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Why is India's largest PE media deal stuck?

Govt's 10-month delay in approving the deal raises questions on whether it has fallen prey to political and business rivalries, report Sanjiv Shankaran, Ashish Sharma & Malathi Nayak.

business Updated: Jan 06, 2008 21:56 IST

Has India's single-largest foreign direct investment deal in print media, the $275 million, or about Rs 1,100 crore, proposed acquisition by Blackstone Group of a 26 per cent stake in the publisher of Eenadu, one of south India's largest newspapers, fallen prey to political and business rivalries?

A 10-month delay by the Union government in approving the transaction and the nature of very similar questions asked by various regulators, the latest being the finance ministry, as well as the cast of external characters arrayed — openly and on the sidelines — against the deal, are raising uncomfortable questions about the ability of politics to put a chokehold on a marquee economic policy, one where both timely approvals and transparency have been explicitly guaranteed by the Indian government to foreign investors.

It also raises the question whether India's economic policy can be held hostage by just one member of Parliament, albeit from the ruling Congress Party, who has single-handedly delayed a global transaction through an incessant letter-writing campaign that raised several claims, including many tangential to the issue, such as fears of Chinese government money allegedly flowing into India through Blackstone.

At the heart of the long delay are two rather simple questions with seemingly straightforward legal answers.

Does the promoter of an Indian company, who is selling a stake in his media firm to a foreign investor, have the right to do what he wants with that money, in this particular case, pay off liabilities of another company that he separately also owns?

And, is the foreign investor, who has cleared all other Indian foreign direct investment (FDI) hurdles, including sensitive security-related questions and who will get an uncontested stake in the media firm, considered as investing in media if the promoter decides to put that payout for other uses?

A Mint review of the saga and conversations with independent legal experts suggests that the Indian government is on shaky grounds in holding up Blackstone's proposal to buy a 26 per cent stake in Hyderabad-based Ushodaya Enterprises Ltd, whose promoter is Ramoji Rao, a larger-than-life entrepreneur in Andhra Pradesh where he runs Eenadu, the largest-selling Telugu daily. Rao's business conglomerate, owned by him and his family, includes Margadarsi Financiers, a company that collects deposits from the public, which has run into a regulatory, legal and political maelstorm over its business, which had been accepting deposits from some 250,000 small investors since 1972 that amounted to atleast Rs 2,200 crore.

Largely because of Eenadu's media clout in Andhra Pradesh, Rao has been in a very public and vitriolic battle with the top leaders of the Congress Party in the state, starting with Chief Minister Rajasekhara Reddy, who also carries significant clout at the Centre because the state elected 30 Congress party members to the Lok Sabha and Reddy's continued success is vital to the ruling United Progressive Alliance's hopes of coming back to power whenever the next national elections are held.

And, then there is Aruna Kumar Vundavalli, the Congress Party's Lok Sabha MP from Rajahmundry, in AP, who has waged a solo, year-long campaign at various government departments, especially the Finance Ministry, to block the Blackstone deal, raising a variety of new concerns as the deal slowly moved forward through various regulatory approvals, including alleging that approving this deal would allow China to make backdoor acquisitions in India.

"All I have said is that if Ushodaya Enterprises is linked to the HUF (the Hindu Undivided Family of Ramoji Rao), which continues to be under investigation, the government should not give the go-ahead to any FDI in such a company," maintains Vundavalli.

Vundavalli is significantly more powerful than an individual MP because he is not only a secretary of the All India Congress Committee, incharge of Puducherry and Finance Minister P Chidambaram's home state, Tamil Nadu, but also a permanent invitee to the ruling party's apex decision-making body, the Congress Working Committee.

Business backdrop

Further complicating matters is the emerging business backdrop of the Rao versus Reddy ongoing political rivalry.

Reddy's son, YS Jaganmohan Reddy, is on the verge of launching Sakshi, a new Telugu newspaper that plans to take Eenadu head-on starting in February.

Political rivalries in the state being what they are, most observers see Sakshi turning into a pro-Congress paper that will battle Eenadu, widely seen as an anti-Congress paper, in the run-up to elections in the state, further raising the stakes in the Ushodaya deal being blocked or cleared.

