NEW DELHI: Some fine print has become public in the $415 million (Rs1,785 crore) settlement between Hutchison Telecommunications International Ltd (HTIL), the two-thirds parent of an Indian cellular company being sold to Vodafone Group Plc., and local partner Essar Group announced last month: the Mumbai conglomerate is obliged to pay fines up to the same amount if Indian regulators decide to penalize the Hong Kong company.
In a note circulated among its shareholders, HTIL also said Vodafone has the option of not going ahead with the purchase if the Foreign Investment Promotion Board (FIPB) imposes a fine or a liability of $500 million or more on Hutchison Essar, the Indian cellular company which is being taken over.
FIPB, in charge of clearing foreign investment in certain areas, is yet to approve Newbury, England-based acquirer’s proposal to buy the 67% stake HTIL holds in Hutchison Essar for $11.1 billion. In question is whether 15% equity held by three Indian shareholders is a proxy for the HTIL or not.
Three weeks ago, HTIL had agreed to the $415 million payment to Essar, which had complained that the Vodafone transaction violated its “right of first refusal” on the Hong Kong partner’s stake. Under the agreement, Essar had agreed to give up all their rights and claims on the equity being sold to Vodafone.
HTIL’s shareholder circular, however, points out that the so-called “settlement agreement” with Essar also had a “cushion” clause for HTIL. It provided that in the event of any fine or liability being imposed on HTIL in connection with the Vodafone deal, the Essars will use the payment recieved from HTIL to pay the fine. A senior Essar executive confirmed these terms of the deal.
“ECIL (Essar Communication Investment Ltd, the Mauritius-based holding company of the Essar group) has also agreed to indemnify and hold harmless the Company (HTIL) on demand against any liability or loss in respect of claims which are or may be brought pursuant to the Agreement against the Company (the “Essar Indemnity”),” HTIL says in the shareholder note dated Tuesday. It adds that the amount Essar may have to pay under the clause is limited to what it receives from HTIL.
Legal experts said the structuring of the settlement protected HTIL against big losses. “It makes the Essars directly interested in making sure that there is no fine imposed on HTIL as part of the transaction, whether the deal goes through or not,” said Anoop Rawat, a senior associate with the Delhi law firm Suman Khaitan & Company. “The clause makes sure that even if the Vodafone deal goes through, but there is a fine imposed, it will be the Essars who pay all of it, unless the fine is higher than $415 million.”
Going by the valuation of the Vodafone-HTIL deal, fines under Indian law for transgressing a 74% foreign ownership cap could work out to as high as Rs32,280 crore.
Besides making Essar directly interested in making sure there are no big fines tied to the FIPB approval, HTIL and Vodafone have also ensured both of them have an exit option from the $11.1 billion deal if the foreign investment approval authority makes the deal conditional on a fine or ‘regularization charge’ of more than $500 million.
“Completion of the Transaction (with Vodafone) remains conditional upon all requisite consents of FIPB..., provided that such consents are not subject to a condition or other requirement which, if implemented, would require the disposal of, or cause an adverse effect on, the assets and/or liabilities of the Hutchison Essar Group..., in an amount of US$500 million or more,” the circular goes on.
The circular also gives an insight into what prompted the Hong Kong operator to offer the $415 million payment to the Essar group. It points out that if the Essar group had gone to court over their alleged right of first refusal over the 67% equity being sold to Vodafone, the deal could have been delayed by as much as a year.