Back-door entry through Hutch-Essar?
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Back-door entry through Hutch-Essar?

Security agencies are worried over "foreign influence" in Hutch Essar, write Siddharth Zarabi and R Saksena.

india Updated: Jan 16, 2006 05:12 IST

The Indian security agencies want this telecom deal looked at very carefully. In December, a company that operates and controls Pakistan’s mobile market bought a 19.3 per cent stake in Hutchison Essar’s parent company, the Hong Kong-based Hutchison Telecom International Ltd (HTIL).

Security agencies believe this deal needs to be scrutinized for any impact that it may have on the country’s security.

The company (Egyptian) in question, Orascom, is owned by billionaire Naguib Sawiris. It has a major telecom presence in Bangladesh, Egypt, Algeria, Tunisia, Iraq and Zimbabwe too.

The deal acquiring stakes in Hutchison Essar was signed on December 21. Sawiris had then said, “This is an important first step with both HWL and HTIL. We have often expressed our keen interest to enter markets like India, Indonesia and Vietnam. This tie-up presents us with exposure to these markets.”

Just an expansionist business tycoon at work. But security agencies and telecom circles don’t quite see this as some routine M&A. The phrase being used is “back-door entry”.

Under the deal, Orascom gets board representation in HTIL’s operating subsidiaries, including Hutch-Essar. It also gains proportionate (to its stake in HTIL) governance rights over the Indian operation. Given that Orascom will have an effective holding of 12.19 per cent in Hutch-Essar, it is expected to play a key role in the affairs of the Indian operation.

Questions have been raised over this development, as it means that a new foreign operator is becoming a partner in the management of Hutch-Essar, in violation of the FDI norms for Indian telecom service providers. Recently promulgated norms impose stringent restrictions on this front. Both the Department of Telecom and FIPB should have been in the loop on this
development; but they aren’t.

In response to an HT questionnaire, HTIL's parent company - Hutchison Whampoa Ltd (HWL) - did not offer comments on whether any assessment had been held on the impact of the Orascom - HTIL deal on the Indian JV and whether it conforms to Indian telecom investment rules and guidelines.

One of the key fears has to do with the structure of the Orascom-HTIL deal. HTIL owns interests in various telecom operations in Asia. However, it derives a majority of its value from a 53 per cent equity stake (direct and beneficial) in the Indian JV Hutch Essar. Confirming this, Euginie Kwok, senior manager, HWL said as a result of the transaction, HTIL was no longer a subsidiary but “has become a 49.8 per cent owned associate company of Hutchison Whampoa”.

As part of the deal, Orascom gets a conditional right to purchase a further 3.7 per cent interest in HTIL from HWL within the next 12 months. In addition, the companies have agreed on rights of first refusal in case of a sale after the expiration of the standstill period of two years.

Hutchison Whampoa Ltd holds nearly 49.8 per cent ownership in HTIL, with Orascom Telecom being the second largest shareholder at 19.3 per cent and the remaining are freely-traded.

There are indications that Orascom wants to increase its shareholding in HTIL. While e-mails to Orascom officials remained unanswered, HWL did not answer a question in this regard terming it “hypothetical”.

First Published: Jan 16, 2006 02:08 IST