New Delhi / Mumbai: The ministry of corporate affairs (MCA) has laun-ched an investigation into the shareholding of Loop Telecom Pvt. Ltd, even as Mint’s reporting has disclosed that the current ownership pattern may violate an existing rule governing telecom firms—in spirit.
The rule in question says the same company may not own more than 10% in telcos offering services in the same operating area or circles as they are called.
At the core of the controversy is the Essar group, which, through companies registered in India and Mauritius, owns 33% in Vodafone Essar Ltd, India’s third largest mobile phone company that has a so-called universal access service (UAS) licence that allows the holder to provide fixed and wireless services. This means the group can hold a maximum 10% stake in any other telco.
Indirect connection: Shashi Ruia (left) and Ravi Ruia-led Essar group may be controlling Loop Telecom without actually owning it.
Mint’s reporting shows that the Essar group may actually be controlling Loop without owning it. This has been made possible by a multi-tiered structure that separates ownership and control, and by using instruments such as non-convertible debentures, or NCDs (essentially debt that cannot be converted into shares).
Essar Teleholdings Ltd (ETHL), part of the Essar group, however, has financing links to Loop. That’s because Loop is owned by BPL Communications (a holding of around 24%), BPL Mobile Communications Ltd (51%), and Capital Global Ltd, Mauritius (around 24%).
Mauritius, where it is easy to set up companies, is a preferred destination for firms wishing to route investments into India, especially if they wish to remain unnamed.
BPL Communications holds a 69% stake in BPL Mobile Communications, and around 80% of the former is owned by Santa Trading Pvt. Ltd, owned by Kiran Khaitan, the sister of the Ruia brothers, Sashi and Ravi, who run Essar. That would mean that anyone who controls Santa also controls Loop. The remaining 20% of BPL Communications is owned by companies with names such as Black Lion and Inditel Holdings, and the Mauritius-based Deccan Asian and Aidtel Holdings.
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And ETHL, which holds 9.9% of BPL Mobile Communications that offers wireless services in Mumbai under the BPL Mobile brand, has subscribed to 90 million NCDs of Santa Trading, valued at Rs1,592 crore.
Such convoluted structures were common in the Indian telecom business in the late 1990s and early 2000s when Indian promoters wanted capital, but couldn’t divest more than 49%, which was then the ceiling on foreign direct investment in telecommunications. They got around this problem by setting up a holding company in which they would divest up to 49%; have the holding company float a subsidiary in which they would again divest up to 49%; and then have the subsidiary hold the telecom licence. Since then, however, India has raised the cap on foreign investment in telcos to 74%.
MCA is investigating Loop’s ownership at the request of the department of telecommunications (DoT), which wants to know whether Loop is either an Essar group company or controlled by ETHL.
Mint’s reporting, which is based on the shareholding data provided by the Essar group and the Registrar of Companies, an MCA arm, shows that while Loop has significant connections to the Essar group and ETHL, it doesn’t meet the technical definition of being controlled by either of these. According to Indian corporate law, control is defined by direct ownership of a majority stake—or at least 51%.
DoT asked MCA to investigate Loop after receiving a complaint about its shareholding pattern. Mint couldn’t ascertain the name of the complainant.
An official at DoT said a letter had been sent to MCA. The official, who declined to be identified, said the ministry was yet to respond.
A senior official at MCA, who too declined to be identified, said that the ministry’s officials were examining the matter.
“Loop may be trying to circumvent the UAS guidelines. Logically, if Essar has one licence with Vodafone, it should not be part of any other telephony initiative. And since Loop is indirectly being funded by Santa Trading, which, in turn is funded by ETHL, there are issues of corporate governance, which have to be looked into,” said a senior government official familiar with the matter.
Vikas Saraf, director (strategy and mergers and alliances) at Essar group, confirmed Loop’s shareholding structure and defended it. “We have followed UAS guidelines, which restrict ETHL’s shareholding to less than 10% in BPL Mobile Communications Ltd,” he said.
Santa Trading’s revenue, according to the latest data available, was Rs12,500 for 2006-07. “That’s because Santa is a holding company,” said Saraf, who added that the debentures owned by ETHL meant that Santa Trading could never take a controlling stake of BPL Communications.
Saraf said Santa Trading is controlled by the Khaitan family and not just Kiran Khaitan and added that according to the Companies Act, a married sister is not considered part of the same family.
ETHL said Sangeeta Lakhi, a representative of the Khaitan family, Ajay Madan, the chief executive of Loop, and T. Sathisan, a representative of BPL Communications, are the directors of Santa.
Graphics by Ahmed Raza Khan / Mint