Mint's review of various regulatory questions in exchanges between various ministries and ministry of finance documents, as well as conversations with government officials, none of whom wanted to be identified given what they concede is a politically sensitive business story, show no overt involvement of Reddy in the Blackstone-Ushodaya transaction itself even as he is actively involved in the Margadarsi Financiers saga.

Reddy has also denied specifically targeting Rao's business interests for political reasons, an allegation made by the opposition Telugu Desam party in the state.

But, both sides are not pulling their punches.

Court documents show that Rao's laywers have gone to the extent of arguing before the Supreme Court that the Congress government in Andhra Pradesh has been abusing power to unfairly target the group as it can't stand legitimate criticism in Eenadu's print and television outlets. In turn, the state has filed numerous legal petitions alleging business and financial violations by Rao and his family, and are asking the Supreme Court to lift its existing ruling and allow the state to seize the assets of Margadarsi Financiers.

And, from the Congress Party's side, GS Rao, the acting president of the party's state unit, says: "It is well-known in Andhra Pradesh that Eenadu newspaper has been running baseless campaigns against our party in general and the chief minister in particular. It is equally well-known that the paper is a tool in the hands of the opposition Telugu Desam."

Perhaps because of the high stakes involved — print media in India is a booming business where value of companies is still skyrocketing — Rao and Ushodaya declined to comment for this story despite repeated attempts over the past month. Questions that were emailed to the firm were also not answered.

Blackstone, which is traded on the New York Stock Exchange, is one of the world's largest private equity firms with $625 million in previously approved investments in India, most of which were announced and closed after the firm had sought the Ushodaya approval. India-based executives of Blackstone also declined to comment for this story and did not respond to emailed questions from a Mint reporter.

The saga unfolds

Two months before Blackstone formally entered into the picture, Vundavalli, in a letter to Chidambaram, levelled allegations against Margadarsi Financiers, claiming that it had violated regulations governing HUFs and indulged in non-banking financial activities by collecting Rs 2,204.42 crore from numerous depositors, which it could not refund.

On November 30, 2006, the Reserve Bank of India, responding to a November 10 request from the Finance Ministry that noted CM Reddy had forwarded the complaint of MP Vundavalli, weighed in and directed Margadarsi Financiers not to accept any new deposits.

Because of the size of deposits and the large number of investors and "associated systemic risk", the banking regulator agreed to let Margadarsi pay back depositors as and when their deposits matured, through the use of existing funds and future divestments of holdings over the next three years, and said it would nominate a chartered accountant to monitor compliance.

On December 1, the Finance Ministry then issued a Press Information Bureau statement saying it had sought RBI's action and noted the central bank's recommendations and left it to the bank to monitor developments and take "appropriate action as and when considered necessary." Essentially, endorsing the RBI approach and, for all practical purposes, closing the chapter on Vundavalli's first complaint.

Blackstone enters

In January, Blackstone and Ushodaya announced what was then the fifth largest private equity investment in India and the largest such deal, even a year later, in print media. Rao, who had a 74.6 per cent personal stake, together with his Hindu Undivided Family, owned 99.86 per cent of the shares of Ushodaya, which is an independent legal entity, one of several that Rao and his family own and control including Margadarsi Financiers.

On February 5, according to Finance Ministry documents, Ushodaya applied for various Central clearances, a process that normally takes about 4-6 weeks. The Foreign Investment Promotion Board (FIPB) took up the issue on March 14, just two days after MP Vundavalli again wrote to Prime Minister Manmohan Singh, the finance minister and PR Dasmunsi, minister of information and broadcasting.

In this letter, Vundavalli raised several allegations against Rao and Margadarsi Financiers but, interestingly, asked Chidambaram to clear the Blackstone investment by imposing a condition of Ushodaya "utilising the entire money first for repayment of the (Margadarsi) depositors." He also wrote that, if that doesn't happen, it will "bring the government to disrepute".

At this point, the letter shows, Vundavalli was arguing for what Rao had told RBI — that he would take proceeds from the Blackstone investment to pay Margadarsi depositors. Separately, the AP government's court petitions show, Rao had also proposed to raise about Rs 827 crore in loans from Standard Chartered Bank, also to pay the depositors.

