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.

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.