The bid by Vodafone Group PLC to acquire a majority stake in Indian mobile operator Hutchison Essar Ltd. was cleared late Friday by the Indian government’s Foreign Investment Promotion Board (FIPB). The deal now requires the final approval of India’s finance ministry.
Hutchison Telecommunications International Ltd. (HTIL), the majority share holder in Hutchison Essar, announced in February that it had entered into an agreement with a subsidiary of Vodafone Group to sell its 67 percent direct and indirect equity and loan interests in Hutchison Essar for a total cash consideration of US$11.1 billion.
The proposed deal ran into trouble initially with the Indian joint venture partner, the Essar Group, which wanted a say in the management of Hutchison Essar after Vodafone acquired a majority stake. Essar said it would cede operational control to Vodafone, but wanted to be consulted on strategic decisions relating to the joint venture.
The Essar Group holds 33 percent of the equity in Hutchison Essar, of which 22 percent is held by an Essar group company registered outside India.
The issue of management control was resolved in March when Vodafone and Essar agreed that while Vodafone would have operational control of the joint venture, Ravi Ruia, vice chairman of the Essar Group, would be appointed by Vodafone as chairman of the joint venture, which would be renamed as Vodafone Essar.
Under Indian rules, Vodafone thereafter applied for clearance from the FIPB. The deal then came under scrutiny by the FIPB and other government agencies as it was alleged that Hutchison Essar was in violation of Indian rules limiting foreign equity in a telecom services joint venture to 74 percent.
An Indian NGO (nongovernment organization) called Telecom Watchdog also filed a petition in March with the High Court of Delhi, alleging that foreign shareholding in mobile services operator, Hutchison Essar Ltd. is in breach of the Indian government’s regulations on foreign direct investment. Certain Indians holding 15 percent of the equity in the company were alleged to be fronts for HTIL as HTIL provided loans to these Indian partners to help them acquire equity in Hutchison Essar.
In a filing before the U.S. Securities and Exchange Commission last year, HTIL said it had provided credit support to some investment companies in India in return for “put and call options” to acquire equity interests in or held by these companies.
The petition by Telecom Watchdog was also referred by the court to the FIPB. The FIPB decided on Friday that the 15 percent stake held by the Indian shareholders was Indian shareholding, but that these shareholders could not sell their stake without government permission.
By the new arrangement, after the completion of the transaction, Vodafone will hold 52 percent of Hutchison Essar, while the Essar Group will hold 33 percent, including 22 percent held by a group company abroad, with the remaining 15 percent held by the Indian investors.
