Bad air: static hits Hutch-Vodafone megadeal

In what could turn out to be a whopping US$ 11 billion (Rs 50,000 crore) scam, the much-hyped takeover of Hutchison Essar by the world's largest telecom entity, Vodafone, has sent the Prime Minister's Office into a spin. This is a story of shadow equities, and transnational FDI norm violations.

By Shahid Faridi

In a shocking case of what could be a Rs 50,000 crore scam, the Reserve Bank of India (RBI) has begun a thorough probe into the multi-layered structure of Hutchison Telecommunications International Limited (HTIL) for breaching the Foreign Direct Investment (FDI) norms.

The RBI scrutiny is centred around the foreign ownership of Hutchison Essar Ltd (HEL), putting a question mark over its recent much-hyped takeover by the British telecom giant, Vodafone. The RBI is looking at allegations that the HEL might, in fact, be owned to the tune of 89 per cent by foreign entities, as against the FDI cut off of 74 per cent.

As per the records in the Foreign Investment Promotion Board (FIPB), HEL is owned 52 per cent by HTIL, and 22 per cent represents the foreign shareholding of the Essar Group through its Mauritius subsidiaries.

However, in addition to this, it has been brought to the prime minister's notice that HTIL is actually the owner of an additional 15 per cent shareholding of HEL, which is shown as "Indian shareholding", supposedly belonging to two Indian individuals, Asim Ghosh and Analjit Singh. But it is, in fact, fully owned and controlled by HTIL.

Over the past couple of weeks, even as Vodafone Chief Executive Officer Arun Sarin was making the high-profile announcement, a flurry of letters were being exchanged between the Prime Minister's Office, Hutch, Vodafone, the FIPB, and the ministries of commerce, home, law and finance.

If true, given the glittering and clean cachet that the Indian government has given the influx of FDI, the scandal could turn out to be one of the biggest to rattle the Indian government to its very roots.

The facts of the case began coming out after HTIL's announcement that it was selling 67 per cent shares in HEL to Vodafone. By this takeover, HTIL would end up pocketing proceeds of more than US$ 11 billion (or Rs 50,000 crore). It is obvious that this 67 per cent shareholding includes the 15 per cent earlier that the two Indian nationals, Ghosh and Singh, claimed to have owned, as HTIL has always said it owns only 52 per cent of HTIL.

The structure of HTIL-HEL is in clear violation of the FDI policy via Press Note 1, which clearly states that resident Indians should hold 26 per cent of the equity. However, in the case of HEL, the 15 per cent equity stated to be held by the two aforesaid individuals is beneficially owned, financed and controlled by the foreign entities, which are, prima facie, HTIL, and now proposed to be Vodafone.

Further, Vodafone's contention that their arrangement with the existing minority partners (Asim Ghosh and Analjit Singh) will result in a shareholding structure after acquisition "that meets the requirements of India's foreign ownership rule" establishes that the two Indian individuals are no more than the fronts of an arrangement devised to facilitate, first, a Chinese company, HTIL, and now the UK-based company, to flout the FDI policy.

If this is allowed, even 100 per cent equity of a telecom company potentially could be allowed, seriously endangering national security. In a recent report on security threats posed by FDI, National Security Advisor M K Narayanan had referred exactly to these tactics employed by foreign companies to gain control of Indian companies (see NSC puts FDI under scanner, Realpolitik, October-November 2006). It is being alleged that the sales proceeds of the

15 per cent "Indian" shareholding belonging to the companies owned by Ghosh and Singh, which run into billions of dollars, are being paid to HTIL in Hong Kong, whereas this money should have come to India, as these are Indian companies.

There is also the issue of concealment of income and evasion of income tax on the sale of the 15 per cent shareholding. The Indian companies owning the 15 per cent shareholding have to necessarily pay capital gains tax on the sale, but this is being given the slip.

Following the spate of allegations, a letter was shot off to Hutchison Essar Ltd by the ministry of finance on February 28 seeking complete details of the "direct and indirect" foreign holdings in the company, along with details of the foreign companies that hold interests in the Indian companies.

