INDIA BUSINESS WORLD - APRIL 2006
THE MONTH THAT WAS

MNC MUST ASK INDIAN ALLY BEFORE SELLING

IN A significant development, the ministry of company affairs (MCA) has clarified that foreign promoters effecting changes in the shareholding of Indian telecom ventures would need to take the local partner into confidence. In a letter addressed to the commerce ministry, MCA has indicated that the Indian partner's right should not be limited to just providing an opinion on such an issue.

The missive was in the context of the questions raised by the Essar group over Orascom's acquisition of indirect equity stake in Hutchison Essar without taking prior approval from the government. The letter is significant given the fact that Orascom is slated to pick up additional stake in Hutchison Telecommunications International Ltd (HTIL) in an international deal, which would increase its beneficial stake in Hutchison Essar from its present level of about 10%.

In a letter, MCA has stated that consultation with local partner as per the policy guidelines “does not mean mere opinion seeking. It implies meeting of minds taht has to be achieved through an integrated, participatory consultative process with Indian promoters”.

It goes on to add, “As far as the modality to enforce this requirement is concerned, it has been suggested that this can be achieved by making necessary arrangements in the Articles of Association of the licensee company.”

MCA had sought the law ministry's opinion on the issue, and on the basis of comments received from the department of legal affairs, it has stated its position to the ministry of commerce. However, this leaves a grey area in cases where changes in foreign shareholding do not lead to a change in the board.

Meanwhile, Orascom is in the process of raising its 19.3% stake to 23% in HTIL, which is the holding company through which the foreign promoter Hutchison Whampoa holds its investments in Hutchison Essar. Given Orascom's holding in HTIL, it has an indirect equity holding in Hutchison Essar, which also gives it the right to appoint one member on the board of the Indian telco. At present, HTIL direct and indirect equity holding in Hutchison Essar add up to about 49%. The Essar group holds 33%, Hindujas about 5% and the rest is held by Analjit Singh and Asim Ghosh in their individual capacities .