British telecom giant Vodafone decided to pay $11.08 billion for acquiring only 51.96 per cent in Hutch Essar and not for the 67 per cent stake it claimed in its original announcement and filing with the US Securities Exchange Commission. In its reply to the Indian government, Vodafone has admitted that although it acquired some subscription rights and call options, which when exercised would increase its stake to 67 per cent, but the prevailing guidelines on foreign direct investment in the telecom sector do not permit it.
If Vodafone has acquired only 51.96 per cent in Hutch Essar, the equity value of the Indian mobile firm shoots up to $21.5 billion from the original announcement of $18 billion.
Vodafone has agreed to pay $11.08 billion in cash to Hutchison Telecommunications International Ltd, the senior partner in the joint venture with the Ruias’ Essar group. In arriving at this price, Vodafone acquired various assets and liabilities of CGP Holding, the special purpose vehicle of Hutchison Telecommunications International Ltd, which, in turn, owns the majority stake in Hutch Essar. The assets and liabilities of CGP Holdings include a 51.96 per cent direct and indirect equity ownership of Hutch Essar. Besides this, Vodafone has also “acquired, subject to Indian foreign investment rules, its rights and entitlements, including subscription rights at par value and a call option to acquire in the future 62.75 per cent of Telecom Investment India Pvt Ltd and a call option to acquire in the future a further 54.21 per cent of Omega Telecom Holdings Private Ltd, which together would give us a further 15.03 per cent proportionate indirect equity ownership of Hutch Essar”.
These two investment companies are the bone of contention at the Foreign Investment Promotion Board, which is examining the foreign holding in Hutch Essar. Analjit Singh and Asim Ghosh are shareholders in Telecom Investment through their investment companies. The effective stake of these two Indian shareholders is 12.26 per cent. In Omega Telecom, IDFC is a shareholder. These Indian partners have complete voting rights. However, Hutchison Telecommunications International Ltd, and now Vodafone, has the option to buy out these shareholders.
In its reply to the finance ministry on March 27, Vodafone has clarified that, “Under current Indian telecommunications and FDI regulations the options we were purchasing could not be exercised within the existing shareholder structure if they resulted in a transfer to us or to another non-resident entity. However, given that some of the competing bidders in the auction process were Indian enterprise, we were aware that unless we attached adequate value to these options our bid was likely to be unsuccessful.”