Mobile service operator Vodafone is in talks with foreign banks to provide counter guarantee to nationalised banks in India for a sum of Rs 8,500 crore. This follows an order from the Supreme Court last week asking the telco to furnish a bank guarantee of a nationalised bank and set aside Rs 2,500 crore in cash with the court.
Most Indian banks have huge exposure to the telecom sector and are not keen to increase their lending to the industry. However, if a foreign bank provides a counter guarantee, the credit exposure of the Indian bank will be to the foreign bank and not to Vodafone.
Vodafone has been asked to deposit money and furnish guarantee after it lost a legal battle over a tax claim. The income-tax (I-T) department had made a claim of Rs 11,200 crore as capital gain tax after Vodafone bought the Indian operations of Hutch for $11 billion three years ago. The Bombay High Court had ruled in favour the I-T department following which Vodafone moved the Supreme Court. The telecom company have been given three weeks time to park cash and eight weeks to furnish the guarantee.
Officials from large government-owned banks, including State Bank of India , confirmed to ET that they will look into the matter once Vodafone arranges a counter guarantee from foreign banks. With regards to Rs 2,500 crore cash that needs to be deposited, sources from the banking sector say that the company plans to remit a substantial portion from its overseas office.
“Banks are in favour of counter guarantee from foreign banks because this will have to set aside lesser capital for a bank than that is required for a company,” said a bank official from a nationalised bank. “Further, it will give banks leeway to finance other telecom projects,” he added.
Although the banking regulator does not prescribe a cap on lending to any sector, banks have an internal limit on maximum exposure they would take on each sector. The exposure is linked to their net worth or capital and is often in the range of 10 to 15%.
Banks exposure to telecom rose following the auction of third generation (3G) spectrum auction and broadband wireless access (BWA) wherein telecom companies had to jointly provide Rs 1.06 lakh crore to the government. More than half of this sum was funded by banks.