Hutch deal clears FIPB test

I know how Kapil Dev must have felt when he was cleared of match-fixing: Asim Ghosh

Ending months of controversy, the Foreign Investment Promotion Board (FIPB) today cleared Vodafone's proposal to acquire 52 per cent in Hutchison-Essar from Hong-Kong-based Hutchison Telecom International Ltd (HTIL).

The proposal has now been sent for the finance minister's approval, Industry Secretary Ajay Dua told reporters after a short meeting of the FIPB, the nodal agency for clearing foreign direct investment (FDI) proposals, here today.

Dua said the deal had been cleared without conditions but needed to conform to Press Note 3 of 2007 that requires a company to comply with the 74 per cent limit on FDI in telecom services.

"The Indian shareholding should also remain Indian and the parties cannot transfer the stake to a foreign entity without government approval," Dua said. This effectively restricts the sale of a controversial 15 per cent additional stake to Vodafone.

When asked whether FIPB is convinced that the deal complies with the 74 per cent FDI limit, Dua retorted, "That is why the clearance is given". He also said that none of the tax issues raised by the income tax department were discussed.

Hutch-Essar Managing Director Asim Ghosh, who was at the centre of the controversy, said, "We need to hear officially from the government of India, but if the news is true I am delighted. I know how Kapil Dev must have felt when he was cleared of match fixing."

A Vodafone spokesperson described the news as "clearly welcome," but said the company awaited the finance minister's decision. The Vodafone scrip rose 0.14 per cent on the London Stock Exchange soon after the news broke.

The FIPB's clearance comes days after the department of legal affairs gave the deal a clean chit, following questions raised by different government departments.

In the months after HTIL, owned by maverick businessman Li Ka-Shing, agreed to sell its stake to UK's Vodafone for $11.1 billion, the world's largest telecom company, controversy arose over the shareholding pattern of India's fourth-largest mobile service provider.

This included a public interest litigation filed by an NGO called Telecom Watchdog, questioning Hutch-Essar's foreign shareholding. The Delhi High Court had ordered the government to probe the matter and present a report. The court is likely to hear the matter later this month.

In particular, questions were raised about the 15 per cent shareholding jointly held by Asim Ghosh, Analjit Singh, promoter of healthcare group Max India, and Infrastructure Development Finance Corporation.

These shares were held on behalf of the foreign promoter. The complication had arisen because Hutch-Essar's Indian shareholder, the Essar group, held 22 per cent of its 33 per cent stake overseas, which therefore qualified as FDI.

Together with HTIL's (and now Vodafone's) 52 per cent direct shareholding, this meets the 74 per cent FDI ceiling. Questions had been raised over whether the 15 per cent surrogate stake owned by Ghosh, Singh and IDFC breached the FDI limit and violated the country's foreign exchange laws. In that case, the company's foreign shareholding would have been 89 per cent.

As a result, Vodafone's application to FIPB in February came under the scrutiny of the Reserve Bank of India (RBI), the finance ministry, the law ministry and even the income tax department.

The FIPB clearance followed the law ministry's opinion that Asim Ghosh, Analjit Singh and IDFC are the "legal and beneficial owners" of the near 15 per cent indirect shareholding in Hutch Essar.