Back to the eighties?

The series of missives the Foreign Investment Promotion Board (FIPB) and other government agencies have sent to various promoters of Hutchison-Essar, to clarify their stakeholdings in India's fourth-largest mobile service provider, highlight two points: the government is getting caught in corporate wars again, and the inventiveness of ownership structures will provide ever new challenges to regimes that seek to dictate shareholding rules. The FIPB move comes a week or so after Vodafone, which last month signed an agreement to buy out Hutch's Hong Kong promoter, applied to the government for approval. The point of contention is whether the foreign shareholding pattern in Hutchison-Essar conforms to the 74 per cent cap prescribed for telecom ventures. And the focus is on the 15-odd per cent stake held by companies controlled by Hutch managing director Asim Ghosh and Max India chief Analjit Singh""whose shareholding has been counted when stating that 67 per cent of Hutch-Essar has been sold to Vodafone. It is obvious from this that the arrangement with Ghosh and Singh, which is financed by Hutch Hong Kong, is (at best) an attempt to conform to the letter rather than the spirit of the law. And since Hutch-Essar's Indian partners, the Ruias, already hold 22 per cent of their 33 per cent holding overseas, the 74 per cent foreign shareholding cap has been breached, the reality being (67 + 22) 89 per cent.

At one level, the government is duty-bound to investigate fully the precise nature of the Ghosh-Singh holdings. At another, this complex arrangement raises questions about the enforceability of sectoral caps in shareholding. The problem in the immediate case has also been caused by lax supervision. The arrangement was made a year ago and disclosures made to the department of telecommunications in April and subsequently to the FIPB. The FIPB then issued a letter confirming the deal to Hutch-Essar in August. It is obvious that the FIPB's decision now to go afresh into the whole question has been provoked by shareholders who want to put a spoke in the Vodafone wheel. This is reminiscent of government meddling in corporate battles in the eighties. It is true that, unlike such skirmishes as Swraj Paul versus H P Nanda, and M R Chhabria versus Shaw Wallace, government-owned financial institutions (FIs) no longer play a key role in determining the outcome of takeover battles. But as the Hutch-Essar affair shows, the government still has the power to influence corporate battles if it so chooses.