India’s foreign investment regulator is to review Vodafone’s $11bn deal for control of mobile operator Hutchison Essar on Wednesday after the country’s central bank questioned whether its shareholding breaches legal limits.

At issue is whether Hutchison Essar, through a complex shareholding arrangement, has violated an Indian law that limits foreign direct investment in domestic telecom operators to 74 per cent.

Hutchison Telecommunications International (HTIL) holds 52 per cent of Hutchison Essar directly and has options over another 15 per cent held by Asim Ghosh, Hutchison Essar managing director, and Analjit Singh, chairman of healthcare group Max India

The remaining 33 per cent is held by Essar, an Indian conglomerate, but two-thirds of its stake is controlled through an offshore company for tax reasons.

Vodafone, the world’s largest mobile operator, last month agreed to buy the shares held by Hutchison Telecom and those it had options over.

The Reserve Bank of India queried the stakes held by Mr Ghosh and Mr Singh in a letter dated March 20 to the Foreign Investment Promotion Board.

“Since the funding [for their shares] has been made at the instance of HTIL, it would imply that these persons would be holding shares in concert with HTIL and, if this is taken into account, the foreign holding in Hutchison Essar may breach the FDI cap of 74 per cent,” said the letter seen by the Financial Times.

The central bank also suggested that HTIL did not correctly report the acquisition of an additional minority stake last year.

The bank pointed out that through HTIL’s acquisition of IndusInd Telecom Network, its indirect stake would amount to 6.11 per cent and not 2.34 per cent as previously indicated.

“We have no information on this transfer of shares. FIPB may like to look into the issue of changing shareholder patterns in the holding companies of both [Hutchison Essar] and Hutchison Telecom to establish the veracity of declarations made by the company to FIPB,” the letter stated.

HTIL, a unit of Li Ka-shing’s Hutchison Whampoa, on Tuesday repeated its position that the shareholding structure complied with foreign investment laws.

The finalisation of Vodafone’s deal with HTIL has been fraught with complications. Essar claimed it had a right of first refusal over the sale of the 67 per cent stake Vodafone was buying and threatened court action.

HTIL earlier this month announced a conditional settlement under which it will pay Essar $415m to end the threat of legal action.

Telecom Watchdog, a Delhi-based consumer advocacy group, this month filed its own court petition claiming Hutchison Essar was in breach of foreign investment limits.

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