Also sought are complete details of the Indian companies along with their stake in HEL, split in two groups—companies that are completely Indian, having no foreign holding; and companies that have direct or indirect foreign holding in them, thereby resulting in indirect FDI in HEL. Hutch has also been asked to certify this information.

A clarification is also sought on entities that have beneficial ownership of stakes held in HEL by the entities of Asim Ghosh and Analjit Singh—namely Indusind Telecom Network Pvt Ltd and Telecom Investments India Pvt Ltd—together with their subsidiaries, Jay Kay Finholdings (India) Pvt Ltd and Usha Martin Telematics Ltd.

On the same day, a similar letter was issued to Bharti Airtel Ltd, seeking details of the date of acquisition of direct and indirect stakes by Vodafone in Bharti, and the current status of Vodafone's holding, both direct and indirect, and the shareholding pattern of Bharti.

In a detailed letter to the FIPB chairperson, Vodafone explains that it proposed to acquire the entire issued share capital of CGP Investments (Holdings) Limited, a company incorporated in the Cayman Islands indirectly from HTIL.

"CGP owns, through its direct and indirect wholly-owned subsidiaries, an aggregate of 42.34 per cent of the issued share capital of Hutchison Essar Ltd and has further indirect interests in 9.62 per cent of the issued share capital of HWL [Hutchison Whampoa Limited]," the February 20 letter states.

"The acquisition of the entire share capital of CGP by Vodafone from HTIL involves a transfer of shares of an overseas company from one non-resident to another non-resident and, therefore, did not fall within the jurisdiction of the FIPB," the letter adds.

However, this "Overseas Transaction" would result in Vodafone acquiring an indirect controlling interest of 51.96 per cent in HEL, a company incorporated in India—but given that the transaction involves a transfer from a non-resident to another non-resident, it does not lead to any change in the foreign ownership of HEL, it states.

But by virtue of Press Note 1, which provides that a foreign collaborator must obtain approval of the government for a new venture where it has an existing joint venture in the "same" field, the fact that Bharti Airtel and HEL are engaged in activities in the "same field", the provisions of Press Note 1 can be applied in this case. This factual position has been explained in the Vodafone letter, and the company has sought an approval for the same from the FIPB. In the meantime, Asim Ghosh and Analjit Singh gave statements clarifying their positions. Singh, who is chairperson of Max India, has disputed the contention that he held shares in concert with HTIL in HEL and has asserted that he has independent voting and dividend rights in the company. "I don't want to comment specifically on the RBI letter," he told The Economic Times. "But how can I be acting in concert with anyone when I have independent voting rights and no voting arrangement with HTIL?"

Ghosh, managing director, Essar, said, "I am not aware of the RBI letter. Let me be clear: as far as my shares are concerned, I am acting in my own interest." Ghosh's indirect stake in HEL is 4.68 per cent.

"The interest on the commercial loans that I have taken for acquiring my shareholding is paid by me and I am the recipient of the dividend income. I am an Indian citizen. The directors of my companies through which I hold stake in HEL are Indians," said Singh.

Singh had acquired 7.57 per cent in HEL through three of his companies last year. He had secured loans from Rabo India Finance to acquire his shareholding for which Hutchison had stood guarantee, and this guarantee will now be transferred to Vodafone.

Singh said that the FIPB had been informed at the time when he had acquired his shareholding in HEL and both the FIPB and the RBI had been aware of the structure for the past 15 months. "There are some interested parties that are now trying to sensationalise the issue," he said.

Commenting on Hutchison standing guarantee for the loans advanced to him, Singh said that the Hong Kong-based company was protecting his downside. "If I don't repay the loans, it's Hutchison's liability. There is no contingent liability of mine," he said, adding that many other companies and individuals in India had similar arrangements.

The entire matter is now being handled by the Prime Minister's Office, as all concerned ministries and departments have been put into action to protect the government from a major embarrassment, barely two years from the national elections.