Why is India’s largest PE media deal so stuck?15 min read . Updated: 08 Jan 2008, 07:13 PM IST
Why is India’s largest PE media deal so stuck?
Why is India’s largest PE media deal so stuck?
New Delhi: Has India’s single largest foreign direct investment (FDI) deal in print media, the $275 million, or about Rs1,080 crore, proposed acquisition by Blackstone Group of a 26% stake in the publisher of Eenadu, one of south India’s largest newspapers, fallen prey to political pressures and business rivalries?
A 10-month delay by the Union government in approving the transaction and the nature of very similar questions asked by various regulators, the latest being the finance ministry, as well as the cast of external characters arrayed—openly and on the sidelines—against the deal, are raising uncomfortable questions about the ability of politics to put a chokehold on a marquee economic policy, one where both timely approvals and transparency have been explicitly guaranteed by the Indian government to foreign investors.
It also raises the question whether India’s economic policy can be held hostage by just one member of Parliament, albeit from the ruling Congress party, who has single-handedly delayed a global transaction through an incessant letter-writing campaign that raised several claims, including many tangential to the issue, such as fears of Chinese government money allegedly flowing into India through Blackstone.
At the heart of the long delay are two rather simple questions with seemingly straightforward legal answers.
Does the promoter of an Indian company, who is selling a stake in his family’s media firm to a foreign investor, have the right to do what he wants with that money, in this particular case, pay off liabilities of another company that his family separately also owns?
And, is the foreign investor, who has cleared all other Indian FDI hurdles, including sensitive security-related questions, and who will get an uncontested stake in the media firm, considered as investing in media if the promoter decides to put that payout for other uses?
A Mint review of the saga and conversations with independent legal experts suggests that the Indian government is on shaky ground in holding up Blackstone’s proposal to buy a 26% stake in Hyderabad-based Ushodaya Enterprises Ltd, whose promoter is Ramoji Rao, a larger-than-life entrepreneur in Andhra Pradesh, where he runs Eenadu, the largest-selling Telugu daily. Rao’s business conglomerate, owned by him and his family, includes Margadarsi Financiers, a company that collects deposits from the public, which has run into a regulatory, legal and political maelstrom over its business. Margadarsi Financiers had been accepting deposits from some 250,000 small investors since 1972, which amounted to at least Rs2,200 crore.
Largely because of Eenadu’s media clout in Andhra Pradesh, Rao has been in a very public and vitriolic battle with the top leaders of the Congress party in the state, including chief minister Y.S. Rajasekhara Reddy, who also carries significant clout at the Centre. The state elected 30 Congress party members to the Lok Sabha and Reddy’s continued success is vital to the ruling United Progressive Alliance’s hopes of coming back to power, whenever the next national elections are held.
And, then, there is Aruna Kumar Vundavalli, the Congress party’s Lok Sabha MP from Rajahmundry, in Andhra Pradesh, who has waged a solo, year-long campaign at various government departments, especially the finance ministry, to block the Blackstone deal, raising a variety of new concerns as the deal slowly moved forward through various regulatory approvals, including alleging that approving the deal would allow China to make backdoor acquisitions in India.
“All I have said is that if Ushodaya Enterprises is linked to the HUF (the Hindu Undivided Family of Ramoji Rao), which continues to be under investigation, the government should not give the go-ahead to any FDI in such a company," maintains Vundavalli.
In the Capital, Vundavalli is significantly more powerful than an individual MP because he is not only a secretary of the All India Congress Committee, in charge of Puducherry and finance minister P. Chidambaram’s home state, Tamil Nadu, but also a permanent invitee to the ruling party’s apex decision-making body, the Congress Working Committee.
Further complicating matters is the emerging business backdrop of the ongoing Rao vs Reddy political rivalry.
Reddy’s son, Y.S. Jaganmohan Reddy, is on the verge of launching Sakshi, a new Telugu newspaper that plans to take Eenadu head-on starting in February. Political rivalries in the state being what they are, most observers see Sakshi turning into a pro-Congress paper that will battle Eenadu, widely seen as an anti-Congress paper, in the run-up to elections in the state, further raising the stakes in the Ushodaya deal being blocked or cleared.