At its March meeting, the FIPB deferred the discussion for four weeks because the Information & Broadcasting (I&B) Ministry had sought additional time to discuss the Vundavalli request.

On April 3, DK Singh, director at FIPB, wrote to the I&B Ministry clarifying the Finance Ministry's stand on the condition sought by Vundavalli on what happens to the Blackstone money. "It is clarified that only those conditions can be imposed by FIPB, which are in accordance with the existing FDI policy in the sector," Singh wrote.

Meanwhile, FIPB records reviewed by Mint show, the delay of four weeks dragged into four months as the I&B ministry sought the opinion of various ministries on the proposed transaction. On July 6, Dasmunsi wrote to Vundavalli saying the I&B Ministry deals with print media investments and isn't the appropriate body to deal with any issues involving Margadarsi Financiers.

Minutes of a July 27 FIPB board meeting show that on the same day, the I&B ministry gave a formal "No Objection" certificate, recommending that the Blackstone investment be approved by FIPB and the Ministry of Finance.

FIPB's records also show that the certificate was issued only after the I&B ministry asked—and received—similar "No Objection" certificates from the Ministry of Home Affairs, Ministry of External Affairs, Ministry of Corporate Affairs, the Department of Industrial Policy and Promotion, and the Department of Economic Affairs.

On the same day, the FIPB minutes show that the board, citing I&B support for the proposal, "recommended" the proposal to the finance ministry saying "since the investment inflow exceeds Rs 600 crore, the proposal should be submitted for consideration and approval of the Cabinet Committee on Economic Affairs thereafter."

Shifting tactics

Within weeks, Vundavalli appears to have changed tactics, from first asking the government to insist Blackstone proceeds only go to repaying Margadarsi depositors, to now wanting the government to stop the deal.

In a August 16 letter, the MP raises entirely new allegations, this time about Rao's land holdings and also claims that Margadarsi Financiers, and not Rao's family, actually holds 90 per cent of the share capital of Ushodaya. This time, Vundavalli asks for the FIPB meeting of August 17 to be "deferred" seeking new inquiries into the holdings of Rao and his family. In that same letter, Vundavalli also goes on to claim that the Chinese government "has placed huge funds at the disposal of Blackstone for onward investments in countries like India…We should be more careful when the money is flowing into media."

(Ahead of its initial public offering, the US-based Blackstone sold a $3 billion stake to Jianyin Investment, a Chinese government-owned entity in a publicly announced transaction where China didn't get any management say in Blackstone. Even the US Treasury Department at that time didn't seek any national security investigation.)

Even before he made the allegations in his letter, it appears from government records reviewed by Mint that the I&B ministry had made Vundavalli personally aware that the deal has already been cleared by both Ministry of External Affairs as well as the Ministry of Home Affairs, two departments responsible for making sure of security and related FDI issues.

Indeed, back on June 13 itself, Anurag Srivastava, an under secretary in the external affairs ministry, formally issued a "No Objection" to the proposal. And the Ministry of Home Affairs, in a July 26 formal communication from Deputy Secretary JPS Verma, clearing the proposal, specifically wrote: "Enquiries have not revealed anything adverse from security angle against Ushodaya and Blackstone."

Even the Ministry of Corporate Affairs, in its July 11 memo signed by MS Pachouri, an assistant director, issued a "No Objection" saying "there is no complaint against the company (Ushodaya) pending with the Registrar of Companies." Despite Vundavalli's new allegations, the FIPB minutes, reviewed by Mint, show that on August 17, the board once again recommended to the Finance Ministry that the deal be cleared.

Long shadow

Still, Vundavalli's allegations appear to have cast a long shadow on the deal. FIPB records show that the Finance Ministry, specifically citing Vundavalli's claims, "has observed that prima facie, it appears that the purpose of securing funds from M/s Blackstone is not for advancing the business of Ushodaya Enterprises Ltd, but for replaying the deposits taken by M/s Margadarsi Financiers." As a result of these new concerns, on September 5, the FIPB sought details of Ushodaya's shareholding pattern. But, when Ushodaya submitted the information showing it is Rao and his family that own the majority of Ushodaya and not Margadarsi Financiers, the FIPB's records show that it promptly issued another letter, on September 6, also from DK Singh, this time asking for detailed information on Vundavalli's claims about Margadarsi. Even though, these were precisely the same claims that the ministry itself had asked the RBI to look into as far as December 2006 and signed off on the RBI's approach of letting funds raised from sale of other assets be used to repay Margadarsi depositors.

