The Essar Group has asked Vodafone to pay $600-$700 million more for its 33 per cent holding in Vodafone Essar.

To this end, it is believed that the Essar Group will invoke a Reserve Bank of India (RBI) resolution that stipulates a minimum value for Indian shares in privately-held companies.

The April 2010 RBI resolution, which sought to protect domestic companies from aggressive multinational buyers, mandates that Indian shares in privately-held firms should be valued under the discounted cash flow method. Under this method, Essar’s 11 percent stake in Vodafone Essar is worth $1.8-1.9 billion, compared with the purchase option that pegs it at $1.2 billion.

Vodafone purchased 67 per cent interest in the Indian operator from Hutchison Whampoa and two Indian shareholders Analjit Singh and Ashim Ghosh in 2007 in a $11-billion deal. At that time, Essar and Vodafone agreed that the former could sell its interest in the company to the latter for $5 billion till May 2011.

The agreement comprised a put or sell option for the 22 per cent held by the Essar group overseas and the other a call or buy option for Vodafone to buy the 11 per cent stake the Essar group held in India.

Essar had the first right to exercise its option, but if it tendered its entire 22 per cent, Vodafone’s option would become valid.

The partners had agreed that should only a part of the option be exercised, the value of the stake changing hands would be ascertained by three investment banks, but the amount would be capped at $5 billion if the entire option was exercised.

The options were to expire on May 8, 2010, after which both sides would have been forced to negotiate a price, which may have been less much than $5 billion.

In March, Vodafone said it would purchase Essar’s 33 per cent stake for $5 billion as per the agreement. However, the Essar group now plans to argue that since the 11 per cent held in India is being bought by Vodafone it is subject to Reserve Bank regulations.

It is believed that the amount payable for the domestically-held 11 per cent would be subject to capital gains tax, but not the remaining 22 per cent held in the Mauritius subsidiaries.