Mint’s review of various regulatory questions in exchanges between various ministries and ministry of finance documents, as well as conversations with government officials, none of whom wanted to be identified given what they concede is a politically sensitive business story, show no overt involvement of the Andhra Pradesh chief minister in the Blackstone-Ushodaya transaction itself, even as he is actively involved in the Margadarsi Financiers saga. Reddy has also denied specifically targeting Rao’s business interests for political reasons, an allegation made by the opposition Telugu Desam Party in the state.
But both sides aren’t pulling their punches.
Court documents show that Rao’s lawyers have gone to the extent of arguing before the Supreme Court that the Congress government in Andhra has been abusing power to unfairly target the group as it can’t stand legitimate criticism in Eenadu’s print and television outlets. In turn, the state has filed numerous legal petitions alleging business and financial violations by Rao and his family, and is asking the Supreme Court to lift its existing ruling and allow the state to seize the assets of Margadarsi Financiers.
And, from the Congress’ side, G.S. Rao, the acting president of the party’s state unit, says: “It is well known in Andhra Pradesh that Eenadu newspaper has been running baseless campaigns against our party in general and the chief minister in particular. It is equally well known that the paper is a tool in the hands of the opposition Telugu Desam."
Perhaps because of the high stakes involved—print media in India is a booming business where the value of companies is still skyrocketing—Rao and Ushodaya declined to comment for this story, despite repeated attempts over the past month. Questions that were emailed to the firm were also not answered.
Blackstone, which is traded on the New York Stock Exchange, is one of the world’s largest private equity firms with $625 million in previously approved investments in India, most of which were announced and closed after the firm had sought the Ushodaya approval. India-based executives of Blackstone also declined to comment for this story and did not respond to emailed questions from a Mint reporter.
The saga unfolds
Two months before Blackstone formally entered into the picture, Vundavalli, in a letter to Chidambaram, levelled allegations against Margadarsi Financiers, claiming that it had violated regulations governing HUFs and indulged in non-banking financial activities by collecting Rs2,204.42 crore from numerous depositors, which, he claimed, it could not refund.
On 30 November 2006, the Reserve Bank of India (RBI), responding to a 10 November request from the finance ministry and noting that Reddy had forwarded the complaint of Vundavalli, weighed in and asked Margadarsi Financiers not to accept new deposits.
Because of the size of deposits and the large number of investors and “associated systemic risk," RBI agreed to let Margadarsi pay back depositors as and when their deposits matured, through the use of existing funds and future divestments of holdings over the next three years. RBI said it was also nominating a chartered accountant to monitor compliance.
On 1 December, the finance ministry then issued a Press Information Bureau statement saying it had sought RBI’s involvement and noted the central bank’s recommendations on Margadarsi Financiers, leaving it to the bank to monitor developments and take “appropriate action as and when considered necessary." Essentially, the ministry endorsed the RBI approach, for all practical purposes, closing the chapter on Vundavalli’s first complaint.
In January 2007, Blackstone and Ushodaya announced what was then the fifth largest private equity investment in India and the largest such deal, even a year later, in print media. Rao, who had a 74.6% personal stake, together with his Hindu Undivided Family, owned 99.86% of the shares of Ushodaya, which is an independent legal entity, one of several that Rao and his family own and control, including Margadarsi Financiers. On 5 February, according to finance ministry documents, Ushodaya applied for various Central clearances, a process that normally takes about four to six weeks.
The Foreign Investment Promotion Board (FIPB) took up the issue on 14 March, just two days after Vundavalli again wrote to Prime Minister Manmohan Singh, Chidambaram and Priya Ranjan Dasmunsi, minister of information and broadcasting (I&B).
In this letter, Vundavalli raised several allegations against Rao and Margadarsi Financiers but, interestingly, asked Chidambaram to clear the Blackstone investment by imposing a condition of Ushodaya “utilizing the entire money first for repayment of the (Margadarsi) depositors." He also wrote that if this doesn’t happen, it will “bring the government to disrepute."
At this point, the letter shows, Vundavalli was arguing for what Rao had promised RBI—that he would, in essence take proceeds from divestments such as the Blackstone deal, to repay Margadarsi depositors. Separately, the state government’s court petitions reviewed by Mint show, Rao had also proposed to raise about Rs827 crore in loans from Standard Chartered Bank, again to repay depositors.
