Hutchison Telecom International Limited (HTIL)’s exit from the Hutchison Essar Limited (HEL) joint venture seems unlikely to be clean and quick. The cheer following Vodafone’s buyout of HTIL’s 67 per cent stake in HEL for over Rs 11 billion has subsided somewhat with questions being raised over whether foreign direct investment (FDI) norms were being violated. Moreover, the 15 per cent stake held by Asim Ghosh, HEL MD, and Analjit Singh, Max India chairman, has come under the scrutiny of the Foreign Investment Promotion Board (FIPB).
The FIPB moved in after the British telecom giant approached it, seeking approval to acquire a controlling stake in HEL as well as for its telecom sector investment plans in the country.
Although the shareholding will change once the Vodafone-HTIL deal is complete, key central ministries (finance, commerce and telecom) and the Reserve Bank of India (RBI) have begun a concerted attempt to unravel the complex shareholding pattern in HEL. Currently, HTIL holds 52 per cent in the company, the Essar Group holds 33 per cent and HTIL’s partners (Ghosh and Singh) hold nearly 15 per cent, giving HTIL 67 per cent controlling interest.
While HTIL officials maintain that they have adhered to the laws, endFebruary, the finance ministry asked the RBI to “urgently” comment on alleged violations of the provisions of the Foreign Exchange Management Act. This was on account of Singh and Ghosh holding 15 per cent in the company, which was funded with HTIL providing bank guarantees of $110.4 million to Ghosh and $200 million to Singh. In exchange, HTIL secured a call-and-put option to buy out Ghosh and Singh’s holding in HEL at par at any time in the next 10 years beginning March 1, 2006.
Separately, a Delhi-based NGO, Telecom Watchdog, has filed a public interest litigation in the Delhi High Court, alleging that the FDI in Hutchison Essar was more than the permissible limit of 74 per cent. Rajeev Chandrasekhar, former chief of BPL Mobile, also demanded that Communications and IT Minister Dayanidhi Maran explain in Parliament whether HEL has violated FDI norms.
As it stands, Vodafone has submitted its board resolution and no-objection certificate from Bharti. However, in light of the recent developments, the FIPB is yet to take a call on the issue. It needs to take note of HTIL’s stake sale to Vodafone as also the continuation of Ghosh and Singh as shareholders.
Meanwhile, the issue of the right of first refusal (RoFR) continues to be a point of debate: Essar claims it has the RoFR; Hutchison contests this. Compounding the already uneasy relationship between Vodafone and Essar, the latter has stated that it will offer to purchase HTIL’s 67 per cent stake if Vodafone does not give it equal management control.
According to an Essar spokesperson, “The Essar Group wants to continue in Hutchison Essar, a company in which it has created tremendous value with its partner HTIL over the past six years.” However, Essar wants to be more than a mere financial investor. “If Vodafone intends to offer us equal partnership in the company, we have no issue. Otherwise, we will exercise our right of first refusal and buy HTIL’s stake at the same price as Vodafone.”
Vodafone is not commenting for now, as it still needs to get the necessary legal clearances and is not willing to decide on the management structure yet. HTIL and Vodafone are, however, of the view that the RoFR is not applicable in their case. For the moment, Vodafone is quiet and waiting for the acquisition process to go through as the deal is subject to FIPB approval for Vodafone’s exit from Bharti as well as acquisition of HTIL’s stake in HEL.
Meanwhile, early March, Vodafone clinched a three-year non-compete agreement with HTIL. This means that the Hong Kong-based company cannot enter any business in India, or establish telecom services or related infrastructure facilities. It also cannot offer jobs to any key employees of HEL within six months of completion of the sale.
