Vodafone’s dual sympathies

Vodafone’s dual sympathies

How much of Vodafone Essar Ltd is owned by its parent company, Vodafone Group Plc? That depends on who’s asking. The general understanding is that the London-headquartered firm currently owns 67% of its Indian arm. Sample this recent report in the Financial Times: “In 2007 Vodafone bought a 67% controlling interest in what was then Hutchison Essar. It was then renamed Vodafone Essar. (While) Vodafone owns 42% directly… its total interest in Vodafone Essar is 67%."

But when it comes to reporting to the Indian government’s Foreign Investment Promotion Board (FIPB), the ownership of the parent company is limited to the direct holding of 42.4%.

Vodafone has now said that it will purchase its Indian partner Essar Group’s 33% stake. This effectively takes its stake to 100%. But again, as far as FIPB is concerned, Vodafone’s stake will increase only to 75.4%, just a notch above the foreign direct investment (FDI) limit of 74% for the telecom sector. It would have to divest shares amounting to only 1.4% to be compliant with the FDI rules.

A report in Mint states that Vodafone has “parked" shares with Analjit Singh, founder of the Max India group, and Asim Ghosh, former chief executive of Vodafone Essar. These investors are considered to be essentially dummy/sleeping investors. At the time FDI rules are relaxed, they would be expected to sell their shares to Vodafone at a pre-determined rate. According to reports, there are contractual agreements in place between these investors and Vodafone that prohibit them from selling the shares to anyone else.

This is a mockery of India’s FDI regulations and FIPB. Vodafone can tell its stakeholders that it enjoys a de facto 100% stake in its Indian arm, while at the same time claiming that it complies with India’s FDI limits.

If India’s policymakers aren’t particular about the FDI limits in certain sectors, then they should remove these limits. After all, what’s so sacrosanct about a 74% limit in ownership? Apart from denying a foreign firm an additional 26% economic interest, it does little in terms of the company’s functioning.

Having such limits sends the message that while India operates under arcane laws, they can be bent. And as the investigation into the 2G scam shows, one can never say when there would be a volte face by policymakers on these issues.

The only people who benefit in this situation are the dummy investors. There’s no good reason why this anomaly shouldn’t be corrected.

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