New Delhi: Ending weeks of uncertainty, the Union government has approved Vodafone Group Plc’s $11.1 billion (Rs45,510 crore) buyout of a two-thirds stake in Hutchison Essar Ltd (HEL), the fourth-ranked cellular firm in India, the world’s fastest growing mobile phone market. At the same time, it sent out a strong message to foreign companies that were breaching the foreign direct investment (FDI) ceiling by warehousing equity stakes with resident Indians or Indian firms.
The regulatory clearance, granted by the Foreign Investment Promotion Board (FIPB), a body tasked with approving overseas holding in select sectors where such ownership is restricted, ramps up Vodafone’s subscriber base by about a tenth immediately and gives it a strong foothold in a telecom market projected to grow three times to 500 million customers by 2012.
For Hutchison Telecom International Ltd (HTIL), a Hong Kong-based company selling its 67% stake in HEL to Vodafone, New Delhi’s green signal returns to its shareholders—led by chairman Li Ka-Shing—nearly 10 times the equity investment they made in the Indian cellular business.
FIPB said its approval on Friday was conditional. The 12.26% stake in HEL held by Asim Ghosh, chief executive of the company being sold, and Analjit Singh, chairman of hospitals and insurance firm Max India Ltd, cannot be sold to a foreign entity without prior permission of the government.
The two can, however, sell their shares to an Indian entity without such permission.
The board, which had held three previous inconclusive meetings, had studied the Vodafone-HTIL transaction for a possible violation of foreign ownership in Indian telecom service firms, currently capped at 74%.
HTIL owns 52% directly in HEL, one-third of which is owned by the Essar Group. About 22% of the Mumbai oil-to-steel conglomerate’s 33% stake in the phone firm is held through foreign units.
The remaining 15% in HEL is controlled by Ghosh, Singh and core-sector financier IDFC Ltd. A litigant in the Delhi high court, Telecom Watchdog, had complained that this 15% is a proxy for HTIL since the Hong Kong company has options to buy the trio’s stake at par value. HTIL, Ghosh and Singh had denied the charges.
After a two-hour-long meeting of FIPB, industry secretary Ajay Dua told reporters that the board had decided that the shareholding of the three promoters (Singh, Ghosh and IDFC) was Indian.
“They will have to remain with Indian shareholders and it can’t be sold without the government’s permission,” Dua said. The board’s decision has to be approved by finance minister P. Chidambaram.
Damien Chew, a London-based stock analyst with ING Equity Markets, said investors were breathing a sigh of relief.
“The basic expectation here was that the deal will go through, but people were wondering if there would be a fine or not...or whether it would be 52% or 67%,” he said in a phone interview.
Shares of Vodafone dropped 0.21% to 142.9 pence on the London Stock Exchange at close of trade on Friday.
HEL will have to comply with FDI regulations in telecom (detailed in the government’s Press Note 3 of 2007) as they evolve, industry secretary Dua said. Key conditions in the rules clarified last week include seeking approval from the home ministry for key appointments in telecom companies.
Another senior government official, who attended the FIPB meeting, said the board has suggested a review of the FDI regulations in the country.
The Vodafone-Hutchison deal, he said, has brought out “loopholes” in the existing system. “We have recommended to the government that they examine the current rules which allow foreign entities to hold an indirect economic interest of up to 100% in which no FDI is allowed,” the official said.
Foreign companies have often used resident Indians or Indian entities to front for them, said the official.
Other than telecom, insurance and media are two sectors where such “equity warehousing” pacts between Indian shareholders and foreign shareholders are not uncommon.
The aggregate foreign holding in insurance is currently capped at 26%, but the finance minister has said the aim is to hike it to 49% through a legislative amendment.