ESSAR GROUP USES NEW FDI RULE TO TRANSFER A PART OF ITS INDIAN HOLDING IN VODAFONE ESSAR TO ITS OVERSEAS INVESTMENT COMPANY

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ESSAR Group is indirectly transferring a part of its Indian holding in Vodafone Essar to its overseas investment company, using the provisions of the relaxed foreign investment norms issued last year.

The deal will result in the effective transfer of around 2.63% economic interest in Vodafone Essar, India’s third largest mobile service provider in terms of subscriber numbers.

The group, owned by the Ruia family, will transfer its 49% stake in Essar Telecommunications Holding Private Ltd (ETHPL) that holds 10.97% in Vodafone Essar to Mauritius-based Essar Telecom India Ltd (ETIL) for Rs 530 crore. A spokesman for Essar Group declined to confirm the transaction.

The proposed transaction is allowed under the Press Notes 2, 3 and 4 issued in 2009, under which foreign investment of less than 50% in an Indian investing company will not be treated as FDI as long as Indian citizens have a 50% stake and the right to appoint a majority of directors in the investing company.

In a similar transaction in 2009, Analjit Singh and Asim Ghosh had divested 49% stake in their holding companies that own 7.57% and 4.68%, respectively, in Vodafone Essar to Vodafone Plc.

Several Indian companies are expected to follow this route to raise capital from overseas investors in restricted sectors such as retail, media, defence and telecom, said a leading lawyer, who asked not to be named. In fact, Future group and UTV Software had planned to use this window for bringing foreign capital into their retail and media firms. However, the plans are now put on hold.

Essar Group currently owns 33.02% stake in Vodafone Essar. It owns 22% stake through overseas investment company ETIL, which is treated as foreign investment. The balance 10.97% is owned by ETHPL Communications Holding Ltd, treated as Indian ownership.

The transaction involves ETIL buying 49% stake in Essar Capital Holdings (India) Ltd (ECHL), owned by Anshuman Ruia for Rs 280 crore ($60 million). In addition ETIL will acquire 49% stake in Essar Satvision (India), owned by ECHL for Rs 250 crore ($53 million). ECHL and Essar Satvision, in turn, will buy 49% stake in ETHPL that owns 10.97% in Vodafone Essar.

Mr Singh, who runs healthcare to financial services group Max India, got Rs 533 crore and Mr Ghosh, a professional with long stints at Hong Kong-based Hutchsion Whampoa and later with Vodafone, Rs 329 crore from the sale of 49% stakes in their holding firms.

Vodafone had acquired Hutchison Telecom’s 67% economic interest in the Indian firm for $11.1 billion in 2007. Of this, the UK major owns 52% directly and had options over 15% held by Mr Ghosh, Mr Singh and infrastructure finance company IDFC. The rest of the stake is with the Essar Group.

Since all these holding companies have majority Indian ownership, there will no change in overall foreign ownerhip in Vodafone Essar. Under the new guidelines, indirect foreign ownership through minority stakes is not counted as FDI. Under the earlier norms, indirect foreign holdings were counted on proportionate basis while calculating foreign holding.

Under the current norms, the foreign holding Vodafone Essar is just 64.38%, as against 74% under the previous norms.Indirect investment of ETIL Mauritius in ETHPL through Indian firms ECHL and Essar Satvision will not be counted as FDI under Press Note 2, 2009. Hence the t r a n s a c - tions will not result in breaching the o v e r a l l ceiling.

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