Vodafone Group Plc., which is buying a two-thirds stake in Hutchison Essar, has said it may explore options such as juggling equity with prospective partner Essar Group, if the ownership pattern of the target company does not get regulatory approval. However, the world’s largest mobile telephony firm by revenue is confident that it will be allowed to go ahead with the deal.
The Foreign Investment Promotion Board (FIPB), a nodal body under the ministry of finance that approves overseas holding in certain businesses, is examining the ownership of Hutchison Essar in the light of allegations that a 12.26% stake held by two Indian shareholders—Asim Ghosh, the chief executive of the company being sold, and Max India chairman Analjit Singh—is a proxy for Hutchison Telecommunications International Ltd (HTIL).
Telecom Watchdog, a non-governmental organization has said in its petition in the Delhi high court that a minority 2.7% equity held by financier IDFC Ltd in Hutchison Essar also represents HTIL. Such an “indirect stake” adds 15% to HTIL’s holding, it has alleged.
HTIL owns 52% directly in Hutchison Essar, India’s fourth-largest mobile telephony company, and together with this 15%, controls 67% in the Indian company, which it is selling to Vodafone for $11.1 billion. Ghosh and Singh deny they represent HTIL.
If the stake is declared foreign-owned, Vodafone could be forced to find another Indian buyer for the 15% stake to comply with government rules that cap foreign investment in telecom services at 74%. Both Vodafone and Hong Kong-based HTIL maintain they are in compliance with foreign investment regulations in India.
“In the unlikely event that FIPB does not grant the approval, we would obviously examine a range of alternatives with HTIL and Essar,” the press office of the Newbury, England-based company said in an email through its local press relations firm, “but it is too early to speculate in any more detail about what these might be.”
One option favoured by lawyers was that the 15% stake held by the Ghosh-Singh-IDFC trio would be transferred to Essar in return for converting an equivalent stake held by the Mumbai business family’s foreign units into Indian-registered holding which would, in turn, be handed over to Vodafone.
“The 15% Indian stake ruled as improper foreign holding can be transferred to Essar, and Essar can, in turn, compensate Vodafone for the loss of shares by transferring an equal number of shares from its Mauritius holding company to Vodafone,” said Akil Hirani of the Mumbai law firm Majmudar & Company.
Other lawyers pointed to a quagmire of rules and regulations that may envelop the deal if the shares held by Ghosh and Singh are declared illegal under complex foreign-exchange laws.
“The penalty for violating rules under Fema (the Foreign Exchange Management Act) is either up to Rs2 lakh or up to thrice the sum involved, if the value of the shares involved in the violation can be ascertained,” said Anoop Rawat, senior associate lawyer at Suman Khaitan & Co., a New Delhi law firm. Rawat pointed out that the parties may also have to pay Rs5,000 per day for each day since the transfer of shares took place in early 2006.
Going by the valuation used for the Vodafone-HTIL deal, the 15% held by Ghosh, Singh and IDFC is worth about $2.48 billion or Rs10,760 crore. A fine of three times that works out to Rs32,280 crore.
Rawat, however, points out that the actual fine may be lower, depending both on how much leeway the government wants to give, and on the accounting methods used to determine the value of the shares.
“One way is to use a conservative net-asset-value method to value the company lower than what is being paid by Vodafone now. It is also possible to reach lower valuations using other ways such as using the cash flow, but ultimately, it is for the government to accept or reject such a valuation,” he explained.
Essar Group executives declined to confirm if the steel-to-oil conglomerate would be interested in swapping stakes with Vodafone, terming such suggestions speculative. “We are fully committed to the partnership with Vodafone under the current agreement,” a spokesman for the group said.
Senior executives at Hutchison Essar, too, said it was too early to talk about alternative shareholders. “As far as our information goes, no agency of the government, including the department of telecommunications, has given its final opinion on the legality of the Indian shareholders’ position or otherwise,” a top executive said on condition of anonymity.
Vodafone said it is confident of completing the buyout over the next three months. While the decision is up to the Indian government, Vodafone proposes to “step into HTIL’s shoes and... we will ensure that the shareholding structure of Hutch Essar or Vodafone Essar complies with the relevant regulations in force at the time,” according to its statement.
FIPB is expected to meet shortly to take a decision on the Vodafone buyout based on advice from the law ministry and the banking regulator, the Reserve Bank of India.
Its last two meetings were inconclusive.
Vodafone defended the deal, saying it was not making any material change to the holding structure of Hutchison Essar.
“The holding company structure that we are inheriting from HTIL has been in place for over a year. No substantive changes to that structure will take place as a result of the Vodafone-HTIL transaction,” the British company’s email read, adding that, as far as possible, “all other shareholders will remain in place” even after it replaces HTIL as the main shareholder in the company.