Malaysia’s Axiata Group, the parent company of Ncell, has decided to exit Nepal in a blow to the government which is preparing to hold an investment summit in April 2024 to attract domestic and foreign investors to the country.

Seven years after entering Nepal’s telecom sector by acquiring the majority stake from Swedish telecommunication giant TeliaSonera, the Malaysian company decided to quit the Nepali market citing decreasing profits and other challenges in operation in the country.

Since it acquired 80 percent stake in Ncell in April 2016, Axiata has been facing one after another setback, particularly reputational damage, due to unpaid capital gains tax by the Swedish company when the European company exited Nepal.

Ncell itself was forced to pay the capital gains tax through the court verdict, affecting the profitability of Axiata, its parent company.

Even though Teliasonera was supposed to pay the capital gains tax for making gains, Ncell had to pay up after its former owner went away without paying applicable taxes.

“The outlook in Nepal is increasingly challenging, thus the board has decided to exit Nepal and accordingly reclassify Ncell as an asset held for sale,” said Vivek Sood, group chief executive officer and managing director of Axiata, according to a statement posted on Axiata’s website.

“We believe this move will place Axiata in a much stronger position to deliver on our strategic priorities and is in the best long-term interest of all our shareholders.”

According to Axiata’s statement, Ncell's year-to-date (from early 2023 to third quarter) revenue shrank by 6.4 percent due to lower domestic interconnect rates.

Earnings before interest and taxes (EBIT) declined 11.4 percent due to open year tax assessment and profit after tax, and minority interests (PATMI) saw a decline of 47.7 percent due to higher net finance cost.

According to Axiata’s statement, profitability of the entire Axiata group was affected by Ncell. Axiata’s PATAMI declined to a loss of 1.3 billion Malaysian ringgit affected by asset impairment from the reclassification of Ncell among others, according to its statement.

Ncell officials declined to speak on the issue as the parent company itself has spoken on the matter.

The Malaysian company has not mentioned who is going to buy its stake in Ncell. Some reports say its own minority shareholder—Sunivera Capital Ventures—could take it up. The company is owned by Satish Lal Acharya.

In recent years, telecommunications companies have been struggling to maintain profitability as their income from voice services are plunging. While Axiata pointed out revenue loss for Ncell in its latest statement, its rival, Nepal Telecom, is also witnessing reduced profitability.

Ncell also suffered a quarter-on-quarter 1.82 percent decline in subscription growth, to 13.47 million, in the fourth quarter of the last fiscal year 2022-23, according to Nepal Telecommunications Authority (NTA).

Experts on the telecom sector say the government's misguided policies and laws contributed to Axiata’s decision to exit Nepal as the future looks uncertain for telecom companies in Nepal.

“Axiata’s decision to leave Nepal ahead of the planned investment summit could send a message that Nepal is not a good destination for foreign investment,” said Ananda Raj Khanal, former senior director at the NTA.

He also pointed out a number of factors that might have forced Axiata to leave. “One is a high renewal fee of Rs20 billion, which needs to be paid thrice during the 25-year licence period, amounting to a total of Rs60 billion,” he said.

According to the regulations made in accordance with the Telecommunication Act 1997, the licence renewal fee in the first 10 years is Rs20.13 billion, with the need for renewal every five years by paying an equivalent amount.

“It is an unrealistic cost for telecom operators as they also continuously pay income tax, value-added tax (VAT), and rural telecommunication fee, among others,” said Khanal.

The telecom companies have to continuously invest in technology with the advent of the 5G era.

As per Section 33 of the Telecommunications Act-1997, a telecommunications company having over 50 percent stake of foreign investors needs to hand over all the assets to the government upon the expiry of the licence period. A fresh licence can be issued to the same company if it pays the value of the property that went in the name of the government.

But a local company or a company having less than 50 percent foreign ownership need not hand over its property to the government even after the expiry of the licence period. Such a company can continue providing the service by taking a fresh licence, the law says. “This provision is discriminatory to foreign firms,” said Khanal.

Earlier this year, the government had drafted an amendment to the Act, removing the provision requiring handover of property to the government after 25 years. But it invited controversy within the bureaucracy, with some suggesting that the provision is intended to benefit Ncell.

On the other hand, the NTA is yet to allow Ncell to conduct testing of 5G services even though such approval has been given to Nepal Telecom, according to officials. The company also faced reputational damage due to controversy over capital gains tax. Nepal’s Supreme Court in November 2019 determined the capital gains tax liability of Ncell at Rs21.1 billion, which it paid in instalments. Earlier, the telecom giant had paid as much as Rs23.57 billion.

On June 9 this year, the International Centre for Settlement of Investment Disputes (ICSID), an international investment dispute resolution body established by the World Bank, issued a verdict in favour of the Nepal government in the dispute over the determination of capital gains tax (CGT) levied on Ncell regarding its acquisition by Axiata.

Officials said the win saved the government from paying as much as Rs66 billion to Ncell and Axiata Investment (UK) that they had claimed in compensation from the Nepal government. The claims were supposedly for losses caused to Ncell along with annual interest of 16 percent and arbitration expenses.