At its March meeting, FIPB deferred the discussion for four weeks because the I&B ministry had sought additional time to discuss the Vundavalli request. On 3 April, D.K. Singh, director at FIPB, wrote to the I&B ministry, clarifying the finance ministry’s stand on the condition sought by Vundavalli on what should happen to the Blackstone money. “It is clarified that only those conditions can be imposed by FIPB, which are in accordance with the existing FDI policy in the sector," Singh wrote.
Meanwhile, FIPB records reviewed by Mint show, the delay of four weeks dragged into four months as the I&B ministry sought the opinion of various ministries on the proposed transaction. On 6 July, Dasmunsi wrote to Vundavalli saying the I&B ministry deals with print media investments and isn’t the appropriate body to deal with any issues involving Margadarsi Financiers.
But, minutes of a 27 July FIPB board meeting show, on that day, the I&B ministry gave a formal no objection certificate, recommending that the Blackstone investment be approved by FIPB and the ministry of finance.
FIPB’s records also show that the clearance was issued only after the I&B ministry asked—and received—similar no objection certificates from the ministry of home affairs, ministry of external affairs, ministry of corporate affairs, the department of industrial policy and promotion, and the department of economic affairs.
And, on the same day, the FIPB minutes show that the board, citing I&B support for the proposal, “recommended" the proposal to the finance ministry saying “since the investment inflow exceeds Rs600 crore, the proposal should be submitted for consideration and approval of the cabinet committee on economic affairs thereafter."
Within weeks, Vundavalli appears to have changed tactics, from first asking the government to insist Blackstone proceeds only go to repaying Margadarsi depositors, to now wanting the government to stop the deal.
In a 16 August letter, the MP raised entirely new allegations, this time about Rao’s land holdings in Hyderabad and also claimed that Margadarsi Financiers, and not Rao’s family, held 90% of the share capital of Ushodaya. This time, Vundavalli asked for the FIPB meeting of 17 August to be “deferred" seeking new inquiries into the holdings of Rao and his family. In that same letter, Vundavalli also goes on to claim that the Chinese government “has placed huge funds at the disposal of Blackstone for onward investments in countries like India… We should be more careful when the money is flowing into media." (Ahead of its initial public offering, the US-based Blackstone sold a $3 billion stake to China Investment Corp., a Chinese government-owned entity in a transaction where China didn’t get any management say in Blackstone. So much so that even the US Treasury Department didn’t seek any national security investigation into that investment.)
Even before he made the allegations in his letter, it appears from government records reviewed by Mint, that the I&B ministry had made Vundavalli aware that the Blackstone investment had already been cleared by both ministry of external affairs as well as the ministry of home affairs, two key ministries responsible for security and related FDI issues.
Indeed, back on 13 June itself, Anurag Srivastava, an undersecretary in the external affairs ministry, formally issued a no objection to the proposal. And, the ministry of home affairs, in a 26 July formal communication from deputy secretary J.P.S. Verma, clearing the proposal, specifically wrote: “Enquiries have not revealed anything adverse from security angle against Ushodaya and Blackstone."
Even the ministry of corporate affairs, in its 11 July memo signed by M.S. Pachouri, an assistant director, issued a no objection saying: “There is no complaint against the company (Ushodaya) pending with the Registrar of Companies."
Despite Vundavalli’s new allegations, the FIPB minutes, reviewed by Mint, show that at a 17 August meeting, the board once again recommended to the finance ministry that the deal be cleared.
Still, Vundavalli’s allegations appear to have cast a long shadow on the deal.
FIPB records then show that the finance ministry, specifically citing Vundavalli’s claims, “has observed that prima facie, it appears that the purpose of securing funds from M/s Blackstone is not for advancing the business of Ushodaya Enterprises Ltd, but for repaying the deposits taken by M/s Margadarsi Financiers."
As a result of these new concerns, on 5 September, FIPB sought details of Ushodaya’s shareholding pattern. But, when Ushodaya submitted proof showing it is Rao and his family that own the majority of Ushodaya and not Margadarsi Financiers, the FIPB’s records show that it promptly issued another letter.
