Tax dispute a sideshow; won't impact India plans: Vodafone

Vodafone's MD and CEO Martin Pieters has welcomed the TRAI's move to stick to its stance. In an exclusive interview with CNBC-TV18's Shereen Bhan, Pieters spoke about the new M&A policy and the conciliation process with the government over the tax dispute. Pieters says Vodafone is confident of investing in India and that the tax matter is just a side show.

Below is the edited transcript of Pieters’ interview with CNBC-TV18

Q: We have just heard from the Telecom Regulatory Authority of India (TRAI) this afternoon. The TRAI is saying that it believes its recommendations as far as the spectrum price cut were concerned are valid. The government should consider them because you cannot see auctions in isolation from the rest of the economy and the rest of the environment and ecosystem. That should be music to your ears

A: It was not a surprise because TRAI came out with a very solid set of recommendations in the first place. This wasn't the rebound so to say. So, we didn’t expect that TRAI in such a short time now would suddenly change its mind.

Q: With the TRAI digging its heel in on its recommendations do you believe that DoT and the telecom commission will finally agree and adhere to the recommendations, is that your hope?

A: I am not a member of that commission. What we have seen is that there is a kind of hesitation in the bureaucracy to take tough decisions for reasons we all know – the 2G scam, bureaucrats being blamed sometimes 10 years later for things they might have done. So, there is a kind of general resistance to take tough decisions and bite the bullet. That is why it was sent back to TRAI.

TRAI has come with more or less the same recommendations, so that gives a good reason for the Telecom Commission now to adopt these and send them on to the EGoM for a decision.

Q: If we actually see the telecom commission and the government decide we are not going to go down the road of the TRAI but we are going to stay where we are as far as spectrum prices are concerned, are we likely to see a third failed auction?

A: I see no reason why if you would not change the price why it would go any better in the next auction. What the TRAI has done, it has made it very clear that for this country we are in a situation that is actually not good for the country. It is not good for the ex-chequer because there is no money coming into the coffer of the finance minister and he needs it desperately as you know, but also the country needs better services and needs more broadband services.

The spectrum policy as now laid out by the TRAI opens up the window to make sure that where this industry was stuck for two or three years in a lot of trouble due to various reasons to make a fresh start and make sure that there is a future not only for the companies in the industry, but I would say for India because India is really far behind if it comes to broadband penetration.

Q: If the government were to adhere to the TRAI recommendations and reserve prices were to be cut, I know the Cellular Operators Association of India (COAI) has come out and said 47 percent is not enough, it should be even more, but even if it were to go along with what the TRAI has recommended and suggested, will you be there in the auction?

A: We will be there in the auctions. Vodafone was there in last auction. We were the only company that lost substantial spectrum while none of our licenses were cancelled. So we did it based on a business case. So, with lower spectrum pricing you can expect Vodafone to be there. By the way you know that our licenses in three of the most important place, Kolkata, Mumbai and Delhi are finishing their lifetime of 20 years. So we will need to buy spectrum back.

Q: If there is no change is spectrum reserve price, will you stay away from the auction?

 A: I cannot comment on that. I assume there will be a change in spectrum price. I am not going into speculation.

Q: Department of Telecommunications (DoT) has been tweaking M&A guidelines and perhaps making it better for the large telecom players to say that permissible market share can go up from 35 percent to 50 percent. Does that make sense? Does it make it better? Are we actually going to see consolidation over the next 3-5 years in this country?

A: We need to see consolidation. Consolidation is happening while we speak, but it is what I always call course consolidation, meaning that you have seen quite a lot of telecom companies that were there three years ago are completely disappearing or reducing the level of activity in the country. Some of them who used to be country-wide, nation-wide are now only in a few circles.

Others have reduced the scale of their activities even in circles where they still are, but they are no longer there with their own networks, they use others networks. We have seen a defective consolidation, but the real consolidation needs to come because there are too many unsustainable players.

Some of the newspaper articles say that the top three in the industry now consolidate close to 70 percent of the revenue of the industry, which means that there is not much room left for so many other players. So, we need to see some consolidation and that if more liberal M&A rules would come out, that will be a very good news, because actually two very small unsustainable players going together does not create a sustainable player.

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Q: Do you think what we have now seen from the DoT is liberal enough? Does it pave the way really for large scale consolidation? When you were talking about the fact that the three large players really command substantial market share, the rest of them, there is Aircel, Uninors of the world 7 percent, 3 percent market share, would Vodafone actually make a play for M&A in India if you find that these guidelines are liberal enough?

 A: What I have seen in rest of the world is that telecom operators die very slowly and there is a reason for it. The reason is that telecom is a very capital intensive industry, so once you had put the money on the ground you have put considerable money on the ground. That means that you are hesitating to give it up for free meaning going broke is very often not an option. So in reality the bigger players who can afford should play a role in sanitising the market and probably buying a few of these smaller players, although sometimes it economically hardly makes sense, but at least you get a more rational market where there is more rational pricing.

Q: Will it make economic sense for Vodafone to look at M&A in India?

