Vodafone calls for insider trading probe of Essar firm

Vodafone calls for insider trading probe of Essar firm

New Delhi: The uneasy relationship between Vodafone Group Plc and its Indian partner Essar Group deteriorated further, with the former writing to the Indian stock market regulator urging it to investigate possible violations of insider trading laws by India Securities Ltd (ISL).

The world’s largest telco by revenue has also asked the stock market regulator to investigate possible manipulation by ISL, part of the Essar Group, of its own share price.

Essar owns a 33% stake in Vodafone Essar Ltd, India’s third largest mobile telephony firm with just over 124 million subscribers at end-December. Vodafone and one of its Indian partners own the remaining 67% stake, with the telco itself directly holding 60%.

Essar has the option of selling the entire 33% stake to the UK-based telco for at least $5 billion (Rs22,800 crore), provided it does so by May, or a smaller stake at an independently appraised price. Last July, Vodafone sweetened the deal and offered Essar an additional Rs3,400 crore if it would sell even some shares.

The letter to the Securities and Exchange Board of India (Sebi) comes in the wake of Essar’s plans to merge Essar Telecommunications Holdings Pvt. Ltd (ETHPL) with ISL. ETHPL owns one-third of the 33% Essar owns in Vodafone Essar and earlier this week Vodafone, in a statement, articulated its objection to the move, saying this merger could result in a faulty valuation of Vodafone Essar. That is because the merger would have to take into account the stake of ETHPL in Vodafone Essar while arriving at a price or swap ratio and this could set a benchmark for the price of Vodafone Essar shares. While neither ETHPL nor Vodafone Essar is listed, ISL is.

“The proposed merger of ETHPL with ISL is in full compliance with all regulations and is being done in an open and transparent manner," said an Essar spokesperson.

As reported in Mint, Essar had responded to Vodafone’s earlier statement by saying that the latter was neither a shareholder nor a creditor of ISL or ETHPL and has nothing to do with the merger scheme. On Wednesday, a day after Vodafone’s statement, ISL said in a statement to the bourses that “Vodafone has no locus standi to raise such objections to the merger".

Essar’s remaining 22% stake in Vodafone Essar is held through Essar Telecom Ltd, another unlisted firm.

The merger proposal is pending before the Madras high court for final approval. The matter was to have been heard on Thursday, but has been postponed. All such mergers involving a publicly listed firm need to be approved by a high court.

Vodafone’s letter to Sebi, signed by Eric De Rijk, director at Vodafone International Holdings BV, was also shared with the media and bourses. It said that ISL shares ended March at a price of Rs13.89 each. With 199.5 million shares, the market value works out to Rs277 crore. The letter adds that ISL’s annual report for 2009-10 mentions that the firm issued 20,000 compulsorily convertible preference shares of face value of Rs2,000 each to two foreign institutional investors (FIIs) for Rs360 crore, “well in excess of the total market capitalization of ISL at the time".

“The scheme and the notice issued to the shareholders of ISL along with the scheme disclose that such preference shares will be converted into equity shares through the scheme, and upon completion of the proposed merger and conversion, the shareholding of FIIs in ISL will be 20.42%," the letter said.

“There does not, however, appear to have been any disclosure made to the public shareholders of ISL, which would prompt such an investment in March 2010," it adds.

Vodafone has also asked Sebi to look into the sudden price movement of ISL shares. “On 14 January 2010, the share price of ISL was Rs6.25; however, on 17 January 2011, the share price of ISL had increased by more than 11 times to Rs69.05," it said.

“Given the intended objective of the scheme (to merge) to facilitate price discovery in VEL (Vodafone Essar) and the illiquidity of the ISL stock with the public shareholding (other than the shareholding of the Essar Group and two FIIs) being reduced to less than 5% upon completion of the merger and other corporate actions contemplated in the scheme, the rapid increase in the share price of ISL by more than 11 times in one year may require further investigation," the letter said.