D.Murali

Chennai, April 10: Months have lapsed since the announcement of the deal involving Hutch and Vodafone, the world’s largest mobile telecom company; but the transaction is yet to get a go-ahead. Quite queer, it may seem to a world that has got used to wireless life, instant messaging and quick connectivity. At the time of writing, there is a story by Ruth David of Forbes, about a letter to the Finance Ministry obtained by the Financial Times, in which Vodafone is said to have admitted it would breach the 74 per cent cap on foreign ownership in telecom companies if it acquired the entire 67 per cent stake in Hutch-Essar, controlled by Hutchison Telecom.

On the ‘breach’ angle, Business Line spoke to Ms Priti Suri, the author of ‘FDI Notifications – An Anthology’, a recent publication of LexisNexis Butterworths. Ms Suri is a lawyer with two decades professional experience, heading Priti Suri & Associates, based in New Delhi. “Please be aware that we have not seen the application, or any of the other documents between the contracting parties involved in the transaction,” she begins, with a disclaimer.

Excerpts of an interview

On the FDI ceiling for telecom

Press Note 5 of 2005, which increased the FDI (foreign direct investment) limit from 49 per cent to 74 per cent, governs the current FDI policy on telecom services. Essentially, investment up to 49 per cent is under the automatic route, while between 49 per cent and 74 per cent requires the FIPB (Foreign Investment Promotion Board) approval.

On how the ceiling is computed

The note specifies the manner in which the total 74 per cent is to be computed. The 74 per cent foreign investment can be made directly or indirectly in the operating company or through a holding company, while the balance 26 per cent can be held by resident Indian citizens or an Indian company/companies in which the FDI does not exceed 49 per cent and Indian owners control the management. The 74 per cent ceiling is on the “total composite foreign holding” which means that a structure of any indirect equity interest would not be permitted as that would result in the breach of the prescribed ceiling. The current impasse for Vodafone focuses on the possibility of a breach of this ceiling.

On what the situation currently is, in the deal

Without having seen any contractual documents and relying purely on media reports it appears that the situation is as follows: HTIL holds 52 per cent of Hutchison Essar directly and purportedly has an “economic interest” in another 15 per cent held by 2 companies owned/controlled by 2 minority stakeholders - Mr Asim Ghosh, the MD of Hutch-Essar Limited, and an entrepreneur Mr Analjit Singh.

On where the problem lies

Though Essar holds the balance 33 per cent yet it appears that a substantial part of this stake is routed through a Mauritian entity for tax reasons, making it foreign. The problem is compounded because it seems that Hutchinson stood as guarantors for the foreign loans taken by the minority shareholders to purchase their shares. In return both companies have apparently granted HTIL certain options, exercisable at any time till 10 years, to subscribe at par value for fresh shares in their equity base. If all of the above is accurate, it seems that there would be an indirect foreign control over Hutch-Essar in violation of the 74 per cent ceiling.

On the options before the FIPB

After reviewing all the requisite documents in order to satisfy itself of the control of Hutch-Essar and in the event of a flagrant violation, FIPB would have 2 recourses: (1) reject the application in totality which, despite a possible violation, would send the wrong message to foreign investors; or (2) allow the application contingent upon restructuring so that the breach is cured.