The Foreign Investment Promotion Board, the nodal government agency that approves overseas equity proposals in certain sectors, appears to be veering around to the view that the minority stakes held by Indian shareholders Asim Ghosh and Analjit Singh in Hutchison Essar Ltd, a mobile-phone services firm being acquired by Vodafone Group Plc., should be considered as foreign holdings.
As a result, FIPB is likely to approve an application by Vodafone to buy a two-thirds stake in the Indian cellular firm from controlling shareholder Hutchison Telecommunication International Ltd at a meeting slated for 23 April on the condition that the companies agree to restructure the ownership of Hutchison Essar.
“The view that is emerging is that deal may be allowed to go through if they agree to change their present equity structure,” a top government official, who is part of FIPB said, preferring not to be identified since a final decision hasn’t been taken.
The government is examining the Vodafone-HTIL deal, which at $11.1 billion, nearly Rs47,800 crore, is the biggest acquisition in India, for a possible violation of foreign ownership in telecom service firms, capped currently at 74%. HTIL owns 52% directly in Hutchison Essar, one-third of which is owned by Essar Group. About 22% of the Mumbai oil-to-steel conglomerate’s 33% stake in the mobile-phone services company is held through foreign units.
The remaining 15% in Hutchison Essar is controlled by Ghosh, the veteran chief executive of the target company; Singh, who is chairman of hospitals chain Max Healthcare; and core-sector financier IDFC Ltd. A litigant in the Delhi high court, Telecom Watchdog, has 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 has denied that charge, saying a ‘fair market value’ pricing formula is in place that will pay Ghosh and Singh more than $430 million.
Details of the valuation of IDFC’s stake or the government’s view of the financier’s 2.7% holding in Hutchison Essar couldn’t be ascertained.
The FIPB official suggested there could be several restructuring options before Vodafone and Hutchison Essar’s shareholders. “Either Essar will have to offload part of its (foreign) stake or the stakes held by Asim Ghosh or Analjit Singh would have be nullified,” the official said. “Another option can be that Vodafone decides to lower its stake.”
The official said the view gaining ground at FIPB was that since HTIL had guaranteed the loans taken by Ghosh and Singh to finance the part-acquisition of their Hutchison Essar equity, and because that arrangement was made contingent to the two agreeing to sell their stake to the Hong Kong company, the duo could not be regarded as Indian stakeholders even if they are Indian citizens residing in India. This view was further strengthened since Ghosh and Singh do not have the freedom to sell their stakes to anyone else, the official added.
Singh owns 7.6% in Hutchison Essar and Ghosh holds 4.7%, according to documents filed by HTIL with FIPB on Monday.
One option, say telecom industry insiders, could be that the 15% stake held by Ghosh, Singh and IDFC be transferred to Essar in exchange for an equivalent stake to Vodafone outside India. This would decrease Essar’s foreign holding to 7% from the current 22% and increase its stake through Indian units from 11% to 26%. This arrangement will keep intact the Mumbai industrial group’s ownership of Hutchison Essar and Vodafone will retain 67% in the Indian cellular company.
HTIL is paying $415 million 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 its rights and claims on the equity being sold to Vodafone.
The payment of this money is conditional on the Vodafone deal going through. This settlement agreement with Essar also has a cushion clause for HTIL. It provides that in the event of any fine or liability being imposed on HTIL in connection with the Vodafone deal, Essar will use the payment received from HTIL to pay the fine.
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 deal if FIPB makes the deal conditional on a fine or ‘regularization cha-rge’ of more than $500 million.
Yet another possibility, which industry insiders called “remote”, could be that Ghosh, Singh and IDFC transfer their shares to an India-registered company.