12.26% Hutch stake valued at just $431m

NEW DELHI: Hong Kong-based Hutchison Telecom International Ltd (HTIL), which holds a direct 52% stake in Hutchison Essar, on Tuesday submitted the requisite documents, including the loan agreement with its minority shareholders Asim Ghosh and Analjit Singh, to the Foreign Investment Promotion Board (FIPB).

The board, which had sought these documents at its March 29 meeting in connection with Vodafone’s application to acquire a controlling stake in Hutchison Essar, is expected to now take up the issue on April 23.

Sources indicated that Vodafone’s proposal is likely to get the go-ahead from the government only after the budget session of Parliament gets over.

The budget session resumes after a recess on April 26 and will go on till May 22. The ruling party may like to play it safe, a source in the government reasoned.

According to the documents submitted by HTIL, the fair market valuation of the stakes held by the minority shareholders - Max India chairman Analjit Singh and Hutch India managing director Asim Ghosh - has surprisingly been estimated at a mere $266.25 million and $164.5 million (post-debt) respectively in Hutchison Essar. Singh and Ghosh together hold 12.26% in the company. This contrasts with the $ 18.8 billion enterprise value decided on by Vodafone when it bought a controlling stake in HTIL.

For an economic interest of 67% in Hutch Essar, Vodafone agreed to pay $11.1 billion. Of the 67%, Vodafone bought a direct 52% stake and economic interest in another 15% held by Ghosh, Singh and IDFC.

The HTIL documents have shown that if the Hutchison Essar valuation rises above $25 billion, the fair market valuation of the minority shareholders will also be raised. The documents do not talk about the minority shareholders’ voting agreement with the company, sources said, but the same could not be confirmed independently with Hutch Essar.

HTIL is believed to have said in its papers to the FIPB that maintaining the stakes of Asim Ghosh and Analjit Singh would ensure compliance with foreign direct investment (FDI) norms. In the case of a stake transfer by Ghosh and Singh, regulatory approvals would be required, government sources have said. HTIL has stressed that its put and call options against the minority shareholding are meant to provide downside protection.

Meanwhile, ahead of the next FIPB meeting, attorney general Milon Banerji will give his views on the issue. Last week, the law ministry had referred the matter to the attorney general, while stressing that the ownership in Hutchison Essar should be examined further.

The Reserve Bank of India has already submitted two reports to FIPB, stressing the need for a further scrutiny of the Essar shareholding structure. The RBI suspects violation of government guidelines, mainly Foreign Exchange Management Act (FEMA). The department of telecommunications (DoT), however, has said that there hasn’t been any violation of licensing agreements in the case of Hutchison Essar.

When contacted, a source close to India’s fourth largest mobile company said that “there’s no need to rejig the equity structure in the company. It’s all legal.”

At the centre of the controversy is the minority shareholding of 15% held by Asim Ghosh, Analjit Singh and IDFC in Hutch Essar.

Essar, with a 33% stake in Hutch Essar, holds 22% of it through a subsidiary incorporated in Mauritius, which makes it a foreign stake. A recent public interest litigation by an NGO, Telecom Watchdog, in the Delhi high court alleged that the FDI level in Hutchison Essar (to be renamed Vodafone Essar) was much beyond 74%, which is the foreign investment cap in the telecom sector.

If the 12.26 stake of Singh and Ghosh is treated as a foreign stake, the total foreign holdings would rise to 86.26% (Vodafone 52%, Essar 22%, plus 12.26%.)