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Ruias sniff cash in Vodafone win

New Delhi, Jan. 21: The Ruias are likely to press for a refund of the $880 million that Vodafone Essar deducted while making a net payment of $3.3 billion last year for the 22 per cent stake held by the overseas entities of the Essar group.

The Ruias have been emboldened to ask for a refund after the Supreme Court threw out the Rs 11,000-crore tax case against the Vodafone group relating to its 2007 acquisition of a controlling interest in Hutchison Essar (since renamed as Vodafone Essar) in an $11.08-billion deal.

Essar is examining the Supreme Court judgment in the Vodafone case and will shortly decide on its course of action, sources close to the development said. The company expects to resolve the issue in a few months, they added. An Essar spokesperson, however, declined to comment.

In June last year, Vodafone agreed to pay the Ruias $5.46 billion for the 33 per cent stake that the Ruias held in Vodafone Essar. The deal was to be consummated in two phases: in the first phase, Vodafone was due to acquire 22 per cent from the overseas entities of the Essar group.

The remaining 11 per cent held by the Ruias’ Indian entities was to be acquired later for which a payment of another $1.26 billion was to be made by February 15, 2012.

The tax payout on the first phase of the transaction was paid to the Indian government on July 5 last year. The deduction was made after the Ruias and Vodafone decided that it was prudent to make the payment on a “without prejudice” basis.

The decision to make the deduction was made after a Vodafone subsidiary Euro Pacific Securities approached the Authority for Advanced Rulings (AAR) seeking clarification whether the deduction of a withholding tax on this transaction was warranted. The AAR adjourned the hearing forcing Vodafone and the Ruias to make the tax payment.

Under the terms of the deal struck in 2007, Vodafone and the Ruias held call and put options that were exercisable by May 2011. The total payout was initially capped at $5 billion. But the Ruias wanted more and Vodafone finally agreed to pay $5.46 billion.

The contours of the second part of the transaction involving the 11 per cent held by Essar’s Indian entities changed somewhat in August last year when Vodafone announced that Piramal Healthcare Ltd had agreed to fork out $640 million to pick up a 5.5 per cent stake in the Indian telecom entity.

Under the terms of the deal, Piramal Healthcare acquired the 5.5 per cent stake directly from the Ruias.

The buyout of the 33 per cent stake from the Ruias had prompted Vodafone to find an Indian partner to hold some part of the stake in order to stay within the 74 per cent limit on foreign holding in the telecom sector.

While reporting its results for the period ended September 30, 2011, Vodafone had said approval for the sale of the remaining 5.5 per cent in Vodafone Essar still held by the Ruias was pending. It wasn’t clear whether Vodafone had approached the Foreign Investment Promotion Board for approval of the stake transfer.

The Supreme Court had yesterday set aside the tax claim against Vodafone on the ground that the Indian authorities did not have jurisdiction over an overseas transaction.

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