On April 12, 2016, the Malaysia-based telecom giant Axiata entered Nepal by acquiring Reynolds Holding which had 80 per cent shares in Ncell. The acquisition cost Axiata a total of USD 1.36 billion.
At that time, Axiata spent USD 1,706 or Rs 181,000, based on the exchange rate, to acquire one share of Ncell, which had a paid-up capital of Rs 100 million.
Axiata, which entered Nepal with enthusiasm, decided to exit on September 30 after a tenure of seven years, six months, and 13 days. At the time of departure, 80 per cent of Ncell’s shares were sold for USD 50 million, equivalent to USD 62.5 per share.
Axiata choosing to sell Ncell shares, despite the company’s robust performance during this period, at a price less than 96 per cent has become a source of significant scrutiny and raised serious questions in the public’s mind.
From the time Axiata announced the availability of Ncell shares for sale in the financial statement of the third quarter of 2023 on November 29, until December 1, when the UK-registered company of the Nepali partner Satish Lal Acharya signed an agreement to purchase the shares, certain aspects are evident, while some details remain unanswered.
What we know
The announcement of Axiata’s board decision to withdraw from Ncell was made public two months later:
The financial statement for the third quarter disclosed that Axiata’s board had decided to withdraw from Ncell on September 29. Despite the decision being made internally, it was not publicised at that time, and Ncell employees were not informed.
The decision became public exactly two months later, on November 29, when the company released its financial statements for the third quarter.
Buyer Spectrlite UK formed three days before sale
Reynolds Holding Limited, registered in St Kitts and Nevis, owns an 80 per cent stake in Ncell. Axiata UK Limited, a subsidiary of the Axiata Group, holds a 100 per cent share in Reynolds Holding, making Malaysia’s Axiata Group Limited the indirect owner of 80 per cent of Ncell’s shares.
According to Ncell reports, Spectrlite UK Limited, a sole proprietorship company owned by Satish Lal Acharya, a Singaporean citizen of Nepali origin, is set to acquire 100 per cent of Reynolds Holding Limited.
However, it appears that Spectrlite UK Limited was established with the sole purpose of making this purchase. This is evident from the company’s registration date on September 26, precisely three days before Axiata decided to sell 80 per cent of Ncell shares.
The timing of Spectrlite UK Limited’s registration and Axiata’s decision to exit the Nepali mobile segment, offering Ncell shares for sale, suggests a potential connection between these two events.
Spectrlite UK’s paid-up capital is not USD 1, but USD 100,000
Spectrlite UK Limited is a company with an issued and paid-up capital of USD 100,000 according to Bursa Malaysia, Malaysia’s stock exchange. The details specify that the company has 100,000 shares, each valued at USD 1.
Axiata will continue to receive partial dividends as long as Ncell’s license is maintained
Ncell’s license is valid until 2029, and as per existing regulations, Ncell’s ownership will be transferred to the government afterwards. However, the company has disclosed that an agreement with Spectrlite UK is in place, stipulating that Axiata will continue to receive dividends throughout the license duration. Additionally, any accidental profits during this period will also be attributed to Axiata.
It is also noted that there is an agreement specifying that Ncell will assume responsibility for business operations and liabilities until 2029. If the government levies any taxes on Ncell, both current and future, the responsibility for these taxes will fall on the buyer.
However, Axiata will not receive the complete dividend from Ncell during this period. According to the details provided by Axiata to the Malaysian stock exchange, Axiata will receive the entire dividend for the year 2023. For the subsequent years, 2024 and 2025, Axiata will be entitled to 40 per cent of the dividend that Reynolds Holding receives from Ncell.
Likewise, Axiata is set to receive 30 per cent of the dividend that Reynolds receives in both 2026 and 2027. Subsequently, for the following two years, Axiata’s share of the dividend will decrease to 20 per cent. The agreement specifies that these percentages will be implemented after obtaining regulatory approval for payment by Ncell to Reynolds.
Moreover, the agreement outlines that if Satish Lal Acharya sells a significant portion of Ncell shares for an amount exceeding the purchase price by December 29, 2029, Axiata is entitled to receive that additional amount.
Axiata to take Rs 25 billion immediately through reserves and dividends
Ncell’s financial statement reveals that Rs 18.76 billion of retained earnings has not been distributed as dividends from past profits. According to the agreement with Spectrlite UK, Axiata is entitled to 80 per cent of the dividend distributed by Ncell in 2023.
In this scenario, Axiata, being the owner of 80 per cent of the shares, can potentially claim the entire amount in reserve by declaring a dividend. This means Axiata could receive Rs 15 billion from the amount in the reserve.
Additionally, Axiata will be able to claim the remaining dividend announced in the last fiscal year 2022/23. The financial statement for that fiscal year mentions an amount of Rs 4.81 billion.