A: Vodafone is only in telecoms and Vodafone has over and over said that we are here to stay. We are here to be one of the main telecom players in India. We love India. We have had a very good first few years here. Vodafone is the natural consolidators, but there needs to be a business reason for it.

Q: What is going on as far as the conciliation process is concerned? As far as my memory serves me there had been three or four rounds of conciliation, but government says there has to be some give and take. What is Vodafone going to put on the table? Are the talks going forward? Are they not moving forward? Are we likely to see any resolution? What exactly is going on as far as the conciliation is concerned?

A: What I meant when I said that Vodafone has had a few very good years in India was that we are here mainly to do business. People always focus on this tax case, but in the whole scheme of things this tax case is literally only one of the elements. Of course financially, it is a big number, but if you look at the total scheme of things we are doing it is not really determining our future here.

Q: So your plans for India are not necessarily linked to the outcome of the tax dispute?

A: They are not, indeed. We are building up a business here. That is a substantial business. This tax case needs some form of resolution one day, but believe me we are not hindered in anyway by the tax case in doing what we need to do everyday.

Q: So you will continue to invest in India irrespective of the outcome of the tax case?

A: Absolutely.

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Q: What is going on as far as the conciliation is concerned. What does Vodafone want from Government of India? In three rounds of conversations that you have had with the government where do things currently stand?

A: The tax case is something that is really targeting my shareholders and I am the managing director of the company. I am not involved in those discussions.

Q: I know Matthew Kirk is leading the conversation from Vodafone's side?

A: Maybe you should have an interview with Matthew Kirk.

Q: When it comes to give and take I know there has been speculation on waiving away the entire principal amount, what the interest waiver will actually mean. Where do things stand today? Are we closer to a resolution? Is it status quo?

A: I am not part of those discussions. The only thing I can say is that Vodafone is really committed to India, that this tax debate is a debate. It is an important debate. It needs to get resulted one day in one way or the other, but believe me it has no impact on our commitment to India.

Q: So you continue to be patient with India. There is no frustration, because there is not a resolution as far as the tax dispute is concerned?

A: As I said it is a sideshow.

Q: Are you hopeful that before the elections in 2014 we could perhaps see a resolution of the tax dispute?

A: I really cannot comment on that, because I am not part of those discussions.

Q: There has been a lot of speculation on what Vodafone intends doing as far as the Foreign Direct Investment (FDI) business is concerned now that the government has changed the guidelines. The Telecom Minister said that Vodafone has indicated to him that the company will be pumping in a couple of billion dollars into India. So he has spoken on your behalf. Give us a sense of what we can expect in terms of FDI from Vodafone? How soon will you be moving your application to the Foreign Investment Promotion Board (FIPB)? How soon you will buy 100 percent into Vodafone India?

A: I expect Vodafone very quickly now to step up its shareholding. You know that two of our biggest shareholders Piramal and Analjit Singh have been there for sometime. Vodafone for sure would be interested to step up as a shareholder. There are discussions going on and when the time is there we will apply to FIPB for approval.

Q: So the discussions are on with Analjit Singh and Ajay Piramal and that is why you have not moved the FIPB application yet. So if I can ask you about your conversation with Ajay Piramal, because as per your annual report you have a predetermined agreement with Ajay Piramal that if the IPO does not happen by 2014 you will buy his share back at Rs 83 billion. Is that the decided valuation or could there be a further conversation in terms of the valuation with Ajay Piramal in specific?

A: I am very sorry that I have to be again a bit difficult for you this time, but these are really discussions that take place between the shareholders and we as management are not privy to those details.

Q: But is there a predetermined agreement with Analjit Singh, because your annual report states that with Ajay Piramal there is a predetermined agreement, but with Analjit Singh there was a predetermined agreement as well or is there an equity valuation exercise on currently for both of them?

A: You should really ask those questions to Vodafone Group, because I am not privy to those discussions. I do not even have those contracts. I have no idea.

Q: What does the Vodafone Group has to tell you in terms of how soon we are likely to see conversations with Ajay Piramal and Analjit Singh close?

A: I just told you that discussions are on and I expect that that will not be forever which means that probably in the foreseeable future we may see a FIPB application.

Q: Would it be fair then to assume that we are talking in the region of USD 2 billion? That is what the Telecom Minister seems to have suggested. Is that going to be the likely inflow that is going to come in from Vodafone?

A: That is your speculation from your end. I do not know. As I said, I am not privy to those numbers.

Q: You continue to be one of the top contributors to the groups revenue as well as the EBITDA margin for 2013. So, despite all the pain and despite all the uncertainty and the policy back and forth India is working for Vodafone?

A: Vodafone is very happy with its investment in India. When we bought into India immediately after that the six licences came followed by a price war. It was a tough time for 2-3 years but we have come out of it very good. We are now clear number two in the telecom market. We have around 22-23 percent market share. We are building up a business in the enterprise business which we did not have. So, I think everyone is quite satisfied with our performance and that is again for us a very good position to be in if you realize that we are renewing all our licences in the next 2 years, meaning that we are in for another run of 20 years atleast.

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Q: What kind of future investments are we likely to see Vodafone make into India given the fact that we are also going to be faced with refarming?

