Stake Sale – FIPB gives its approval

After deferring its decision three times, the Foreign Investment Promotion Board (FIPB) has finally allowed shareholders Analjit Singh, chairman, Max Group, and Asim Ghosh, former CEO, Vodafone Essar, to sell 49 per cent of their stake in Vodafone Essar (7.58 per cent and 4.68 per cent respectively) to UK-based Vodafone Plc. Post-sale, Singh’s stake in Vodafone Essar will come down to 3.87 per cent and Ghosh’s to 2.39 per cent, getting Singh Rs 5.33 billion and Ghosh Rs 3.29 billion. Vodafone Plc’s stake in Vodafone Essar will increase to about 58 per cent, well within the sectoral FDI cap of 74 per cent. The Essar Group will continue to hold about 33 per cent while IDFC will hold 2.74 per cent.

The FIPB decision is significant as the stake sale by the two entrepreneurs had become a contentious issue in 2007 when Vodafone bought Hutchison’s 67 per cent stake in the Indian company. Had Vodafone bought Singh’s and Ghosh’s full stake, it would have breached the FDI cap.

The FIPB had concerns about Singh’s and Ghosh’s shareholding in Vodafone Essar through Mauritius-based Telecom Investments India which has a direct stake in Vodafone Essar through various holding companies. According to the FIPB, the case resembled “treaty shopping”, where investors use the Mauritius route to bring in investments, taking advantage of India’s double tax avoidance treaty.

The loss of Indian control over Vodafone Essar has been an issue. Therefore, while giving its clearance, the FIPB has urged it to retain the Indian tag. It has also asked the company to appoint resident Indian majority directors on the board.

Meanwhile, Vodafone Essar’s run-in with the government over income tax default continues. It has asked the finance ministry for an extension till end-January 2010 to reply to a tax claim notice issued to it by the IT Department. Clearly, the company needs to resolve the matter sooner rather than later.