Late November, the FIPB again met to review the fate of the proposal. Minutes from that meeting show that, by this time, the FIPB had also heard from the Department of Financial Services that the Reserve Bank of India is of the opinion that Margadarsi Financiers was "in compliance" with promises made to the central bank about not accepting new deposits and repaying depositors whose deposits had matured.

But, on December 10, FIPB's internal records show, the saga took another odd turn with the board now asking Blackstone how Rao using the money received from selling the 26 per cent stake in Ushodaya is "not an attempt to circumvent the ECB (External Commerical Borrowings) guidelines of government of India."

Despite the official queries about ECBs, a senior finance ministry official, who didn't want to be indentified, told Mint in December that the use of Blackstone proceeds by Rao for non-media purposes became — and remains — the ministry's major concern.

But, this line of reasoning, FIPB own records show, has been addressed by Blackstone and its outside counsel, the well regarded Delhi firm of Luthra & Luthra, who noted that there is "no prohibition" under any Indian law, and especially the FDI policy, on money "legitimately" flowing out to Rao and his family. And despite the FIPB suddenly raising the issue, the transaction is unrelated to ECBs, which have different guidelines.

Independent voices

Indeed, independent corporate lawyers unrelated to the situation, who were consulted by Mint, say that the end-use, by a seller of investment proceeds, should not be a reason to hold up the investment.

"Once money is brought into an Indian company by a foreign investor, it becomes part of a larger pool of money owned by the Indian company. There would be an end-use restriction only if it is a loan that needs to be repaid with interest. But, if the foreign investor is investing in equity of an Indian company, there is no end-use restriction," explains Anand Prasad, a partner at corporate law firm Trilegal, who is not connected with the specific Blackstone issue. "Once the foreign investor brings money it would become part of a larger fund pool and it would be difficult to distinguish between the money from the foreign investor or the revenues of the company that the investor has invested in."

Another Delhi-based veteran lawyer, who is not connected with any of the parties but didn't not want to be identified, said that there would be a problem only if Blackstone were investing in the Ramoji Rao's Hindu Undivided Family vehicle rather than in Ushodaya.

Meanwhile, the prolonged delay--indeed an more controversial deal, from the FDI perspective, the Vodafone Group Plc's $11.1 billion investment into Hutchison Essar Ltd, took two months to receive FIPB approval--is starting to attract attention, both within India as well as abroad.

"This is a clear case of vindictive politics," complains M Jagannath, a Lok Sabha member of Telugu Desam. "The state government and the Centre, both ruled by the Congress party, are colluding against Ramoji Rao." Finance Ministry officials say that both Ratan Tata and William B Harrison Jr, the co-chairs of the high profile US-India CEO Forum, have raised the delay directly with Chidambaram and the Finance Ministry, both at a Forum meeting in New York back on 24 September, as well as on atleast one other occasion.

The unusual delay has meant that the standard deadlines that Ushodaya and Blackstone set for completing their January 28, 2007 agreement have also now lapsed — at least on paper — allowing other potential buyers to come into the fray. It is unclear, though, given the political opposition to any transaction, whether other private equity firms would want to get into the picture now.

Indeed, at a late-November hearing at the Supreme Court, the Andhra Pradesh government levelled new allegations, this time claiming that Rao and his family have "secret" accounts and are are siphoning off funds. The state government has now asked that the court shouldn't allow the sale of any "investments or the assets" in "group companies" because, the petition claims, "interests of the depositors will suffer."

Effectively, the state appears to be now arguing that selling stake in Ushodaya or any other Rao group companies and using those proceeds to repay the Margadarsi depositors is not in the interests of the depositors. In a recent interview with Mint, Vundavalli said he is not going to be content with the government doing due diligence on all his allegations and then coming to a decision, one way or the other.

"If the (central) government gives the go-ahead to the deal," Vundavalli told Mint, "I will take the matter to the court." The fate of the deal, which is starting to put the spotlight on the execution of India's investment policies, continues to rest with the Finance Ministry. A FIPB meeting is scheduled for this week.