All you need to know about Ncell dispute

Nepal: Ncell, the private sector telecom giant, has again come under scrutiny after its parent company, Axiata, announced on December 1 that it was leaving Nepal by selling its stake in the company.

photo: TKP

The Malaysian conglomerate announced that it had entered into an unconditional sale and purchase agreement (SPA) with Spectrlite UK Limited for the sale of Reynolds Holding Limited, which owns approximately 80 percent equity stake in the Nepal-based Ncell Axiata Limited.

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 another 20 percent stake in Ncell. The deal has courted controversy with the Nepal government forming a high-level panel to probe it.

In this explainer, the Post details the ins and outs of the deal.

What does Axiata say about its exit?

Group Chief Executive Officer and Managing Director of Axiata Vivek Sood claimed in a statement that increasing challenges in the operating environment had led to the company’s Nepal exit.

“It has led the Axiata board to conclude, after a thorough process, that our foray in Nepal cannot continue due to the unfavourable conditions for Axiata, the uncertain regulatory and tax environment, and the looming risks associated with the expiry of the mobile licence in 2029,” he said. “The offer we received from (Spectrlite UK) has enabled and accelerated a clean exit for Axiata.”

Axiata claimed that tax liability imposed on Ncell was unbearable. “Between 2016 and 2020, Ncell had settled a total of Rs47 billion in capital gains tax (CGT) as full and final liability under Nepali law and received confirmation from the Large Taxpayers Office (LTO) of Nepal in April 2020 that no further taxes remain about the acquisition of Reynolds Holding in 2016. Despite the payment of CGT, Ncell was further assessed in January 2021 by the LTO for a sum of approximately Rs57.9 for the same transaction.”

Why is the deal controversial?

Section 27 of the Telecommunications Act 1997 makes it mandatory for a licensee or one willing to buy the stake in a licensed institution to submit an application to Nepal Telecommunication Authority, the country’s telecom regulatory body, for approval. But the NTA was kept in the dark about the Ncell deal.

Further, the Telecommunications Regulation 1997 requires that the licensed entity get prior NTA approval for the sale or purchase of more than five percent of the paid-up capital.

After the NTA sought details of the deal, Ncell on Tuesday wrote to the regulatory body that it was in the process of collecting documents related to the SPA. It also said that the SPA would be submitted to the NTA for regulatory approval in line with clause 15(K) of the Telecommunications Regulation and clause 4 of the NTA Bylaws (Share Sales of Licensed Persons)-2019.

However, prior information on the sale of assets is not necessary as per the Foreign Investment and Technology Transfer Act (FITTA)-2019. In the case of sale or transfer of ownership effected either within or outside Nepal, the concerned company has to, not later than 30 days of the effect of the transaction, give information along with the relevant documentary evidence to the body approving such investment and have it recorded, states section 19 of the Act.

The decision to sell a stake in Axiata in a foreign territory does not violate the FITTA provision, said Shankar Singh Dhami, director at the foreign investment and technology transfer section of the industry department. But the company failed to adhere to the Telecommunications Act.

Our laws are contradictory and cause a lot of confusion and controversy, said Purushottam Khanal, the NTA chairperson.

Besides questions about legal compliance, many have questioned how the company, which Axiata bought in 2016 for $1.365 billion, was valued at just $50 million in 2023.

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 the completion of the transaction and the remainder is payable after 48 months.

There is also a conditional clause, which is unclear, according to Ananda Raj Khanal, former senior director at the NTA. “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 [Spectrlite UK] during this period,” Axiata said in a statement.

Amid questions about low transaction value, Ncell, in a statement on December 7, revealed that the exact enterprise value was approximately $400 million. “It will be released gradually over time contingent upon the company’s performance,” Ncell said about the payment details.

Ncell quoted Acharya as saying that Axiata had run a competitive process for the sale of its shares in Reynolds Holdings based in St Kitts, with Spectrlite emerging as the winner from among several bidders. Many questioned whether the lower value mentioned in the deal was aimed at not paying the CGT to the government.

“As the value has been kept substantially low compared to the amount it paid earlier, there is no ground to charge capital gains tax,” a corporate lawyer told the Post.

Many questioned the background of Satish Lal Acharya and how he could manage the money required to buy a company as big as Ncell.

An investigation by the Centre for Investigative Journalists Nepal in January 2021 had uncovered that Axiata had in fact paid $90 million to a secretive offshore company with a link to Bhavana Singh Shrestha, wife of Acharya, months before her company Sunivera bought 20 percent of Ncell’s shares and became Axiata’s partner in the telecom company.

Acharya’s capability to buy Reynolds Holdings which has 80 percent shares in Ncell was also questioned as the government revoked the licence of Smart Telecom owned by Acharya for not paying renewal and other fees early this year.

Will Ncell come under government ownership after Axiata exit?

Many suspect that ownership transfer in the name of a Non-resident Nepali was intended to avoid Ncell’s property becoming the government’s asset after the 25-year licence period is over in 2029.