On 6 September, D.K. Singh again wrote, this time asking for detailed information on Vundavalli’s claims about Margadarsi. Even though these were precisely the same claims that the ministry itself had asked RBI to look into as early as 10 November 2006 and, then, signed off on the RBI’s solution of letting funds raised from sale of other assets be used to repay Margadarsi depositors.
Late November, FIPB again met to review the fate of the proposal. Minutes from that meeting show that, by this time, FIPB had also heard from the Department of Financial Services that RBI was of the opinion that Margadarsi Financiers was “in compliance" with promises made to the central bank about not accepting new deposits and repaying depositors whose deposits had matured.
But, on 10 December, FIPB’s internal records show, the saga took another odd turn with the board now asking Blackstone as to how Rao using the money received from selling the 26% stake in Ushodaya is “not an attempt to circumvent the ECB (External Commercial Borrowings) guidelines of government of India."
Despite the official queries about ECBs, a senior finance ministry official, who didn’t want to be identified, told Mint in December that the use of Blackstone proceeds by Rao for non-media purposes became—and remains—the ministry’s only concern.
But, this line of reasoning, FIPB’s own records show, has been addressed by Blackstone and its outside counsel, the well-regarded New Delhi firm of Luthra & Luthra, which noted that there is “no prohibition" under any Indian law, and especially the FDI policy, on money “legitimately" flowing out to Rao and his family. And, that, despite the FIPB suddenly raising the issue, the transaction was unrelated to ECBs, which have different guidelines.
Indeed, independent corporate lawyers unrelated to the situation, who were consulted by Mint, say that the end-use, by a seller of investment proceeds, should not be a reason to hold up the investment.
“Once money is brought into an Indian company by a foreign investor, it becomes part of a larger pool of money owned by the Indian company. There would be an end-use restriction only if it is a loan that needs to be repaid with interest. But, if the foreign investor is investing in equity of an Indian company, there is no end-use restriction," explains Anand Prasad, a partner at corporate law firm Trilegal, who is not involved in the specific Blackstone issue. “Once the foreign investor brings money, it would become part of a larger fund pool, and it would be difficult to distinguish between the money from the foreign investor or the revenues of the company that the investor has invested in."
Another New Delhi-based veteran lawyer, who is not connected with any of the parties but didn’t want to be identified, said there would be a problem only if Blackstone was investing in Ramoji Rao’s Hindu Undivided Family vehicle rather than in Ushodaya.
Meanwhile, the prolonged delay—indeed a more controversial deal, from the FDI perspective, the Vodafone Group Plc.’s $11.1 billion investment into Hutchison Essar Ltd, took two months to receive FIPB approval—is starting to attract attention, both within India as well as abroad.
“This is a clear case of vindictive politics," complains M. Jagannath, a Lok Sabha member of the Telugu Desam Party. “The state government and the Centre, both ruled by the Congress party, are colluding against Ramoji Rao."
According to a finance ministry official, both Ratan Tata and William B. Harrison Jr, the co-chairs of the high-profile US-India CEO Forum, have raised the delay directly with Chidambaram and other ministry officials, at a Forum meeting in New York on 24 September, as well as on at least one other occasion.
The unusual delay has meant that the standard deadlines that Ushodaya and Blackstone had set for completing their 28 January 2007 agreement have also now lapsed—at least on paper, allowing other potential buyers to come into the fray. It is unclear though, given the Andhra Pradesh government’s opposition to any deal, whether other private equity firms would want to get into the picture.
Indeed, at a late-November hearing at the Supreme Court, the Andhra government levelled new allegations, this time claiming that Rao and his family have “secret" bank accounts and are are siphoning off funds. The state government then asked the apex court to not allow the sale of any “investments or the assets" in “group companies" because, the petition claims, “interests of the depositors will suffer."
Effectively, the state, as is Vundavalli, appears to be now arguing that selling a stake in Ushodaya or any other Rao group company and using those proceeds to repay Margadarsi depositors is no longer in the “interests of the depositors." In a recent interview with Mint, Vundavalli said he is not going to be content with the government doing due diligence on all his allegations and then coming to a decision, one way or the other.
“If the (Central) government gives the go-ahead to the deal," Vundavalli told Mint, “I will take the matter to the court."
The fate of the deal, which is starting to put the spotlight on how transparently India conducts its investment policies, continues to rest with the finance ministry. An FIPB meeting is scheduled for this week.