Similarly, Axiata is set to receive 80 per cent of the dividend declared in the last fiscal year 2021/22. Although Ncell has not yet submitted details of the dividend declaration for the year, based on the comparison with the previous fiscal year, it can be estimated to be around Rs 5 billion. This suggests there is an agreement for Axiata to receive approximately Rs 25 billion immediately.
What we don’t know?
The sale has posed many questions.
Why was the company’s valuation so low?
Many individuals harbour suspicions that the valuation of 80 per cent of Ncell’s shares may be only USD 50 million.
Upon examining the agreement between Axiata and the buyer Spectrlite UK Limited, it becomes evident that the profit Axiata stands to gain after selling the company exceeds Rs 6.65 billion. This is because, as mentioned earlier, Axiata is entitled to partial dividends until 2029, in addition to access to previous reserves and dividends. The comprehensive benefits outlined in the agreement contribute to a more significant financial outcome for Axiata from the sale of Ncell.
In the third-quarter financial statements of 2023 published by Axiata, Ncell’s equity value is reported as Rs 10.80 billion after subtracting total liabilities from total assets. It’s important to note that, as Ncell’s assets are listed for sale, they have been reclassified, and losses have been accounted for accordingly.
Axiata has set Ncell’s property up for sale at Rs 53.8 billion, with a corresponding liability of Rs 42.28 billion. After deducting liabilities from assets, Ncell’s value is calculated at Rs 10.8 billion. From a balance sheet perspective, this pricing seems appropriate.
However, when the company’s shares are offered for sale, the assets are reclassified, and the loss (impaired assets) is stated as Rs 41.38 billion. If this amount had not been reflected as a loss, the equity value of the company would have been Rs 52.18 billion.
While the equity value of Rs 52 billion falls short of half the purchase price of Rs 143 billion, concerns related to potential tax liabilities in the event of losing a pending court case, the impending expiration of the license in 2029, and a decline in turnover and profit contribute to a conservative valuation. However, the reliability of this argument may be subject to questioning and further scrutiny.
How can per share price fall to Rs 8,000 from Rs 124,000?
In the fiscal year 2020/21, Ncell Axiata Limited transitioned to a Public Limited company by adding six new shareholders. The company issued a total of 11 shares to these new shareholders at a rate of Rs 124,100 per share.
According to information from the Nepal Stock Exchange, on August 12, 2021, the shares were traded on the OTC market of NEPSE at 124,100. However, it is noteworthy that subsequently, Axiata entered into a transaction where 800,000 shares were sold to Spectrlite UK for a total of Rs 6.65 billion.
This means the new price per share stands at Rs 8,312. Why Axiata sold those shares for that price within two years remains unclear. It is uncertain whether the initial share pricing was intentionally elevated in anticipation of issuing primary shares or if the subsequent price reduction is associated with the sale of the company.
Why did Satish Lal and Spectrlite take the Rs 78 billion gamble?
Ncell has to fulfil all responsibilities and liabilities until 2029. Furthermore, any current or future tax claims by the government against Ncell will be the responsibility of the buyer Spectrlite.
Presently, there is a pending matter regarding the Rs 57.9 billion capital gains tax filed by the Large Taxpayer Office against Axiata. The Supreme Court has been hearing the case since Tuesday. Per the agreement between the two companies, if Ncell loses the case in the Supreme Court, the responsibility will fall on Satish Lal Acharya.
In addition to this, Ncell is obligated to pay an additional Rs 20 billion by 2029 for the renewal fee. The share purchase agreement specifies that Ncell will bear this responsibility.
Considering the financial obligations and the impending nationalisation of Ncell assets by 2029, Satish Lal Acharya’s decision to offer partial dividends to Axiata, contribute USD 50 million and assume the responsibility for government taxes and duties amounting to over Rs 78 billion raises a crucial question in this case.
Given these financial commitments and the nationalisation of Ncell assets by 2029, the decision by Satish Lal Acharya to provide partial dividends to Axiata, pay USD 50 million and undertake the responsibility of government taxes and duties totalling over Rs 78 billion raises a critical question in this case.
Will Reynolds Holding transfer ownership now or in 2029?
The timing of the transfer of ownership of Reynolds Holding remains unclear, as it is uncertain whether it will take place immediately or in 2029. Spectrlite UK Limited has been granted the option to pay 80 per cent of Ncell’s shares over four years.
In practical terms, this means that Axiata will only receive the proceeds from the sale by December 2027. Additionally, the agreement stipulates that even if Spectrlite sells its shares at a higher price until December 31, 2029, Axiata will still be entitled to receive the proceeds.
The specific details regarding when the ownership of Reynolds Holding will be transferred to Spectrlite are not clearly outlined in the information provided by Axiata.
Who will control and manage Ncell?
Despite Ncell being responsible for business and liabilities until 2029 and Axiata receiving partial dividends, it remains unclear whether the control and management of Ncell will be carried out by the new company or Axiata.