As per Section 33 of the Telecommunications Act 1997, a telecom company with over 50 percent foreign stake 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 one with less than 50 percent foreign ownership need not hand over its property to the government even after the expiry of the licence period. The law allows such a company to continue to provide services by taking a fresh licence.

Bringing Ncell ownership into the hands of an NRN doesn’t prevent the government from owning the entity, according to officials.

“It will still be owned by a UK-based company which is a foreign firm and it will be treated as foreign investment,” said Dhami, director at the industry department. “Even though the NRN Act allows non-resident Nepalis to invest in Nepal like Nepali citizens if they come here with a foreign passport and have registered as a company, their investment is treated as foreign and repatriation facility provided.”

Even after the ownership transfer, the majority owner of the Ncell will continue to be Reynold Holding registered in Saint Kitts which will be fully owned by a UK-based company.

Dhami’s comment suggests that even after the ownership transfer in the name of Spectrlite UK, Ncell could come under the government’s ownership in 2029, when the licence period expires.

NTA Chairperson Khanal also does not think Acharya’s ownership will make Ncell a Nepali-owned company. “As Axiata is selling its stake to another foreign registered company, I think it will continue to be treated as foreign investment,” he said.

Article 14 of Nepal’s constitution allows NRNs to acquire NRN-specific citizenship of Nepal, entitling them to economic, social, and cultural rights under the federal law.

Section 13 of the Non-Resident Nepali Act 2008 says a foreign citizen of Nepali origin who has invested under the prevailing law (in Nepal) is as entitled to run an industry or business as a citizen of Nepal.

A corporate lawyer on condition of anonymity said that Ncell could try to avoid being acquired by the government citing the NRN Act.

The constitution, however, doesn’t explicitly state the NRNs will be “as entitled to run any industry or business as a citizen of Nepal”.

Why is Axiata concerned about prevailing law?

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

“High renewal fee of Rs20 billion, which needs to be paid three times in the 25-year licence period, amounting to Rs60 billion in total, is impractical,” Khanal, a former senior director at the NTA, told the Post in a recent interview.

According to the Telecommunications Regulation, the licence renewal fee in the first 10 years is Rs20 billion, with the need for renewal every five years 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.

Telecom companies have to continuously invest in technology with the advent of the 5G era. The regulator also considers the laws outdated, as they fail to address new technologies, social media, and offshore trading in the telecom sector. Taxation is also unrealistic as it is not linked to profitability.

NTA Chairperson Khanal said that the Authority submitted a draft amendment to the Telecommunications Act to the communication ministry in order to address the legal shortcomings.

The draft removes the provision requiring property handover to the government after 25 years for new companies entering the sector.

“The requirement that entire property be handed over to the government after 25 years is impractical as it prevents telecom companies from investing in technology enhancement,” said Khanal. “It is only natural. If you have to hand over your property to the government for nothing, why would you invest?”

According to him, the NTA has also proposed removing the provision requiring a renewal fee of Rs20 billion to be paid three times in 25 years. “Instead, the proposal is that telecom companies pay a licence fee every year based on their profitability,” said Chairperson Khanal. “But considering possible controversy, we have proposed that existing operators follow existing laws.”

Why is it a setback for the government?

In late November, the government decided to hold an international investment summit in April next year to attract domestic and foreign investments. But Axiata has claimed that there is no investment climate in Nepal.

Axiata said that an unfavourable foreign investment protection environment was one of the reasons why it accelerated its exit process.

“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 Khanal, former senior director at the NTA.

Negative comments about Nepal’s investment climate touched a nerve of both the government and lawmakers.

The Public Accounts Committee of the House of Representatives sent a nine-point questionnaire to various government agencies, inquiring with them about the potential negative impact of Axiata’s exit on Nepal’s investment climate.

Subsequently, the government on December 5 said it would assess the impacts on Nepal’s telecom sector, foreign investment, and government revenue. Speaking at the Finance Committee of the House, Rastriya Swatantra Party (RSP) lawmaker Swarnim Wagle said Axiata top official’s statement that the country has a poor political-economic environment could dent Nepal’s image.

What is the government doing?

Soon after Ncell buyout reports came out, Prime Minister Pushpa Kamal Dahal called a meeting of the ruling parties on December 5 to discuss the matter.

Ruling party leaders were one that the SPA deal on Ncell was suspicious and needed to be investigated.

A Cabinet meeting on December 7 formed a five-member high-level committee headed by former auditor general Tanka Mani Sharma to look into the matter, giving it 30 days to submit a report.

What is lawmakers’ take?

Three parliamentary bodies—the Public Accounts Committee (PAC), the Finance Committee, and the State Affairs and Good Governance Committee of the House—convened separate meetings to discuss Axiata’s exit plan.

“Non-compliance of legal provisions, unrealistically maintained low value of shares, efforts to avoid paying CGT, making government ownership of the company after six years uncertain, and spreading misinformation about Nepal’s investment climate suggest the transactions are suspicious, non-transparent and unreal,” the PAC decision states.

Members of the committees also suspect the company’s collusion with top politicians and administrators.

