New FDI regime to aid Vodafone buy

New Delhi: The new foreign direct investment (FDI) regime could help Vodafone stay within the 74% ceiling for the telecom sector.

Making use of the new norms, UK-based Vodafone Plc decided to acquire 100% economic interest in mobile phone service provider, Vodafone India.
In fact, with the new norms, it is learnt, Vodafone Plc will buy out the entire 22.04% stake held by Essar in Vodafone India. Essar holds this interest through its Mauritius-based subsidiaries. A part of the remaining 10.97% Essar stake in Vodafone India will be acquired through its Indian subsidiaries.

According to the FDI policy , foreign holding in an Indian telecom company cannot exceed 74%. But, in the new guidelines, referred to as Press Note 2 of 2009, the government changed the definition Indian company. Under this, if Indian holding in a company exceeds 50%, the company will be treated as an Indian company and its holding in other companies down the line, will also be treated as Indian holding.

In the case of Vodafone India , according to a press statement issued during the deal with Hutchison in 2007, Vodafone Plc had acquired 67% economic interest. But, its direct or indirect holding in the Indian company, Vodafone India, had gone up to only 51.96%. In fact, it parked 19.54% stake in Telecom Investments India Private Limited (TII), in which 63% stake was jointly owned by Indian businessman Analjit Singh and the then CEO of Vodafone India Aseem Ghosh. The remaining 37% was with Vodafone Plc. Similarly, 5.11% stake in Vodafone India was parked with Omega, in which IDFC and its subsidiaries own 54.21%.

Ghosh, it is learnt, almost exited from the company in 2009. Analjit Singh’s Max India , the original promoter of the telecom company, had sold majority of its stake in the telecom firm in the late nineties.

On the pro-rata basis, Vodafone Plc’s holdings in Vodafone India through TII and Omega come to 7.28% and 2.34%, respectively. But under the new method for calculating FDI, Vodafone’s holding through these companies is nil as Vodafone Plc’s holding in TII and Omega is less than 50%. Therefore, under the new guidelines, Vodafone Plc’s holding in the Indian company came down from 51.96% to 42.34%. But under the new method, the total holdings 24.65% of TII and Omega will be treated as Indian holding and not as FDI. This gives Vodafone Plc maneuvering space to restructure its holding pattern in its Indian operating company.

As Essar is selling 22.04% holding in Vodafone India, which was owned by Mauritius-based companies, they were treated as foreign holdings even in the new guidelines . Therefore, the purchase of 22.04% stake will increase Vodafone Plc’s holding in the Indian company from 42.34% to 64.38%, which is well within the sectoral FDI cap of 74%. This will still provide scope to buy an additional 9.62% stake by Vodafone Plc in the Indian company directly without violating the FDI norms.

A source said the 10.97% stake owned by Essar’s Indian subsidiary, ETHL Communication Holdings Pvt Ltd, may be split in two parts. The 9.62% holding could be bought by Vodafone Plc directly and the remaining 1.35% could be parked with either Omega or with TII. Both the Indian subsidiaries are funded through debt by Vodafone Plc to complete the deal. Even for the 1.35% holding , Vodafone will have to fund around $205 million.