Videocon Industries is likely to take a tax hit of R3,800-5,100 crore on a potential sale of its 10% stake in Mozambique’s Rovuma basin, unless it is able to push through a deal before the start of the new year when the African country’s recently-amended corporate tax regime takes effect.
The parliament in the southern African nation recently amended its corporate income tax regime, stipulating sales of Mozambican assets held by non-resident entities will be taxed at 32% without consideration for the period they were held. Up to now, the sale of local assets belonging to foreign companies have been taxed on a progressively declining basis, depending on the length of time they were held.
Videocon, which invested $100 million to buy the stake in Mozambique in 2008, had valued its 10% stake in the gas block at $2.26 billion or R12,479 crore in August. Reports have said it is in talks with Dutch oil & gas major Shell over a $3-billion deal.
If a deal goes through in the $2.2-$3 billion price range, Videocon’s capital gains on the sale will be reduced by $690 million to $997 million. In comparison, at the 12.8% rate that was applied to capital gains on the buyout of Cove Energy by Thailand’s PTT Exploration and Production, Videocon would have had a tax outgo of just $281 million to $371 million.
The amended law takes effect on January 1 next year, but sources said a deal was unlikely to close before the deadline.
“Even if they announce the deal this week, it is unlikely that the deal will be closed before the Mozambique government’s January 1 deadline,” said a managing partner of a global audit and consultancy firm on the condition of anonymity as the person is not authorised to comment on individual deals. “It will be difficult to fast track regulatory and governmental approvals even if the buyer and seller fast-track negotiations from their end.”
“Mozambique will treat the deal to be under the purview of the new tax laws as the closing of the deal will most likely happen in 2013,” the person added. When contacted, Videocon’s chairman Venugopal Dhoot declined to comment, saying he needs further clarity on the amendment. Videocon is being advised by consultancy firm KPMG on the sale.
The company’s diversification from a consumer electronics maker to a multi-business group centered on hydrocarbon exploration has put a heavy debt burden on its balance sheet. At the end of June, the group had a consolidated total debt (long-term and short- term borrowing) of R16,812.72 crore.
Videocon is the latest Indian firm to be to affected by changing policies in other countries. Earlier this year, Naveen-Jindal promoted Jindal Steel and Power dropped its $2.1-billion project in Bolivia after failing to receive assurances from the Bolivian government on adequate gas supply.
Airport developer, GMR Group was forced to vacate the Male airport after a new government in Maldives on November 27 cancelled the contract given to GMR-Malaysia Airports Holdings Berhad in 2010 by previous president Mohammed Nasheed.
Tata Power, which bought coal mines in Indonesia, has been impacted by a government directive that coal be sold at market prices, leading to a downgrade by Moody’s in October.
Several oil and mining majors have been looking to invest in Mozambique, which is expected to become one of the world’s leading coal and gas exporters.
State-run refiner Bharat Petroleum (BPCL) also holds a 10% stake in the Rovuma basin, which is operated by US-major Anadarko Petroleum. BPCL said in a notice to the BSE on Friday that Anadarko has signed a heads of agreement (HOA) with Italy’s Eni, the operator of another block in Mozambique, for the coordinated development of common natural gas reservoirs in what it called a “significant step in achieving the target of first LNG cargo by 2018.”
A top BPCL official said the change in tax laws won’t impact the company as it has no plans to sell the asset in the near future.
Mozambique is seeking to derive a bigger share of profits from its mineral wealth, as it faces criticism over granting huge tax breaks to foreign firms to attract investment after a civil war which ended in 1992.
“This obviously will have some impact on sentiment. These companies are probably not going to be happy, but from the government’s point of view they can make significant money from their natural wealth,” Arvind Mahajan, a partner at KPMG India said.