Will Vodafone's Tax Dispute Slow India's Rapidly Growing Telecom Sector?

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 |  Includes: EPI, ERIC, INDL, INDY, INDZ, INP, INXX, MTE, NOK, PIN, SCIN, SIEGY, VOD
by: World Market Pulse

There is no doubt that India as a preferred investment destination is gaining more and more acceptance with each passing day. India is now seeing inflows from all corners of the globe, be it global macro funds, hedge funds or exchange-traded funds. But investing in India comes with its glitches, as Vodafone Group Plc (NASDAQ:VOD), the world’s biggest mobile-phone company by sales, found out after it was ordered by India’s Supreme Court to pay a deposit while it challenges a tax bill for the country’s largest cross-border deal.

Vodafone, fighting a tax bill in India over its 2007 purchase of Hutchison Whampoa Ltd’s (OTCPK:HUWHY) mobile business in the country, had appealed to the Supreme Court challenging a lower court order that Indian tax authorities had jurisdiction over tax bills in cross-border deals. The tax office had asked Vodafone to pay Rs 11,218 crore within 30 days, but the British firm had said it "strongly disagrees" with the calculation. Vodafone is separately trying to settle the dispute out of court. Earlier, reports suggested that the Dutch government had approached India on behalf of Vodafone’s Netherlands unit to settle the three-year-old dispute.

The news had a definite impact on the company’s stock that dropped as much as 1.2 percent to 171.9 pence in London trading and was down 0.1 percent as of 11:32 a.m. There is no doubt that a final verdict against the company could make India less attractive to foreign firms especially in the telecom sector fearful of retroactive changes to India's tax law. Vodafone competes against 14 operators in India, the world’s second-largest market for mobile phone customers. Vodafone Essar Ltd., Vodafone’s India unit, is the nation’s third-largest operator, after Bharti Airtel Ltd. and Reliance Communications Ltd., with 114 million customers and a 17 percent share of the market at the end of August, according to data from India’s telecommunications regulator.

2G Spectrum Scam

On the one hand as Vodafone fights its taxation issues, the already sluggish Indian telecom sector has been in the news for all the wrong reasons lately after the country's telecom minister, A Raja, was forced to resign over spectrum allocation corruption in the 2G allocation to private companies in 2008. The Spectrum was allotted in 2008 beginning at price fixed in 2001, violating the Telecom Regulatory Authority of India’s vehement objection.

Moreover, there was no auction, the license were gifted on a shabby "first come first serve method." The 2G Spectrum allocation scam, considered as the mother of all scams in India has caused more than Rs. 60,000 crores loss to India's public exchequer, exposing the vulnerability of prevailing laws of the nation to the whims and fancies of political-middlemen nexus.

Indian Telecom Sector

India's teledensity has improved from under 4% in March 2001 to around 53% by the end of March 2010. Cellular telephony has emerged as the fastest growing segment in the Indian telecom industry. The mobile subscriber base (GSM and CDMA combined) has grown from under 2 million at the end of FY00 to touch 584 million at the end of March 2010 (average annual growth of nearly 76% during this ten year period). Tariff reduction and decline in handset costs has helped the segment to gain in scale. The cellular segment is playing an important role in the industry by making itself available in the rural and semi urban areas where teledensity is the lowest.

India Braces Itself for 3G Services

The telecommunications market in India has tremendous potential, and there is no communications equipment maker in the world that is not increasing its presence there at this time, ahead of the era of 3G cellular communications. According to recent news, the first phase of 3G networks deployment in India is likely to start from December 2010 and will provide a business opportunity of approximately $3 billion for these network gear makers. If this actually happens, then India will generate the largest global telecom contract in 2010.

Besides the state run Bharat Sanchar Nigam Ltd. and Mahanagar Telephone Nigam Ltd. (NYSE:MTE), other private players who own spectrum are Vodafone Essar; a joint venture between Vodafone Group Plc. and Essar telecom, Bharti Airtel, Idea Cellular, Aircel, Tata Teleservices, and Reliance Communications.