Axiata’s confidence in Ncell’s future benefits suggests a desire for management. However, with 100 per cent share ownership, control and management would naturally belong to Satish Lal Acharya.
While there is an existing management agreement between the two companies stipulating that Axiata will manage Ncell, the fate of this arrangement post-acquisition by Satish Lal Acharya remains unanswered. The possibility exists that Satish Lal Acharya may choose to continue this contract and retain management control, but this aspect remains unresolved. However, this issue is also unanswered.
Is Satish Lal Acharya trying to protect Ncell’s assets as NRN?
According to Section 25 of the Telecommunications Act 1997, the license period of Ncell, which obtained its mobile service license in 2004, is set to expire in 2029. Section 33 of the same Act outlines that land, buildings, equipment, and structures related to telecommunications, with over 50 per cent foreign investment, will be transferred to the ownership of the Government of Nepal following the expiration of the license period.
This means, that after 2029, Ncell, currently owned by Axiata, will become fully owned by the government. Subsection 2 of the Act specifies that the previous company has the option to resume operations after paying an amount equal to the value of the property to the Nepali government and obtaining the license once again.
However, Subsection 4 introduces a provision that after the expiry of the license for operating telecommunication services with up to 50 per cent foreign investment, the entity that held the previous license has the opportunity to reapply for and operate the license again.
The distinction between these two subsections lies in the ownership structure: if more than 50 per cent of the shares are held by foreigners, the assets of the company will be transferred to the government; if less, the property remains with the company. However, in both cases, after the license period expires, there is an opportunity for the entity to obtain the permit again through the same process.
In this scenario, if Satish Lal had owned Reynolds Holding in the name of Ncell’s partner company Sunivera Capital Venture, it could have potentially prevented the nationalisation of the property. Axiata, with an 80 per cent share, reportedly received dividends amounting to Rs 61 billion during this period.
Sunivera, holding a 20 per cent share, received over Rs 16 billion in dividends from Ncell. In theory, this company could have acquired 80 per cent ownership of Ncell for Rs 6.65 billion.
Despite this potential avenue, the question remains unanswered as to why a new company was established in Britain, and ownership of Reynolds was acquired through it instead.
Is it necessary to obtain the permission of the Telecommunication Authority before the share purchase agreement?
In the Telecommunication Regulations and Nepal Telecommunication Authority Regulations, there is a provision requiring approval from the Telecommunication Authority before buying and selling shares or transferring names.
It is important to note that having a share purchase agreement does not necessarily conclude the actual buying, selling, or transferring of shares. Additional procedures need to be completed for these transactions. Furthermore, as the business is not located in Nepal, some argue that prior permission might not be necessary, according to legal opinion.
However, during the earlier acquisition when Axiata took over the shares of Reynolds Holding, the Telecommunication Authority was reportedly involved and the license transfer fee was paid. It is mentioned that the authority has sought an explanation from Ncell regarding the current situation. The process the authority will follow in this instance remains unclear.
Is tax evasion a possibility?
Recently, telecom companies worldwide, including Nepal, have been experiencing a decline in business. Both Ncell and Nepal Telecom have seen a reduction in their operations. Axiata took ownership of Ncell during a period of peak business in Asia in 2015 when Ncell earned Rs 57.26 billion, resulting in a net profit of Rs 18.84 billion after expenses and taxes.
This positive trend continued until 2018 under Axiata’s ownership. However, in subsequent years, both Ncell’s income and profit have witnessed a continuous decline, reflective of a broader trend in Nepal’s telecom sector. Ncell’s income, which stood at Rs 54.16 billion in 2019, decreased to Rs 39.81 billion in 2022, and it seems to have further decreased to only Rs 28.27 billion by the third quarter of 2023.
Similarly, Ncell’s net profit has also been on a downward trajectory. While the company earned a net profit of Rs 20.3 billion in 2016, this figure declined to Rs 13.84 billion in 2019. Axiata’s financial statements indicate a profit of Rs 3.5 billion in 2020, Rs 6.67 billion in 2021, and Rs 5.16 billion in 2022.
In this challenging situation, a chartered accountant notes that Ncell’s price is not at the 2016 level. Even if the decrease is only four per cent, it is highlighted that the government would not receive the expected tax amount, indicating a significant impact on the overall financial landscape.
A chartered accountant pointed out that capital gains tax is imposed on the profit from the sale of shares, not on the loss. Referring to Section 55 of the Income Tax Act, the accountant emphasised that no profit tax is charged even when ownership of more than 50 per cent of the shares is sold, and control is transferred.
In light of this, the accountant cautioned that the government should be vigilant, ensuring that the transaction is not driven solely by the intention to evade taxes, and there are no ulterior motives other than a genuine loss in this particular transaction.
