed at 7.10 rupees, up 19%, on Friday on the Bombay Stock Exchange, extending gains from late Thursday. The stock has recovered from a 24% fall after the company's board said this week it accepted the resignation of Chairman Kumar Mangalam Birla.
India's long-contested retrospective tax law has been a bone of contention for foreign companies such as Vodafone Plc and Cairn Energy. Vodafone has faced paying $2 billion in taxes for not deducting withholding tax from the $11.1 billion paid to Hutchinson Telecommunications in 2007 for a 67% stake in an arm that indirectly held a stake in Vodafone Idea. India has introduced legislation to do away with this taxation.
Avinash Gorakshakar, research director at broker Profitmart, thinks the retrospective tax act was a big hurdle and that many foreign investors were cautious due to the dispute between the government and companies such as Cairn Energy and Vodafone.
"There has been a rethinking in the government" with a view toward attracting fresh foreign direct investment, and this "obviously will be a positive energy driver," Gorakshakar said.
"Vodafone Plc will be a direct beneficiary," he said. The parent likely will pump money into its Indian subsidiary, and most investors now anticipate Vodafone Idea will be rescued by private equity funding and liquidity from Vodafone, Gorakshakar said.
"The government would also like to have a three-player market ... for healthy competition," he said. "Indirectly, the profitability and health of banks with exposure to Vodafone India is also taken care of."
Birla, the fourth-generation scion of the Birla business family, stepped down Wednesday after first offering to sell his stake in the Indo-British venture to India's government. The family controls about 27% of the company. Himanshu Kapania, a board member and nominee of the Aditya Birla Group, will take over as chairman.
Vodafone Idea was formed in 2018 through a merger of the British telecom group's Indian arm and Idea Cellular, part of local conglomerate Aditya Birla Group. The wireless carrier last September rebranded itself as Vi.
The telecom has struggled against Reliance Jio Infocomm, which entered the market in 2016. Vodafone Idea ranks third in India's consolidated telecom market. Reliance Jio held a 35.30% share at the end of January, followed by Airtel with 29.62% and Vodafone Idea at 24.58%, Telecom Regulatory Authority of India data shows.
Vodafone Idea was carrying 1.6 trillion rupees ($21.5 billion) in debt, three times what it held in the financial year through March 2016.
A recent Indian Supreme Court decision struck down Vodafone Idea's plea to recalculate its adjusted gross revenue dues to the Department of Telecommunications. It was the second blow dealt by the court, which in October 2019 ruled that the country's main telecoms must make good on underpaid license fees and spectrum charges. This decision resolved a long-standing dispute between the industry and the Department of Telecommunications.
Vivekanand Subbaraman, an Ambit Capital research analyst, reckons that Vodafone Idea has been trying to stay afloat through capital infusions and by managing a complex integration. The sector would suffer if Vodafone Idea bowed out, he said.
"The problem is, time is running out for Vodafone Idea," he said.
Subbaraman noted that some banks and nonconvertible debentures are due for repayment, while the telecom also faces the Supreme Court mandate for the adjusted gross revenue payments. Most of Vodafone Idea's debt is owed to the government in deferred spectrum payment and AGR dues, he said.
Earlier, Vodafone Idea said it would raise up to $3.4 billion through a mix of equity and debt. In addition to the cost of network investments, the company owes the government a huge amount in back dues.