Nokia Loses Court Appeal In India Tax Dispute But Faces Limited Liabilities

Mar. 19, 2014 4:35 PM ET  |  About: NOK, Includes: MSFT

Nokia (NOK) suffered a setback in its Indian tax case last week as the Supreme Court rejected its appeal against a lower court order which had directed the company to submit a $570 million guarantee before transferring its local assets to Microsoft (MSFT). ^[1] The handset maker is willing to deposit around $370 million in an escrow account to cover its tax liabilities, but the Indian IT (Income Tax) department believes that the amount isn't enough to meet its tax claims, which range between $650 million and $3.4 billion. With the Supreme Court upholding the IT department's demands, Nokia will weigh its options which include either fronting up the extra cash as a guarantee or shutting down its handset manufacturing plant altogether. The Chennai factory is one of Nokia's largest globally, employing around 8,000 people and constituting about 25 percent of the workforce that will be transferred to Microsoft as part of the handset division sale.
However, the good news for Nokia is that it is not liable for its subsidiary's (Nokia India Pvt Ltd.) liabilities, with the Supreme Court ruling that the IT department can't force the parent company to submit an assurance. This limits Nokia's exposure to the extent of the value of its Indian assets, which it claims to be in the range of $440-$500 million and is probably what Microsoft is paying it for the asset as part of the $7.2 billion deal. If the tax dispute isn't resolved soon or negotiations with local authorities do not bring its tax liabilities down to below $500 million, it might be in Nokia's best interests to walk out of India without transferring its assets to Microsoft. This will give Nokia less than expected cash from the Microsoft deal, but limit legal distractions while not hitting its overall valuation by much. By our estimates, Nokia's stock is worth about $28 billion and a $500 million hit due to the Indian tax dispute would cause its valuation to drop by less than 2%. Our $7.50 price estimate for Nokia is about in line with the current market price.NEW DELHI: Nokia recently claimed having received 1 million pre-orders for its first Android-based phone Nokia X in China on its Weibo (Chinese equivalent of Twitter) account. However, the company seems to have jumped the gun and the numbers may not actually be true. According to Liveside.net, Chinese retailer JD.com allowed registered users to click on a 'pre-order' button without filling up any form, or paying a booking amount.

This means that the users who expressed interest are not under any obligation to buy the phone. This clearly means registrations may not translate into actual sales. Though the pre-orders did not require interested buyers to make a payment, the site counted anyone showing interest as a pre-order.

Moreover, the site was even running a contest offering customers a chance to win a Nokia X if they pre-ordered the phone and allowed one user to pre-order up to three phones (one in each of the three colour variants available in China).
Vimal Singh
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