Business Line : Opinion : IFRS and fair value

Business Line : Opinion : IFRS and fair value: "A practical piece of financial governance advice can be found in Verse 461 of the Tamil Classic Tirukkural “Before undertaking a project, ponder what will be gained, lost and ultimately achieved”.

In hindsight, Vodafone must be ruing the fact that this piece of advice was not given to it when it undertook the project of entering India. Its desire to grow inorganically in India through a marquee acquisition of Hutchinson Telecom has resulted in a litigious tax case in which it appears to have lost half the battle."

Its entry into India was through a joint venture with Essar and a clause in the joint venture agreement has resulted in a valuation dispute. Just so as to rub further salt into the wounds, the entire kerfuffle over the 2G spectrum has resulted in a possibility that it may have to shell out an additional $1 billion as spectrum fees.

The present battle over valuation reignites past fires. In 2008, Essar ventured to sell its stake to another company which was prevented through an arbitration order.

Options for Essar

As per the joint venture Essar has two put options viz. underwritten put option and fair market value put option, for divesting its stake to Vodafone. The joint venture had a clause which gave Essar an option to either sell their entire stake for $5 billion (underwritten put option) or a smaller stake at market value( fair market put option) which has caused the present dispute.

Essar plans to put just over 10 per cent of its share with India Securities Ltd (ISL), a listed company that it controls. Vodafone has objected to Essar's plan to part-list its stake as it fears the move would give an inflated valuation of its venture as ISL is a highly illiquid vehicle and post-merger, more than 95 per cent of the shares will be under the control of the Essar Group and two other shareholders. Accordingly, small amounts of buying or selling could distort ISL's share price. It appears that temporary peace has been bought by both the warring parties appointing an independent valuer each. Global accounting norms are uniform in their stand that the quoted market price in an active market is the best indicator of the much-ridiculed Fair Value (FV). Vodafone is of the opinion that an active market does not exist for ISL shares or the market is too closely-held to be called active. Hence, the residuary option under accounting standards to opt for independent valuers.

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