Hutch Row: Indian entity seeks legal opinion

The Indian entity which has given a loan to Asim Ghosh and Analjit Singh to buy a 12.26 per cent equity stake in Hutch Essar Ltd will seek legal opinion on the contentious issue raised by the Reserve Bank of India that the loan extended to them by Hutchison through a complicated route could be a violation of the external commercial borrowing guidelines issued under the Foreign Exchange Management Act (FEMA).

Confirming the development, Ghosh, managing director of Hutch Essar, said the Indian entity would seek legal opinion. The RBI had written a letter in response to the FIPB's query on whether Ghosh and Singh's stake violated FEMA and foreign direct investment norms in telecom.

Sources said though the rules stated that prior permission for such a transaction was not required, any sale of shares that had been funded by the loan would come under the purview of the RBI.

However, they said the ECB guidelines, which were amended after the Hutchison loan agreements were signed, were not clear on this contentious issue and they would seek clarification.

They pointed out that these changes could not be invoked retrospectively to agreements that occurred prior to new amendments in the ECB rules.

Ghosh and Singh's 12.26 per cent stake in Hutch-Essar has been funded by a local finance company (an Indian entity), backed by a standing letter of credit issued by a Honk Kong entity at the instance of Hutchison Telecommunications International Ltd.

Meanwhile, amid allegations of breach of foreign direct investment norms in Hutch-Essar, its minority stakeholders, Asim Ghosh and Analjit Singh, along with Vodafone and HTIL, will be making brief presentations to the Foreign Investment Promotion Board (FIPB) on March 29 to clarify their position.

Ghosh and Singh jointly hold a stake of about 12.26 per cent, which is in the centre of a controversy on whether it actually belongs to them or HTIL (or now Vodafone).

The two shareholders, along with Vodafone and HTIL, had been asked by the FIPB to clarify their position on March 29, sources said, adding that all the four parties had been given 5-10 minutes each to make their case.

While HTIL will be represented by legal firm Amarchand Mangal Das, Vodafone will be represented by its senior official looking after merger and acquisitions.

Official sources, when contacted, said the FIPB had also sought the home ministry's opinion on the issue.

The controversy relates to the allegation that Vodafone, also owns the 12.6 per cent stake held by Ghosh and Singh.

But the two have denied the charge.

Since Essar owns 22 per cent FDI in its 33 per cent stake in the joint venture, the total FDI limit would cross the 74 per cent limit and this is being examined by the FIPB.

Ghosh and Singh have already written to the FIPB assuring that they are the actual owners of their respective stakes and not acting as front of HTIL and now Vodafone.

The FIPB has asked the Reserve Bank of India, Department of Telecom and Department of Industrial Policy and Promotion to clear their stand on the 12.26 per cent stake in Hutch-Essar.

Since all the three had in the past skirted this crucial issue, the FIPB would wait for the second round of replies from them and after that it would hear out the representatives of the stakeholders on Thursday.

Last month, the Li Ka-Shing owned group agreed to sell its 67 per cent stake to UK's Vodafone for an enterprise value of $18.8 billion.

DoT was of the view that 74 per cent FDI in Hutch-Essar was compliant with the guidelines and put the ball in FIPB's court by suggesting that an investigation could be carried out if required.

DIPP too said the shareholding was in conformity with the law.

RBI also had, according to official sources, touched on the overall issue without getting into details.