Nepali Congress General Secretary Gagan Thapa, speaking at the State Affairs Committee meeting on Friday, suspected a political-administrative nexus in the share divestment episode. “Without political and administrative backing, this Ncell share buyout could not have happened,” he said.

At the Finance Committee meeting, RSP’s Wagle pointed to the political links of Satish Lal Acharya, the owner of Spectrlite UK Limited, and his suspicious activities including his funding of trips for politicians and their family members to Singapore.

“If you look at the terms of the SPA including fixed consideration and conditional consideration, they look unreal and raise questions about the deal’s intent,” he said.

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.

There are now a handful of entities probing the Ncell sale case.

The government on Thursday formed a five-member high-level committee to investigate the buyout of Ncell, a mobile service provider. A Cabinet meeting constituted the panel under former auditor general Tanka Mani Sharma. It has been given 30 days to study the matter and submit its report.

The government appointed the panel a day after the Public Accounts Committee of the House of Representatives directed it to halt the Malaysian company Axiata’s efforts to sell its shares in the Nepal-based Ncell until a detailed investigation into the matter is completed. It has decided to summon Prime Minister Pushpa Kamal Dahal and other relevant officials for clarification.

The Finance Committee of the House has also started a study on the buyout row. Its meeting on Wednesday decided to summon the Ncell chief executive officer and officials from the Nepal Telecommunications Authority for their clarification on the deal.

On December 1, Axiata announced that it had entered into an unconditional sale and purchase agreement (SPA) with Spectrlite UK Limited to sell Reynolds Holding Limited, which owns approximately 80 percent equity stake in the Nepal-based Ncell Axiata Limited.

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 another 20 percent stake in Ncell.

While two parliamentary committees are already at work and the government has formed a separate panel to look into the matter, the Education, Health and Information Technology Committee of the House of Representatives can also investigate the sale of shares.

Nirmala Devi Lamichhane Wasti, secretary of the committee, said some lawmakers from the committee have demanded that they too study the dealing of share sales in Ncell.

“Most members of our committee are on a field visit in Jajarkot and Rukum to take stock of the post-earthquake situation. We will decide on the deal once they return,” Wasti told the Post.

On several instances in the past, two or more House panels have intervened in the same case of public concern. The conclusions of their studies are not uniform and often contradictory.

In early 2017, there was a serious dispute on whether Ncell should get the licence to start 4G internet. The Public Accounts Committee had directed the Ministry of Information and Communications and the Nepal Telecommunications Authority not to allow the telecom company to introduce 4G and other services until it clears its capital gains tax (CGT).

The Development Committee and the Finance Committee of the House too intervened in the matter. While the Finance Committee didn’t have a clear position, the Development Committee cleared the way for the licence, contrary to the directives from the Public Accounts Committee.

A meeting of the Development Committee on April 16, 2017 had directed the government not to bar Ncell from rolling out 4G service, stating that it is against the right of consumers to get to use the new technology.

Based on this directive, Nepal Telecommunications Authority cleared the way for Ncell to extend its internet service. As the telecommunication authority’s decision to allow Ncell to roll out the service was based on a House committee’s directives, other committees and agencies couldn’t stop it.

Those who have been closely following parliamentary proceedings say such trends are common. Som Bahadur Thapa, a former secretary at the Parliament Secretariat who also spent years serving as the secretary at the Public Accounts Committee, said as the committee is led by the opposition, the government uses other committees, generally led by ruling party members, to make the decisions it desires.

“I see a similar possibility this time. When there are separate decisions from different parliamentary committees, the implementing agency follows the one that best suits its interest,” Thapa told the Post.

Thapa said it is clear prima facie that the share deal is fishy. How they handle the delicate matter will be a real test of the parliamentary committees, he said.

Officials say it is natural for two or more committees to investigate a single cross-cutting case. Having envisioned such a situation, the parliamentary regulation says two or more parliamentary committees can jointly study a case. “There is no legal hurdle for two or more House committees to even issue a joint directive on an issue,” Ek Ram Giri, spokesperson for the Parliament Secretariat, told the Post. There has been a practice of a joint study in a cross-cutting issue.

Experts on parliamentary affairs say Speaker and deputy Speaker are ex-officio members of all committees and also have the responsibility to coordinate among them. They can take the initiative to bring the concerned parliamentary committees together, they say.

“Unearthing and recommending action against malpractice should be the focus of the government investigation panel, the parliamentary committees as well as the judiciary that are looking into the Ncell deal,” said Thapa.

While the government and parliamentary committees, which are also called mini parliaments, are already studying the matter, the judiciary, too, has come forward to intervene in the purchase and sale of the shares.

On Thursday, the Patan High Court issued an interlocutory interim order asking the authorities to halt the telecom company’s sale.

Responding to a writ petition by Gokul Bahadur Rokaya, a single bench of judge Purushottam Prasad Dhakal issued the order to defendants including the Office of the Company Registrar to stop the buyout.

The court has summoned both parties on December 11 for the next hearing to decide whether to give continuity to the order. The bench has asked the defendants to be present with necessary documents on the purchase deal.