Indian regulators still not convinced by Vodafone’s plan

Vodafone is struggling to convince the Indian government that its proposed USD11 billion (GBP5.5 billion) acquisition of a 67% economic interest in Hutchison Essar, the country’s fourth-largest mobile operator, does not breach rules on foreign direct investment. According to the Financial Times the Foreign Investment Promotion Board (FIPB), the Indian regulator that is vetting the transaction, has yet to be persuaded that the deal will not push the overall foreign shareholding in the operator above the threshold of 74%. Minutes of a 29 March FIPB meeting obtained by the Financial Times show a number of government departments voicing particular concern at the arrangement in which two Indian nationals would hold a 15% stake in Hutchison Essar on Vodafone’s behalf.

Although the Indian government in principle welcomes Vodafone, concern is mounting that the transaction would set a precedent that weakened foreign direct investment rules, which are restrictive in several industrial sectors. The FIPB, which draws on several government ministries, has twice delayed approval of the Vodafone deal, which would be the largest foreign direct investment made in India. It is likely to do so again when it meets on 23 April. Crucially, the 15% stake, held by Asim Ghosh, Hutchison Essar’s managing director, and Analjit Singh, chairman of the healthcare group Max India, does not count towards the foreign ownership ceiling while it is in their hands.

Vodafone signed an agreement in February to buy a 67% economic interest in Hutchison Essar from Hutchison Telecommunications International, a unit of the Hong Kong tycoon Li Ka-shing’s Hutchison Whampoa. HTIL owns 52% of Hutchison Essar, with a further 15% held on its behalf by companies owned by Mr Ghosh and Mr Singh, over which it has call options. The options give HTIL the right to buy back the stake at a substantial discount. Vodafone plans to replicate this shareholder arrangement. The rest of the 74% quota is filled by Essar, an Indian conglomerate that owns 33% of Hutchison Essar and has organised its stake so that 22% is held offshore. This leaves Vodafone unable to own directly more than 52%.