Over 14-Year Wait For VSNL Shareholders Nears Closure

After a 14-year-long wait, minority shareholders of the erstwhile VSNL, now renamed Tata Communications, are finally set to receive shares of the demerged company that will hold VSNL’s surplus land, said a senior executive at Tata Communications, who preferred not to be quoted. The scheme of demerger has to be approved by the two high courts, he added.

The demerger process began when, on August 11, Lok Sabha passed the Taxation Laws (Amendment) Bill. The Bill exempts asset sales by PSUs from capital gains tax.

Of the total land that VSNL acquired from the government when it was incorporated in 1986, 773.13 acres at different locations was identified as ‘surplus’ in the shareholders’ agreement between the government and the Tata Group at the time of the company’s disinvestment. That land bank now stands reduced to 646.08 acres, according to disclosures made by Tata Communications in its annual report of 2015-16.

The Divestment

The divestment of VSNL, a listed company, took place in February 2012, when the government sold 25 percent equity through a strategic sale to Tata Group’s investment arm Panatone Finvest Ltd. The government retained 26 percent in Tata Communications.

Subsequently, Panatone came out with a cash tender offer for other minority shareholders for an additional 20 percent stake in VSNL. Panatone shareholders included Tata Sons, Tata Power, Tata Steel and Tata Industries, who together held 100 percent in the company, and constituted persons acting in concert for the open offer.

The open offer was completed in May 2002, and nearly 20 percent of the shareholders tendered their shares.

Panatone increased its stake in VSNL to 44.99 percent stake after the open offer. Subsequently, it acquired an additional 5 percent stake from the open market, to take its stake to nearly 50 percent.

While the Tata Group consolidated its control over VSNL, it had to sign away rights to VSNL’s surplus land holdings.

According to the terms of the shareholders’ agreement signed between the government and the Tata Group, as part of the divestment the government had to demerge VSNL’s surplus land into a new company. The Tata Group agreed to pass on the benefit of surplus land to the government and minority shareholders of the company.

The shareholders’ agreement of 2002, and Tata’s open offer letter later that year, laid out that the shareholding of Hemisphere Properties India Ltd. – the company that would hold the surplus land after the demerger – will not be a mirror of Tata Communications, but will be based on the following considerations:

• Tata Group will transfer 25 percent of its shareholding to the government, taking the government’s share in the new company to 51 percent.
  
• Tata Group will also transfer 20 percent of its shareholding to minority shareholders who tendered their shares in the open offer.
  

Tata Group incorporated HPIL in 2005-06. In April 2005, a scheme of demerger was presented to the VSNL board, which was then forwarded to the government, along with observations of the board.

Stalled Demerger

But the demerger has been stalled ever since as the VSNL board objected to the burden of capital gains tax which the company would have to pay upon the transfer of surplus land to HPIL, a second source in Tata Communications, who refused to be quoted, told BloombergQuint.

Under the extant rules of the Income Tax Act, the benefit of tax neutrality, available upon demerger, was not applicable to the demerger of a company which ceased to be a public sector company as a result of divestment by the government. Hence, VSNL would have ended up paying capital gains tax on the transfer of this surplus land to HPIL.

The VSNL board observed that since the economic benefit of monetising the surplus land did not accrue to the company, the burden of capital gains tax, which runs into crores of rupees should also not be borne by it.

This anomaly was finally rectified by the government, through the Taxation (Amendment) Bill, 2016. The Bill brings those companies under the scope of demerger, which ceased to be a public sector company as a result of divestment.

Shareholding in HPIL Pre-Demerger

In March 2015, nearly nine years after the company was incorporated, the government acquired 51.12 percent of the shares in HPIL, making it a government-owned company.

The current shareholding of HPIL comprises of the following:

• Government of India: 51.12 percent
  
• Tata Capital: 24.44 percent
  
• Aftaab Investments: 24.44 percent
  

Aftaab Investments is the 100 percent investment arm of Tata Power.

Shareholding in HPIL Post Demerger

According to the senior executive in Tata Communications, the scheme of demerger will involve the transfer of the surplus land to HPIL, and issue of shares to minority shareholders who tendered shares in the 2002 open offer, and those who currently hold shares in Tata Communications.

The resultant shareholding in HPIL post the demerger will look as follows:

• Government: 51.12 percent
  
• Shareholders who tendered shares in the 2002 open offer: 19.99 percent
  
• Current minority shareholders of Tata Communications: 25 percent
  
• Tata Group: 3.88 percent
  

According to data compiled by BloombergQuint, among the minority shareholders - foreign portfolio investors would own 17.6 percent of HPIL, while domestic shareholders will hold nearly 27.40 percent.

The board of Hemisphere Properties is yet to consider the demerger proposal, but is expected to complete the demerger within this financial year, the same senior executive said.

Tata Communications declined to comment on the story.