Mumbai: Anil Ambani’s Reliance Communications Ltd (RCom), India’s second largest telecom services provider by subscribers, has won approval from its board of directors to sell a stake of as much as 26% to strategic or private equity investors, giving it the freedom to raise funds for expansion and seek consolidation opportunities.

Graphic: Ahmed Raza Khan / Mint

A back-of-the-envelope calculation shows that a 26% equity dilution would let the company raise up to Rs11,300 crore at the current market price. The actual amount would, however, depend on the extent of equity dilution and how much premium, over the current market price, RCom is able to extract from potential investors.

RCom and US telecom firm AT&T Inc., meanwhile, have sounded out each other’s interest about a potential transaction in which AT&T would take a significant minority stake in the Indian company, The Wall Street Journal reported, citing people familiar with the matter.

Also Read Reliance Communications: a timeline

The board approval follows the 23 May scrapping of the non-compete agreement between Reliance-Anil Dhirubhai Ambani Group (R-Adag) and his elder brother Mukesh Ambani’s Reliance Industries Ltd (RIL).

The tearing up of the agreement paved the way for the younger sibling to induct a third-party investor aboard RCom, which was thwarted in a 2008 attempt to merge with South Africa’s MTN Group Ltd after RIL invoked the non-compete agreement that gave it the right of first refusal to any significant stake that RCom wanted to sell.

“The board of directors of Reliance Communications Ltd has approved in-principle the induction of strategic/private equity investors into the company for an up to 26% equity stake at an appropriate premium to the prevailing market price, and also to examine and pursue other appropriate strategic combination/consolidation opportunities," RCom said in a brief statement on Sunday.

As on 31 March, promoter holding in RCom stood at 67.6%. The proposed stake sale would be beneficial to shareholders as it would most likely happen at a premium to the current market price, said V.K. Sharma, head of private broking and wealth management at HDFC Securities Ltd.

“The fresh capital infusion is much-needed for the company as it already has a lot of debt on its books," he said.

After hitting a 52-week low of Rs131.80 on the Bombay Stock Exchange (BSE) on 21 May, RCom’s shares have risen 27.6% to close at Rs168.15 on Friday. The firm’s shares gained 14% last week, fuelled by media reports about Emirates Telecommunications Corp., or Etisalat, being in talks to buy a stake in the Indian telecom operator. There were also reports of South African telecom operator MTN being in talks with RCom.

Regulations governing mergers and acquisitions in India’s telecom sector, however, do not permit Etisalat or any existing Indian telecom players to own more than a maximum of 10% in another telecom firm.

RCom has debt of Rs33,332 crore, including the Rs8,585 crore it paid the government for third-generation (3G) mobile phone service licences. A 2 June report by analysts Rumit Dugar, Manoj Singla and Udit Garg of Religare Capital Markets Ltd said that any “de-levering" of the books could act as an upside trigger for the stock.

“Increase in leverage of RCom has been an overhang, and is set to increase further with the 3G outflow," it said. “This is going to stretch net debt/Ebitda to 3.9x," Dugar, Singla and Garg wrote.

Ebitda, or earnings before interest, tax, depreciation and amortization, is a key measure of operating profitability.