Mumbai, Jan. 20: The battle between Vodafone International Holdings BV and the Ruias has escalated.

Vodafone today asked the Securities and Exchange Board of India (Sebi) to investigate the dramatic surge in the stock price of India Securities Ltd (ISL) in the past year and examine the violations of disclosure rules in a capital-raising programme and insider trading regulations.

Vodafone also accused the Ruias of trying to mislead investors in ISL by suggesting that its price would reflect the valuation of the group’s 10.97 per cent stake in Vodafone Essar Ltd (VEL), India’s fourth largest mobile telephony company.

The Ruias have proposed to reverse list Essar Telecom Holdings Ltd (ETHL) by merging the unlisted entity with ISL. The ostensible reason for the move is to achieve a proper price discovery and alternative valuation method before the Essar group exercises its put option to sell the stake in VEL to Vodafone International. The put option expires on May 8. ISL has, however, maintained that the amalgamation aims at unlocking value and market assessment of the telecom assets of the Essar group.

Late tonight, the Essar group came out with a terse rebuttal: “The proposed merger of Essar Teleholdings Pvt Ltd with India Securities Ltd is in full compliance with all regulations and is being done in an open and transparent manner.”

Asset stripping

The Vodafone International letter, which was sent to the market regulator on January 18, alleged that there could be a potential for “asset stripping” of ISL by the Ruias that would deprive its investors an interest in the proceeds from the sale of the Vodafone Essar stake.

The piquant situation arises because the holding has been encumbered with IDBI Trusteeship Services Ltd.

The stake has been encumbered because ETHL’s subsidiary — ETHL Communications Holdings Ltd — had privately offered 45,000 zero coupon, non-convertible debentures to raise a sum of Rs 4,500 crore in two tranches. Each debenture was priced at Rs 10 lakh.

“In the event, that the put options are not exercised by ECHL on March 30, IDBI Trusteeship Services Ltd shall have the right to enforce the security and exercise the put option,” Vodafone told Sebi.

As a result, the only material Indian telecom asset of ISL (the indirect equity interest in Vodafone Essar) would stand transferred without the consent of the shareholders of ISL. It argued that this could result in asset stripping of ISL by its promoters.

Vodafone added that shareholders of ISL would not be entitled to the proceeds of the sale of such assets since these were already encumbered.

It said the amalgamation scheme of ETHPL with ISL contained inadequate information and it circumvented disclosure obligations. For instance, the scheme did not disclose the entities in which ETHPL held an interest even though it described the entity as an unlisted company that was engaged in the business of holding investments in telecom ventures. Moreover, information regarding all assets or liabilities that shall vest in ISL has not been made available.

Vodafone also drew the market regulator’s attention to the share price of ISL, which has jumped more than 11 times to Rs 69.05 in January 17 from Rs 6.25 on January 14 last year. Since the announcement of the amalgamation scheme in June last year, the share price has more than doubled even though ISL has disposed of its major business.

“Given the intended objective of the scheme to facilitate price discovery in VEL and the illiquidity of the stock, the rapid rise in the share price of ISL by more than 11 times in a year may require further examination,” the letter said.

Sebi rules

Vodafone also contended that there was a possible violation of the Sebi (Prohibition of Insider Trading) Regulations, 1992, when it alleged that the scheme might have been under consideration way back in March last year when preference shares were issued to two foreign institutional investors (FIIs). The proceeds from ECHL’s non-convertible debenture issue are supposed to be used to make “an equity investment in ETHL Communications (Mauritius) Ltd …for the purposes of making investments in/acquisition of strategic assets/entities outside of the Essar group”.

These investments will not be made in India either directly or indirectly, says ETHL’s information memorandum.

ETHL Communications (Mauritius) Ltd has given some indication of the investments it was planning to make: $120 million in a South African coal mining firm for a 78.4 per cent stake; $150 million in an Indonesian firm with the rights to explore up to 80 million tonnes per annum of high grade coal; and up to $330 million in a UK listed company with metallurgical coal assets in Australia.

Vodafone said that ECHL was also looking to buy coal assets in the US, South Africa, Indonesia and Australia; refining and other associated assets in Europe; telecom assets in Uganda and Congo; and steel assets in the US.

It said the chartered accountant’s valuation of ECHL for purposes of the amalgamation scheme filed with Madras High Court did not mention any of these acquisitions.

None of the acquisitions specified in the ECHL memorandum was an acquisition of an Indian telecom firm. This, Vodafone claimed, ran counter to the rational of the merger which was to “diversify into infrastructure sector as a stakeholder in a leading telecom company in India”.