Bharti MTN Deal

In the backdrop of domestic major Bharti Airtel and South Africa's MTN hoping to finalize the merger deal by mid September 2009, let's have a look at what has transpired between the two until now.

Background of the deal

Bharti and MTN were in talks of a merger since mid 2008. However, those talks collapsed as supposedly, MTN wanted a bigger stake in Bharti. Later Anil Ambani's Reliance InfoCom too tried for a merger with MTN but the talks stalled after brother Mukesh Ambani's Reliance shot a mail in June 2008, claiming it had the rights of first refusal in the event of a change of management at RCOM.

The current valuation of the deal

The deal was again revived by Bharti in early 2009 and as of May 2009, the deal was worth USD 23 billion. This is much lower than the USD 45 billion, at which the deal was valued at when the talks had initiated in 2008. Bharti will acquire a 49 per cent stake in MTN, which in turn would buy 36 per cent interest in Bharti. The deal involves about USD 10 billion worth cash transaction and remaining USD 13 billion in shares from the two sides. It may become the largest cross border acquisition by a domestic company after the $12.7 billion Tata-Corus deal.

About MTN

MTN is a telecommuications company bassed in South Africa and active in 21 countries, operating mainly in African and Middle Eastern companies.

What's in it for Bharti

Major benefit for Bharti is expanding its subscriber base. Today, Bharti has over 100 million subscribers in India and has a small overseas presence in areas like Seychelles, Jersey Islands and Sri Lanka. MTN, which has 100 million subscribers across Africa , Middle East and Asia, will catapult Bharti to the top five in the global pecking order.

Current Scenario

Both parties are hoping to finalize the deal by mid-September 2009. Their major point of contention is over the valuation and management rights where MTN is supposedly bargaining for more and Bharti may have to loosen a bit. But, both are hopefully close to resolution and sealing the deal. Also, Bharti has shortlisted 8 banks for a 5 year offshore loan up to $4 billion. Barlcays Bank and StanChart are the coadvisors. Deutsche Bank and Merill Lynch are advising MTN on the deal.

India sent back by Swiss Banks

Currently, we read a lot of news regarding Swiss Bank's refusal to share confidential account details with India even though, USA has reached an agreement with Switzerland, under which Swiss Bank UBS AG agreed to hand over details of  more than 4,000 secret accounts worth 18 billion dollars. Many are trying to project this as a power issue, wherein USA being a super power can get what it wants while India cannot. But this may not necessarily be true. There is another point of view on the issue.

US went to Swiss Bank with a list after it spent years in investigating the suspects and collected sufficient proof against the tax evaders. The US revenue service filed a case against UBS AG in an American court and UBS gave way because the case that US built was very strong. In contrast, India went to Swiss banks with a list of people and asked details about them without doing their homework properly. The Indian authority didn't have a strong case against the people whose information they were seeking to acquire. The Swiss law does not permit such fishing expedition.

Indian and Switzerland have signed a double taxation treaty under which the Swiss Banks will have to share information with India, if India can prove that the suspects are tax offenders. The US also achieved its purpose using the same agreement. The Swiss Banks Association has asked India to submit solid proof about the suspects being tax offenders.

About Swiss Bank (source: Wiki)

The secrecy tradition of the Swiss Bank is more than 300 years old. The Swiss government views the right to privacy as a fundamental principle that should be protected by all democratic countries. Bank secrecy (or bank privacy) is a legal principle under which banks are allowed to protect personal information about their customers, through the use of numbered bank accounts or otherwise. Effective bank secrecy is better achieved in certain countries, such as Switzerland or in tax havens, where offshore banks adhere to voluntary or statutory levels of privacy. Swiss law distinguishes between tax evasion (tax -reporting of income) and tax fraud (active deception). International legal assistance is only granted with respect to tax fraud.

New Direct Tax Code for India

The Indian Government this week, unveiled the draft of a brand new direct tax law, which will replace the four-decade Income-Tax Act. If the bill gets passed in the Lower and Upper Houses of the Parliament, the government is hoping to implement the new code for 2011, after getting the bill passed in this year's winter session. According to Finance Minister, Pranab Mukherjee, the new tax will, "Improve efficiency
and equity of the Indian tax system by eliminating distortions in tax structure." Let's see what the tax code proposes for an Individual, Corporate, Stock Market etc.

Individual Taxation

• Lower the income tax but reintroduce wealth and capital gains tax at lower levels.
  

  (Wealth tax – Currently, Wealth tax is imposed on income of more than Rs. 30, 00,000 at the rate of _____.According to the new tax law, net wealth, which would include all wealth of an individual in excess of Rs 50 crore, will be chargeable to wealth tax at the rate of 0.25%.)
  

  Income Tax slabs
  

Income Tax Rate		Current Tax slab	Proposed Tax slab
Exempt	Upto Rs. 1,60,000 a year	Upto Rs. 1,60,000 a year
10%	Upto Rs. 3,00,000 a year	Upto Rs. 10,00,000 a year
20%	Upto Rs. 5,00,000 a year	Upto Rs. 25,00,000 a year
30%	Beyond Rs. 5,00,000 a year	Beyond Rs. 25,00,000 a year

• Now, an individual's gross salary would also include perquisites such as value of rent-free accommodation, medical reimbursements and leave travel encashment, which are currently taxable.
  
• Taxpayers will also not be able to claim tax benefit on interest repayment on housing loans. However, the benefit would be available if the house is rented. 
  
• Bring a uniform pattern of taxation on all long-term savings in the form of EET—exempt at the stage of contribution, exempt during accumulation and taxed during withdrawal. 
  

  ( This means that all the long term savings, will not be taxed when you are investing in them, will not be taxed when you are earning interest on it but not withdrawing it, and will only be taxed once when you are withdrawing it.)
  

