Network failure

New Delhi, Jan. 19: Hutchison Telecom International Ltd (HTIL) won’t be able to buy back the 12.26 per cent indirect stake that Max India chairman Analjit Singh and Hutchison Essar managing director Asim Ghosh own in India’s fourth largest cellular company even though it funnelled loans to them to acquire the shares that the Kotak group offloaded in March 2006.

The reason: HTIL will run foul of the regulations that cap foreign direct investment in the telecom sector at 74 per cent.

With Vodafone, Anil Ambani’s R-ADAG and the Essar group ready to stump up bids for the 67 per cent direct and indirect stake that HTIL holds in Hutchison Essar, it had been speculated that HTIL would exercise its call option and buy out the indirect stake that Ghosh and Analjit Singh hold in Hutchison Essar.

It now transpires that it can’t even if it wants to.

Here’s why: the 67 per cent stake that HTIL holds in Hutchison Essar is carved up three ways. Orascom Telecom of Egypt holds about 10 per cent, while Singh and Ghosh hold 12.26 per cent through a complicated structure that puts Telecom Investments India (TII) at the base of a four-layered pyramid. The rest is held by Hong Kong tycoon LiKa-shing’s Hutchison Whampoa group.

Of this, only Orascom’s stake and the Hutchison Whampoa holding qualifies as foreign direct investment — around 52 per cent.

When their relations with the Hutchison group started to sour early last year, the Ruias cleverly transferred about 22 per cent of their 33 per cent holding in Hutchison Essar to a Mauritius-based entity — Essar Communications — and blocked the FDI headroom that had existed till then.

The upshot of those rapid stakeholding changes mean that HTIL cannot buy out the stake held by Singh and Ghosh even though it had given them loans to acquire the Kotak stake and had iron-clad clauses in the loan agreement that gave it the right to press the call option button at any point over a 10-year period.

Hutchison Whampoa holds the right to subscribe to 97.5 per cent of the shares at par of the two key companies owned by the two individuals.

At present, Hutchison Telecommunications International Ltd (HTIL) holds 47.45 per cent directly in Hutchison Essar.

The Essar group holds 33.01 per cent, while the balance 19.54 per cent is held by TII. Of this 19.54 per cent, Ghosh holds 4.68 per cent, Singh 7.52 per cent and the balance 7.28 per cent is held by HTIL.

Telecom Investments India (TII) is a consortium between Analjit Singh, Asim Ghosh and HTIL each holding 38.78 per cent, 23.97 per cent and 37.25 per cent respectively.

The department of telecommunications is of the view that shares in Hutchison Essar owned by Analjit Singh and Asim Ghosh cannot be construed as foreign direct investment. Senior DoT officials said if these shares were sold to a foreign entity, the government would need to examine whether there was any FDI violation.