This article first appeared in The Edge Malaysia Weekly on January 18, 2021 - January 24, 2021

WHAT started out as a sweet deal that immediately boosted the earnings of Axiata Group Bhd in 2016 is looking more like a bitter pill whose sugar coating has melted.

In April 2019, Axiata was slapped with a capital gains tax claim by the Nepalese authorities in relation to its purchase of an 80% stake in Ncell. By April 2020, Axiata had paid over US$420 million in taxes that were usually imposed on sellers despite it being the buyer. Towards the later part of 2020, Axiata told investors that the profitability of its Nepalese unit, Ncell, would return to the growth path as it had resolved its spectrum-related issues. It was also hopeful of its chances at an international arbitration to secure its future interest in Nepal and to obtain a refund of those taxes that were paid under protest.

Just when it seemed as if its regulatory-related woes were behind it, a news report stated that Axiata appeared to have part-financed its Nepalese local partner’s purchase of the remaining 20% stake in Ncell which Axiata cannot hold due to an 80% cap on foreign shareholding for telecommunications companies in Nepal.

In a Jan 10 statement, Axiata said it “strongly denies baseless allegations made against the group in a news report published by the Centre for Investigative Journalism-Nepal (CIJ-Nepal) and Finance Uncovered on Jan 5”.

In response to The Edge’s questions on Jan 9, Axiata had also denied breaching any Nepalese laws with its RM5.91 billion (US$1.37 billion at the time) purchase of the 80% stake in Nepal’s largest mobile operator from Swedish telecoms operator TeliaSonera. The deal was first announced in October 2015 but completed in April 2016.

“Axiata did not finance any part of the acquisition of the 20% local shareholding in Ncell by Sunivera [Capital Venture Pvt Ltd],” says an Axiata spokesperson when asked to comment on the report, which claimed that a handful of Nepali investors had made a fortune from dealing with Ncell shares.

According to the spokesperson, Axiata entered Nepal with an independent Nepali party as a local partner, as required under local ownership laws. “We had considered other entities but decided on Sunivera Capital Venture Pvt Ltd [as it is] familiar with the group. It is also well-versed with the telecommunications industry and regulatory environment in Nepal.

“We further reiterate that the transfer of 20% of the fully diluted share capital of Ncell previously held by Niraj Govinda Shrestha to Sunivera was transacted directly between both parties on a willing buyer-willing seller basis, without the inclusion, involvement or participation of Axiata,” the spokesperson adds.

According to the report on CIJ-Nepal’s portal, in December 2015, US$90 million flowed from Axiata to Southern Coast Ventures Pvt Ltd (SCV), a company connected to Sunivera Capital Venture, which bought the 20% stake in Ncell and became Axiata’s local partner. SCV, CIJ-Nepal says, is linked to businesswoman Bhavana Singh Shrestha, whose husband is Satish Lal Acharya.

According to Axiata, Axiata’s wholly-owned unit Axiata Investment (Cambodia) Ltd (AIC) acquired a 10.3% stake in a company called Glasswool from SCV for US$90 million (RM379.4 million) on Dec 8, 2015, but “had no knowledge or interest as to how SCV used the proceeds [of the] transaction”.

Notes in Axiata’s 2015 annual report identified Glasswool as the “holding company of Smart Axiata Co Ltd” and that AIC had on Dec 13, 2013, entered into a cooperation agreement with Glasswool and SCV. The notes also showed Glasswool issuing new shares to SCV in 2014 and 2015 and that the purchase of the 10.3% stake in December 2015 had raised Axiata’s interest in Glasswool from 84.99% to 95.28%.

When asked for clarity on the transaction, Axiata’s spokesperson says Satish was one of the shareholders of Timeturns Holdings Ltd, which was the sole owner of Latelz Co Ltd in Cambodia that was merged with Axiata’s Cambodian unit Hello in 2013 to become the entity currently operating under the brand name of “Smart”. AIC bought Glasswool from Timeturns in December 2012 with cash as well as the issuance of a 10% stake in the combined entity to the remaining partner in a deal completed in February 2013.

“As other shareholders from Timeturns exited, Satish remained, holding his stake through SCV. Between 2014 and 2015, SCV’s stake in Smart increased from the initial 10% (2013) to 12.54% and eventually 15% as at February 2015. Around October 2015, he had expressed his intention to dispose of some of his stake in Smart. Recognising the potential of Smart as a high growth company, Axiata made its move to acquire these shares rather than to run the risk of having competitors access the stake,” the spokesperson explains, adding that Axiata later brought in Mitsui as a 10% partner in Cambodia — a stake that was later upped to 20%.

SCV remains a minority shareholder of Axiata’s operating company in Cambodia and “has no bearings in our dealing with Ncell in terms of the local partnership”, Axiata’s spokesperson adds.

Apart from provisions made on the capital gains tax paid, Axiata has not made any other provisions for Nepal as it “does not see that the performance of Ncell will lead to impairment of its assets”.

“Impairment, if any, may come from the unexpected capital gains tax claim on Ncell,” the Axiata spokesperson says but notes that the group is “confident of progress being made” at the ongoing international arbitration proceedings in the UK against the government of Nepal, and it is also seeking a permanent injunction against further attempts by the Nepalese government to collect capital gains tax from Ncell in connection with the transaction.

“We will not be able to comment further on the matter to maintain the required confidentiality. In this matter, we have, however, chosen to take a conservative view and hence, have provided for as a loss, which will in a way translate into impairment. If we win subsequently and are able to claim, it will be accounted for as income,” Axiata’s spokesperson adds.

It would seem that Axiata is in Nepal for the long haul. “Despite the series of reputational attacks being made against Axiata and Ncell in Nepal by various parties, the group remains fully committed to serving our customers in Nepal, whilst contributing towards the nation’s most pressing needs, including providing much needed Covid-19 support that benefits millions of Nepalis,” Axiata’s Jan 10 statement read, noting that some NPR9.7 billion (RM339.5 million) had been channelled via its corporate social responsibility initiatives.

Only time will tell if what’s looking like a bitter pill for Axiata would turn out to have beneficial effects on its growth.

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