A: We need huge investment in data. Data is the big growth story these days. We have only at this moment data spectrum in 9 out of the 22 circles. That is not enough. We want to increase our data footprint. So, the moment there is more 3G spectrum available be it by means of spectrum trading or fresh auctions. There is a possibility that three more slots could be made available from defense. If that happens then we are very interested to buy 3G spectrum where we don’t have it and then we will have to rollout networks. But some time in the future new technologies will also come. 4G is coming. It is too early for it today but I see huge investments also in the future.

Q: I want to talk to you about what you are hearing for Vodafone PLC at this point in time. When you see headlines flashed about India – policy paralysis, vitiated business climate, decisions are not being taken, are they telling you, let's hold back, let us wait and see, let's ride this out. What are they telling you at this point in time? How does PLC view India?

A: In the beginning Vodafone was a bit nervous about India. Vodafone traditionally did not have a big footprint in emerging markets. It was more used to the European and the US situation where volatility is less and predictability and regulation is far more stable.

Coming into India and in a very hectic period with six new licences opening up, a lot of competitive pressure – I think in the beginning they were quite nervous about this investment. However, over time the confidence grew because performance was there and they also saw that sometimes there are very dark clouds at the horizon here but then when you get close actually there is a lot of light also. I think they have understood that.

In a market like India you can't take everything at its first view and things are developing. Whereas in the west you would typically see that regulation would only come after thing is completely debated and everyone agrees. Here it is the other way round. So, we first put up regulation then the debate starts and then if necessary we adjust a bit here and there and that is what they now understand.

If you then look at the contribution of India it is substantial. Europe as I said before is now in a slightly difficult situation – falling revenues in many countries. India being a growth story - be it not at the level that we would like it to see may be around 8-9 percent but still a big growth story compared to Europe, compared to other countries.

Q: Since you continue to be bullish and confident about India, since you believe there is significant headroom for growth, since you believe that the Indian market throws up a huge opportunity for a company like Vodafone, why don’t you just dispense off with the sword of damocles which is the tax dispute on your head and get it over and done with. There is a retrospective law you have gone to court, you haven’t moved arbitration just yet, why don’t you get it over and done with in the tenure of this government?

A: That is a kind of question that you should ask Vodafone Group. The reality is that this is about a very big amount of money. Vodafone is a listed company. It will have to justify to its shareholders if it pays so much money and that is a bit difficult.

Q: There is also a retrospective law which is the law of this country at this point in time?

A: That is why I think the discussion is on how to resolve this issue.

Q: Hopeful – 2014, before the elections that we could see a resolution on this front?

A: I really can't comment on that. I don’t know. I can say that I am very optimistic about India. I am very optimistic about Vodafone in India and I am sure that this tax case is not going to stand in the way of our long term relationship with the country.

Q: Speaking about the margin picture and where you actually see prices headed, given the regulatory framework at this point in time, there seems to be an acknowledgement even within the regulator especially and the government also that this is a sector that now requires to be nurtured back to life, nurtured back to health. It was a golden goose that delivered the eggs and it has been in a dismal state for the last couple of years. Are you feeling better? Do you think that we are now likely to see an uptick as far as margins are concerned? What is the outlook as far as prices?

A: The strange thing is that this industry which is now 18 years old in India has only seen falling prices for 17 out of 18 years. You can imagine in a country with an inflation of around 8-10 percent per year you cannot forever drop your prices. There comes a day that you will need to up your prices. This is the first year that we have done that. If you look at other categories - be it chocolates, biscuits, it doesn’t matter rice or onions everything goes up. However, people seem to think that it is a kind of god's birthright that telecom prices always come down. Let me tell you that is over.

We will have to adjust our prices in the future also for inflation. We are working with very expensive inputs. We use a lot of electricity, we use a lot of diesel, all things have gone up in price tremendously. So, it is impossible to see absolute price crash that we saw in the last 2-3 years. From hereon I expect that pricing will be far more rationale meaning people will not be able to sell forever below cost price, they will in the end have to give a return to their shareholders.

Q: What kind of a band do you envisage, we are actually going to see prices moving up by?

A: We have seen this year anything between 5-10 percent if you look at the revenues per minute (RPMs) - the average outcome of the prices depending on the operator. That is the kind of band that I would expect.

It would be substantially below the inflation level because there is efficiency in the industry. So, the efficiencies will be given to the consumer. However, if you have a 8-9 percent inflation you might every year see a 5-6 percent price increase.

Q: You started this conversation by saying that it is getting increasingly difficult for the bureaucracy to take decisions, to take tough decisions because they are worried about being questioned a decade down the line. We have seen that happen very recently in the coal scam where an FIR has just been filed. For you as an MNC operating in India, is it getting increasingly difficult to do business in India?

A: No it is not. We can say that the last year has become more easy. 

Q: Is that because there is less to do or no decisions are being taken so you don’t have anything to do?

A: The government takes the situation in the economy very seriously, meaning that they are now really looking at relaxing the kind of pressure on the companies that was there. I am optimistic about it. The finance minister knows what to do and he is doing it. I expect that the environment to do business will only improve from here.