The Financial Times is reporting that Vodafone may have to pay more than the agreed USD11.1 billion for a 67% stake in Hutchison Essar, India’s fourth largest cellco. In a briefing paper to the Indian regulator vetting the proposed deal, the Finance Ministry said Vodafone will not now be allowed to fix the price at which it could eventually exercise an option over a 12.26% stake in Hutchison Essar. The paper, seen by the Financial Times, raises questions about whether Vodafone could buy the 12.26% stake held indirectly by two Indian businessmen for as little as USD430 million.
Indian foreign exchange management laws forbid overseas companies from using ‘pre-determined’ pricing formulae to set in advance the terms on which they eventually buy out local partners if and when current foreign direct investment ceilings are relaxed. The ministry reminded the Foreign Investment Promotion Board, the regulator scrutinising Vodafone’s deal, that shares in an unlisted Indian company may not be bought by a non-resident at ‘less than a fair valuation’. This would be determined by an accountant appointed in line with guidelines issued by the Reserve Bank of India.
As it stands Hutchison Telecommunications International Limited (HTIL) owns 52% of Hutchison Essar, with a further 12.26% held on its behalf by companies owned by Asim Ghosh, managing director of Hutchison Essar, and Analjit Singh, chairman of healthcare group, Max India. A further 2.77% stake in Hutchison Essar is held on HTIL’s behalf by a company called Infrastructure Development Finance Company. HTIL has call options allowing it to buy the stakes back at a substantial discount. Vodafone has said it will replicate this shareholder arrangement. In a letter to the Finance Ministry HTIL said Vodafone, Mr Ghosh and Mr Singh had agreed that, assuming an equity valuation for Hutchison Essar of USD25 billion, the two men’s 12.26% stake would be worth USD430 million. But an executive at a rival telecoms company claimed Vodafone would have to pay ‘a full market price, probably over USD3 billion’.