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Tax demand against Vodafone exceeds its IPO size of Rs 13,000 crore
April, 22nd 2016

Vodafone India is likely to categorise the impending tax demand by the Indian government as a contingent liability of its promoter in the Draft Red Herring Prospectus (DRHP) of its initial share sale. This would limit the liabilities of the company, which otherwise would have exceeded the size of its proposed IPO, sources told FE. The total tax demand against Vodafone Plc, after adding interest and penalty, is around Rs 14,300 crore while the size of the public issue of the UK company’s Indian arm is expected to be Rs 13,000 crore.

Legal experts told FE that the potential liability on Vodafone India is limited as the litigation is against Vodafone Plc. “Vodafone India is not a direct party in the tax litigation as the proceedings are against its promoters and its parent company. Hence, the decision is in accordance with the relevant Sebi regulations,” said a securities lawyer. However, in the draft prospectus, the company could disclose the possibility of a “garnishing order” wherein the tax demand would be recognised as a third party risk, the lawyer added.

As per the Securities and Exchange Board of India (Sebi) regulations for Issue of Capital and Disclosure Requirements (ICDR), 2009 the DRHP needs to contain “all material disclosures which are true and adequate so as to enable the applicants to take an informed investment decision”. Events that need to be disclosed include developments pertaining to the company’s business, financials along with pending litigations and potential liabilities.
Vodafone Plc refused to comment on the queries sent by FE. “We have previously said that we have started preparations for a potential IPO, which includes private conversations with banks, but this is a lengthy process and no decision will be made until we are at the end of it,” the company said.

Vodafone India has started its initial public offering (IPO) process and is expected to appoint merchant bankers for the issue by the end of April. Last week, the company had invited several domestic and foreign investment banking firms to submit proposals for running the public issue.

Vodafone Plc, the company’s parent, is locked in a dispute with income tax department since 2007. The dispute is regarding the telecom company’s $11-billion acquisition of Hutchison Essar which is now known as Vodafone India. Although the Supreme Court ruled in favour of Vodafone in the tax case, the government introduced retrospective amendments to tax laws in 2012, bringing such transactions under the tax net. This prompted Vodafone to launch international arbitration proceedings.

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