Mumbai, March 12: Hutchison Telecom International Ltd (HTIL) ? the $3.1-billion Hong Kong-based conglomerate ? is getting ready to flex its muscles.

HTIL has empowered itself with the right to appoint six directors on the 11-member board of Hutchison Essar Ltd, which will give it unfettered control over the company.

The Hutchison move has driven a wedge between the two partners in Hutchison Essar ? the Ruias of the Essar group and Hong Kong-based tycoon Li Ka-shing of Hutchison Whampoa ? and is one more instance of the high-stakes battles that are being played out across India’s rugged telecom landscape.

The battle for control at Hutchison Essar began three months ago when Hutchison Whampoa roped in Orascom Telecom of Egypt as a partner in Hutchison Telecom International Ltd (HTIL), which holds a 42.34 per cent stake in Hutchison Essar (see chart).

Hutchison Whampoa has been slowly altering the shareholding structures in group companies without informing the Ruias about how these material changes will impact Hutchison Essar.

Sources said Hutchison Essar hadn’t yet received a request from HTIL for an increase in the number of its director nominees.

At present, HTIL has five directors on the board, the Ruias have three nominees, while the Kotak group has two. The Hindujas, who have a 5.1 per cent stake, have one director on the board.

Genesis of the dispute

Trouble broke out about three months ago when Orascom Telecom Holding came on board as a shareholder in HTIL after it bought 917,759,712 shares representing a 19.3 per cent stake in the company. Orascom was to pay $HK 11 (or $1.42) per share which valued the deal at $1.3 billion. The payment was to be made by February 28.

Orascom Telecom operates GSM networks in West Asia, Africa and South Asia, including Pakistan and Bangladesh.

The deal also gave Orascom Telecom the option to raise its stake in HTIL by another 3.69 per cent, but this was subject to certain conditions that introduce an Israeli thread in the deal.

Orascom will get the additional shares in HTIL ? and therefore, a higher indirect stake in Hutchison Essar ? if the Israeli government permits Orascom to raise its stake in Partner Communications Co Ltd to 10 per cent or more.

Partner Communications is the GSM service provider in Israel in which HTIL holds approximately 51.8 per cent.

The stake hike option in HTIL will remain valid for a year from the “date of the closing of the share-purchase transaction”.

Push for recast

The Ruias are upset over the entry of Orascom into Hutchison Essar. But if you look closely at some of the conditions of the deal between HTIL and Orascom as spelt out in various documents filed with the Hong Kong Stock Exchange and the Securities and Exchange Commission of the US, they perhaps have good reason to go ballistic.

The shareholders’ agreement between HTIL and Orascom Telecom provides for the formation of a finance committee that, among other things, will “review any proposal being considered with respect to the reorganisation or restructuring of the shareholdings and board of directors of HTIL businesses (including India Co due to the recently enacted foreign direct investment regulations...)”. The agreement defines India Co as “Hutchison Essar Limited, being the holding company of the Indian subsidiaries and a current subsidiary of HTIL.”

The shareholders’ agreement also gives Orascom the right to nominate one director on the board of Hutchison Essar Ltd. It also obliges HTIL to get an Orascom nominee on the board of Hutchison Essar “no later than March 31, 2006”.

Till such time that an Orascom nominee comes on the board of Hutchison Essar, HTIL will be required to invite an Orascom nominee “to attend and/or participate as an observer at all board meetings of India Co (Hutchison Essar).” Orascom will also be entitled to receive “all notices of meetings, board papers, written resolutions, minutes or other written communications” sent to the directors of Hutchison Essar.

Orascom will also be entitled to have a nominee on the other Indian subsidiaries: Hutchison Essar Mobile Services Ltd, Hutchison Telecom East Ltd, Fascel Ltd, Aircell Digilink Ltd and Hutchison Essar South Ltd. Orascom’s nominees on these companies will have to be in place in some or all of these firms within three months of a start date fixed as July 1, 2006. Till such time that Orascom has a board nominee on these companies, HTIL will ensure that the Egyptian company receives all the board papers.

The agreement binds the Orascom nominee to vote along with HTIL on all issues that come up before the board of Hutchison Essar and the other subsidiaries.

Security concerns

The Essar group is cagey about talking on the subject, but has written a letter to the department of telecom (DoT) wanting to know whether changes in the shareholding pattern through direct or indirect equity required approvals from the authorities. It is also believed to have insinuated that India’s security could be compromised if Orascom ? which operates a GSM service in Pakistan ? enters the board of Hutchison Essar.

Naguib Sawiris, chairman of the board and chief executive of Orascom Telecom Holdings, is also chairman of the board of Pakistan Mobilink. HTIL has inducted Sawiris into its board after the December deal.

Sources say the Ruias own 33 per cent of the equity in Hutchison Essar, and are, therefore, the largest shareholder in the company.

But the problem is that there’s a confetti of numbers floating around and it is difficult to get a real fix on who holds how much.

On March 1, HTIL’s associates Asim Ghosh and Analjit Singh bought out the Kotak stake using loans that were given to them by HTIL. As a result, Telecom India Investments Ltd (TII) ended up with a 19.5 per cent stake in Hutchison Essar.

HTIL has the option to buy back the stake held by the firms owned by Ghosh and Singh within a period of 10 years. This will actually raise HTIL’s stake to 61.9 per cent (including the direct stake of 42.34 per cent). Li Ka-shing’s Hutchison Whampoa will then have an effective stake of a little over 30 per cent in Hutchison Essar.

The recast of Telecom India Investment's (TII) shareholding will entitle HTIL to appoint one of the two directors that TII sends to the board of Hutchison Essar.

Ruia response

Meanwhile, the Ruias are reported to have opened negotiations with the Hindujas to buy out their 5.1 per cent stake. If they pull of the deal, the Ruia stake will rise to 38 per cent.

The battle between the Ruias and Hutchison Whampoa now enters an interesting new phase and much will depend on how the DoT rules on Orascom’s backdoor entry into Hutchison Essar.

HTIL will also be waiting eagerly for the outcome of DoT’s deliberation before it asserts its right to have more directors on the board ? and bring along an Orascom nominee in tow.