Government, Axiata could be in a long legal battle over Ncell saleNepal studying the legality of Axiata’s abrupt exit without notifying the Nepal Telecommunications Authority.
A fresh legal battle between Nepali regulators and the owner of Ncell, the private sector telecom giant, could ensue following the Malaysian company Axiata’s decision to exit Nepal, allegedly without informing the Nepal Telecommunications Authority, officials and experts said.
On December 1, Axiata announced that it had entered into an unconditional sale and purchase agreement (SPA) with Spectrlite UK Limited (“Purchaser”) for the sale of Reynolds Holding Limited (“Reynolds”) which owns approximately 80 percent equity stake in Ncell Axiata Limited (“Ncell”).
Spectrlite UK, registered in the United Kingdom in September this year, is owned by Satish Lal Acharya, a person of Nepali origin currently based in Singapore. Sunivera Capital Venture, owned by his wife Bhavana Singh Shrestha, has a 20 percent stake in Ncell.
According to Axiata, key terms of the SPA include a fixed consideration and a conditional consideration. The fixed consideration is $50 million, of which $5 million is payable within six months of transaction completion and the remainder is payable after 48 months of transaction completion.
“The conditional consideration is… contingent upon the future business performance and net distributions declared by Ncell until 2029, and any windfall gains secured by the Purchaser during this period,” the Axiata said in a statement.
The Malaysian company has not disclosed how much it would receive under the conditional consideration. In 2016, Axiata had acquired 100 percent share of Reynolds Holding Limited to enter Nepal. It had purchased Reynolds Holding for $1.365 billion.
Now, in 2023, Axiata and Ncell have not notified the regulator about the new deal, according to Nepal Telecommunications Authority (NTA), the telecom regulatory body.
As per clause 15 (K) of the Telecommunications Regulation 1998, NTA’s approval is a prerequisite for the sale and purchase of more than five percent of the paid-up capital of a licensed entity.
Likewise, clause 4 of the NTA Bylaws (Share Sales of Licensed Persons)-2019 has also made provision that licensed persons need the NTA’s approval for the purchase and sales of licensed entities.
“We have notified Axiata through Ncell that prior approval of the NTA is essential,” said Purhusottam Khanal, chairperson of NTA. “As there has been no official communication from the companies concerned about the SPA, we have written to the Malaysian company.”
He said that the NTA has the option of not recognising the SPA if Nepal’s rules were violated. “In such a case, Axiata could move the court, triggering a new legal battle,” Khanal said.
The NTA plans to wait for Axiata’s answer till Tuesday. “If we don’t get an answer, we plan to seek clarification by giving a 24-hour deadline,” Khanal said.
Even Prime Minister Pushpa Kamal Dahal said that whether to grant Axiata an approval to leave Nepal would depend on further study.
“A foreign company cannot do whatever it likes in Nepal. As this case is linked with the NTA and also our tax administration, I have told the chief secretary that we should first study the matter. Only after we study the issue will we decide if the sale can go ahead,” he said during an interaction with editors on Monday.
Officials said that the provision requiring regulatory approval for sales of telecommunication entities was kept considering that telecommunication is a sensitive technology. “We cannot allow just about anyone to get an operating licence for telecom service. We have to examine the capability of potential new owners to run such services,” said Khanal.
In recent years, telecom technology has been a geopolitical hot potato, particularly since the US and its allied countries started blocking Chinese companies like Huawei and ZTE from their telecommunication networks citing security concerns.
While the regulatory authority has been pointing out the provision of telecommunication regulation to justify why Axiata should take prior approval for this deal, some legal experts have raised the possibility of Reynolds Holding, which is registered at Saint Kitts and Nevis, also needing Nepal’s approval.
“There has been no change in the ownership of a company registered in Nepal, but of one that has been registered in another country,” said Gandhi Pandit, a corporate lawyer adding, “can we ask the authority of Saint Kitts and Nevis not to approve the SPA without Nepali authorities’ approval?”
In the past, when Axiata entered Nepal in 2016, Nepali authorities imposed capital gains tax even though the Malaysian company had purchased 100 percent share of Reynolds Holding, which is based in another country.
Swedish Company TeliaSonera had exited Nepal without paying capital gains taxes. Ncell itself had to pay those taxes after Nepal’s Supreme Court ruled in 2019 that Ncell and Axiata were liable to pay those taxes.
Pandit said that questions could be asked whether Saint Kitts and Nevis would not have sovereign rights to deal with the company registered in its territory. “Following the latest SPA, there will be a change in the ownership of only Reynolds Holding registered in another country, but it will continue to own Ncell,” he said.
But many experts say that people register shell companies in tax havens like Saint Kitts and Nevis to avoid paying taxes in the country where they operate.
Pandit also believes that both the Nepal government and Reynolds Holding would have grounds to make legal challenges, as the Nepali authorities could point to the regulation while Reynolds Holding could say it is not registered in Nepal.
Questions have been raised whether Axiata decided to sell its share in Reynolds Holding at such a low price compared to how much it paid eight years ago, just to avoid paying taxes in Nepal. For example, capital gains tax is applicable when the seller makes certain gains from selling assets.
Officials at the Inland Revenue Department (IRD) are also in the dark over the Axiata deal with Spectrlite UK. “So far there has been no notification about this deal. First, the regulatory authority should deal with this issue,” said Dirgha Raj Mainali, director general at the IRD. “There is a legal provision on self-tax assessment and the tax authority also examines whether the taxpayer made a correct tax assessment.”
He said the IRD believes companies like Ncell would comply with tax laws. Many consider the value reportedly agreed between the Axiata and Spectrlite UK unrealistic and the deal as non-transparent.
“Even if prices were kept artificially low, it puts Spectrlite UK at high risk of having to pay more taxes when it decides to sell its share in Ncell in the future because of possible more capital gains,” said Mainali.
In the past, the Ncell and its owners have fought legal battles with the Nepali state over capital gains tax at both domestic courts and an international tribunal. The Supreme Court ruled in favour of the government.
The court in November 2019 determined the capital gains tax liability of Ncell at Rs21.1 billion, which the company 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 levied on Ncell after its acquisition by Axiata.
It barred the Nepal government from demanding any further taxes, fees, penalties, or interests from Ncell and its owners.