Govt rejects RBI stand on Essar share pledge

The finance ministry has said there is no law that prohibits Essar Communications (India) Ltd (ECIL) from monetising its stakeholding in Hutchison Essar Ltd.

In other words, it has turned down the Reserve Bank of India's recommendation of May 21 to reject Essar's application to pledge shares in ECIL, a non-resident company that indirectly holds nearly 16 per cent in mobile service provider Hutchison-Essar, for an overseas loan to fund its expansion plans.

"We cannot convey our concurrence to the suggestion by the Reserve Bank of India to reject the transaction, unless there is a specific provision of law that prohibits such a transaction. Our understanding is that there is no such law," the foreign trade wing of the department of economic affairs (DEA) said in a letter dated June 4.

Sources said the DEA is also advising the central bank to take action on the basis of its rules without being "extra cautious".

ECIL has drawn on credit facility from Standard Chartered Bank, London, and had sought the RBI's approval to pledge its current and future equity shareholding in another Hutchison-Essar holding company, ETIL, in favour of the bank.

Sources with knowledge of the transaction said it was undertaken in parts, and added that the entire transaction was closed on June 1. Essar is yet to hear from the RBI, they added.

The RBI's May 21 letter to the DEA had recommended rejecting Essar's application on the ground that the proposal would result in the transfer of equity holding of a resident entity from one non-resident entity to another one and could violate the 74 per cent foreign direct investment (FDI) limit on telecom service providers.

The central bank's letter suggested that it was being abundantly cautious in the light of recent controversies over FDI limits and indirect holdings in Hutchison-Essar following Vodafone's acquisition of Hutchison's stake in India's fourth-largest mobile service provider.

The DEA's letter says, "It is not clear why the transaction becomes ineligible in the eyes of the RBI. It is true that the Hutch-Vodafone deal created some interest among newspapers and the reading public, but that should not lead to any panic reaction. If rules do not exist, we need not invent them. If rules exist, we must obey them, at least till they are amended".