 

Corporate

• Cutting down the corporate tax rate to 25% from current rate of 30% plus 10% surcharge if turnover is more than Rs. 1crore plus education cess (For Indian companies).
  
• Current profit-linked tax incentives for businesses will be replaced with investment-linked incentives. 
  

  (This means that current tax incentives given to corporate according to the profits they make should be given according to the investments they make.)
  

• It also proposes rationalization of tax provisions for amalgamations and demerger so that tax remains neutral when businesses reorganize. 
  
• Dividend distributed by companies would be taxed at the rate of 15%. From current rate of 12.5%.
  
• Currently, if there is a conflict between the tax treaty that India has with another country and the Indian tax law, the non resident Indian entity has the choice to opt for the treaty benefits and domestic law. According to the new code, this choice will be withdrawn and in case of conflict which ever has been framed later will be followed. So if a double taxation treaty has been signed later, the Indian tax law will be superseded by the Treaty provisions.
  

 

Stock Market

• Proposes abolition of Security Transaction Tax. Capital gains on shares and securities have been proposed to be taxed as income.
  

  (Security Transaction Tax that was introduced in Budget 2004-05, and is levied every time you buy or sell a security like shares. The rate differs according to the nature of the security and whether it is a purchase or sell. )
  

  
   

  
   

Indian Private Airlines

The private airline strike threat was recently called off after government contemplated action. The pet peeve of the private airlines is the aviation fuel costs (40% of which are taxes) and airport charges. The strike was meant to ask government to reduce both. But reportedly not all private airlines were interested in the strike causing a divide in the full service airlines and low cost ones.

Performance-wise there is a stark contrast between the full service airlines and low cost ones.

The full service airlines are making the most losses. Kingfisher lost Rs 243 crore in the latest quarter ending June 2009, Jet Airways lost Rs 225 crore while budget carrier SpiceJet made Rs 26 crore of profits. As compared to the same period a year ago, Jet's revenue's are down 18 per cent while SpiceJet's are up 15 per cent.

Air India has a passenger load factor of 67.9 per cent, Jet Airways' is around the same and Kingfisher's is 72 per cent - SpiceJet, however, is 77.3, GoAir 85,1 and IndiGo 81.6 per cent (all figures for June 2009). That is, the budget airlines are getting in more passengers per flight. Since they have lower costs of flying, this means their costs per passenger seat are much lower than those of the full-service airline. Even in market share these airlines are doing better. Though Kingfisher and Jet have cut capacity, deferred deliveries, and decreased passenger routes, SpiceJet has done the opposite.

So even though the low cost airlines are facing the same situation as the full service ones, they are faring much better despite the high fuel costs. Also, the other argument of high airport charges doesn’t hold true as India has one of the lowest air port charges in the world.

( Airline related posts: What's happening at Air India)

(Source: Primarily Rediff.com)

The impending food crisis in India

The not so good monsoon in India, has pushed India into an impending food crisis. Not just India, but other developing and underdeveloped economies are also worried about the food crisis that may lead to food war in several countries. The world food prices have been climbing in most parts of the world despite a slowdown and saw a surge in 2008. The United Nations has pointed out that unlike previous price rise which were mainly driven by food shortages, the price spike came in 2008 when the world's farmers reaped a record grain crop. In countries like India, the food price hike draws more concern because the population spends a considerable part of their income on food and any increase affects them more than their developed countries counterpart.

Main reasons for global food prices hike in 2008

The main reason for global food crisis in 2008 has been contributed to increased use of food crops land for biofuel cultivation thus reducing the land available for food crops. George Bush also pointed out in 2008 that another main reason is increasing consumer demand in countries like India and China because of their prosperity. I also read an interesting article where it was mentioned that increasing non vegetarianism is also responsible for increased demand of food grains because more foodgrains are required to breed the cattle than the same proportion required for directly feeding the human beings. Also, the increased energy costs in 2008, led to increased transportation costs further fuelling price hike.

Current food situation in India

After enjoying a reliable monsoon for the past few years, this time the rain gods have decided to give a hard time to India. The country is facing drought like situation in many Northern and Eastern parts like North Gujarat, UP. And simultaneously is also facing floods in Western Gujarat, North Bihar etc. The rainfall is deficient in almost two third of the country and the Prime Minister has now called for an emergency meeting to stem the price rise. The impact of poor monsoon is that the entire paddy growing belt of West Bengal, Andhra Pradesh, UP, Bihar, Punjab, Chhattisgarh and Haryana has received either scanty or deficient rainfall or their maybe an impending shortfall of the Indian staple diet of rice and wheat.

The step that government is taking to stem this rise has also taken the form of a political debate. The state governments are vying with one another for drought assistance from Central government. The opposition party, BJP, has pointed out that, “In recent years 1.83 tons of wheat, 3.95 lakh tons of rice, 22,000 tons of paddy and a huge no of tonnes of maize was wasted or damaged in the various godowns of the Food Corporation of India (FCI)." Agricultural Minister Sharad Pawar has pegged this loss at 20% of the total turnover of FCI. This is a big amount to be wasted in the year of poor agriculture output.

The Impact of food crisis

Poor agricultural growth will not only increase food prices, but also slowdown the economic recovery of India. India is dependent on the rural market for taking its GDP to a growth trajectory and a poor crop will reduce the purchasing power in the hands of farmer which form a considerable part of the India’s population. Also, the contribution of agricultural industry to India’s GDP is substantial and any dip in it will bring down the overall GDP growth of India. Also, an increased household budget will give the Indian consumer decreased purchasing power as most of the income will be spent on food items. If the government doesn’t take necessary steps to deal with India’s dependency on monsoon in short term and long term, it will hamper India’s growth both in the current slowdown and in the long haul.