INDIA BUSINESS WORLD - APRIL 2007
The Month that was ...

RBI QUESTIONS HTIL'S HOLDING IN HUTCH

The Reserve Bank of India (RBI) has said that a multi-layered holding structure put in place by Hutchison Telecom for the 12.26% - the stake that the company could not own directly in Hutch-Essar - may have breached the telecom sector's foreign investment guidelines.

In a letter dated March 20 and addressed to DK Singh, director, Foreign Investment Promotion Board (FIPB), ministry of finance, the RBI has also said that there is a need for a thorough investigation to ascertain the actual foreign holding in Hutch-Essar.

"Since the funding has been made at the instance of HTIL, it would imply that these persons would be holding shares in concert with HTIL and if this is taken into account, the foreign holding in Hutchison-Essar may breach the FDI cap of 74%. This aspect may be looked into by the FIPB," the letter states. M Rajeshwar Rao, general manager, foreign exchange department, RBI, is the author of the letter.

RBI's communication is in response to an office memorandum dated February 28 by Mr. Singh. The FIPB had sought the central bank's comments on the alleged violation of FDI regulations in the telecom sector by Hutchison Telecom International. "Given the nature and magnitude of irregularities, we are of the view that there is a need to have a thorough investigation to assess the complexities of the transaction and to establish the actual foreign holding in the company," the RBI letter says.

The structure that is the cause of so much heartburn was actually created some time in early 2006 after Kotak Mahindra exited the venture. Since Hutch could not own the 12.26% directly, it created a multi-layered structure with three different sets of companies controlled by Mr. Asim Ghosh and Mr. Analjit Singh. Mr. Ghosh held a 4.68% indirect stake in Hutch-Essar through three investment companies while Mr. Singh held 7.58% through three companies. When contacted, both Mr. Ghosh and Mr. Singh declined to comment.

RBI's comments may come as a blow to Hutchison's plans of exiting its Indian joint venture quietly. Last month, the Li Ka-shing group agreed to sell its 67% stake to Britain's Vodafone for an enterprise value of $18.8 billion. Vodafone later forged an agreement with existing investor Essar who agreed to stay in the company.

The FIPB is yet to approve the transaction. It has asked for comments from RBI on the ownership issue and is supposed to consider the proposal at its next meeting some time this week. RBI's move is unlikely to scupper the transaction with Vodafone but could cause considerable embarrassment to Hutch, Mr. Analjit Singh and Mr. Asim Ghosh should the government conduct a full-fledged probe.

Advisors to Mr. Singh defended the structure vigorously. They said that both Mr. Singh and Mr. Ghosh are Indian shareholders and founders of their respective companies. They have full control over their shares and their companies are not just dummies put forward by Hutch.

Industry sources in Mumbai said that it is strange that the concept of holding in concert is being applied to an unlisted company. In a joint venture, all partners are to act in concert. The two partners have full control over their shares and that there is no question of FDI stake being over 74%.

Hutchison ensured that it had key rights and options to enable it take control. It could, for instance, buy out 97.5% in two key companies at par any time over the next 10 years. Hutch was also consolidating this 12.26% in its global balance sheet.

Funds for buying the shares were provided by a local Indian bank on the basis of a standby letter of credit from Hutchison Telecom International. The RBI has raised questions over this as well.