INDIA BUSINESS WORLD - JULY 2006
THE MONTH THAT WAS...

HUTCH WINS ORASCOM FDI FIGHT

THE Foreign Investment Promotion Board (FIPB) on Friday cleared Hutch Essar's (HEL) proposal to raise FDI from 49% to 68%, notwithstanding strong opposition from national security advisor (NSA) MK Narayanan and Hutch's Indian partner Essar. The foreign investment includes the 10% indirect shareholding of Egypt-based Orascom, which it holds by virtue of its 19.3% equity in Hutch International. This is the first approval for more than 49% FDI in a telco.

 The home ministry is represented on FIPB. The board's decision shows that the institutional decision-making process is capable of insulating itself from unreasonable insecurities on the national security front. This is likely to give comfort to potential commercial partners in countries such as Egypt , where questions against Orascom had raised hackles.

The FIPB clearance is also for Hutchison Telecommunication (India)'s acquisition of an additional 5.11% stake in the unlisted Indian cellular JV of Hutchison Essar for $450 million from Hinduja TMT on June 30.Earlier, NSA had said Orascom's acquisition of equity in HTIL was a threat to national security as it was a dominant player in Pakistan and Bangladesh.

THE new FDI guidelines make it mandatory for the telecom operators to take government's approval if they have foreign equity.

As per the deal between Orascom and Hutch, Orascom gets representation on the HEL board. This is a cause of dispute between Essar and Hutch. Essar says it was not taken into confidence when Hutch sold equity in HTIL to Orascom. In a letter to DoT it had sought clarification on whether entry of a strategic partner (Orascom) at the foreign holding company level (HTIL) required prior DoT approval, especially if such shareholding change in the holding company triggers changes in the indirect shareholding of Hutch Essar. Hutch defended its decision to sell equity to Orascom saying the agreement between Orascom and HTIL envisages that only a resident Indian will be on the HEL board. Moreover, the board seat to Orascom has been given from HTIL's quota.

DoT had already cleared the proposal on the grounds that transfer of shares happened outside India and it does not breach FDI ceiling.

The department of economic affairs (under finance ministry) too gave its in-principle approval.