The two major beneficiaries of the first phase of 3G rollouts will be L.M. Ericsson AB (NASDAQ:ERIC) and Nokia Siemens Networks, a joint venture between Nokia Corp. (NYSE:NOK) and Siemens AG (SI). While Ericsson is the existing vendor for Vodafone Essar, BhartiAirtel, and Idea Cellular for 2G networks, Nokia Siemens Networks has already established a strong 2G foothold in Vodafone Essar, BhartiAirtel, Tata Telecomservices and Idea Cellular.

Mobile Trading Picking Up in India

Trading through mobile phones has gained popularity the world over. Now the Indian capital market watchdog, Securities Exchange Board of India (SEBI) has given the green light for trading of shares via mobile phones. With the regulator's nod, the Indian stock exchanges are all set to offer the facility to investors through their registered brokers. The facility will enable any registered broker or a client to trade, place orders and view positions from anywhere in the country through their mobile phones.

All trading facilities accessible in internet trading will be available in mobile trading and investors will be able to see real time changes in share prices and market data of multiple companies on their mobile screen. An investor will need to have an online trading account and internet enabled mobile phone. Investors will have to download a software application from the link forwarded by their broker. If the mobile trading platform does not compromise on the security of transactions, it's bound to increase retail investor participation in the Indian markets, one of the world’s largest growing markets.

India Investment Options

Some of the popular India investment ETFs include:

  • Wisdom Tree India Earnings Fund (NYSEARCA:EPI): The WisdomTree India Earnings Index is a fundamentally weighted index that measures the performance of companies incorporated and traded in India that are profitable and that are eligible to be purchased by foreign investors as of the index measurement date. (Expense Ratio: 0.88%)
  • PowerShares India Portfolio (NYSEARCA:PIN): The Index is designed to replicate the Indian equity markets as a whole, through a group of 50 Indian stocks selected from a universe of the largest companies listed on two major Indian exchanges. The India Index has 50 constituents, spread among the following sectors: Information Technology, Health Services, Financial Services, Heavy Industry, Consumer Products and Other. (Expense Ratio: 0.78%)
  • iPath MSCI India Index ETN (NYSEARCA:INP): The Index seeks to represent approximately 85% of the free-float-adjusted market capitalization of equity securities by industry group within India. (Expense Ratio: 0.75%)
  • iShares S&P India Nifty 50 Index (NASDAQ:INDY): The index measures the performance of 50 large cap Indian stocks. (Expense Ratio: 0.89%)
  • EG Shares India Infrastructure (NYSEARCA:INXX): The index is a free-float market capitalization weighted stock market index comprised of 30 leading companies that Indxx, LLC determines to be representative of India's Infrastructure industries, as defined by the Industry Classification Benchmark (ICB). (Expense Ratio: 0.85%)
  • EG Shares India Small Cap (NYSEARCA:SCIN): The index is a free float market capitalization weighted stock market index comprised of a representative sample of 75 Indian companies that Indxx LLC determines to be the representative of small market cap companies in India. (Expense Ratio: 0.85%)
  • Direxion Daily India Bull 2x Shares (NYSEARCA:INDL): The Index is designed to replicate the Indian equity markets as a whole, through a group of 50 Indian stocks selected from a universe of the largest companies listed on two major Indian exchanges. The India Index has 50 constituents, spread among the following sectors: Information Technology, Health Services, Financial Services, Heavy Industry, Consumer Products and Other. (Expense Ratio: 0.95%)
  • Direxion Daily India Bear 2x Shares (NYSE:INDZ): The Index is designed to replicate the Indian equity markets as a whole, through a group of 50 Indian stocks selected from a universe of the largest companies listed on two major Indian exchanges. The India Index has 50 constituents, spread among the following sectors: Information Technology, Health Services, Financial Services, Heavy Industry, Consumer Products and Other. (Expense Ratio: 0.95%)

Disclosure: No positions