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Vodafone is struggling to convince the Indian government that its proposed $11bn (£5.5bn) acquisition of a 67 per cent economic interest in Hutchison Essar, the country’s fourth-largest mobile operator, does not breach rules on foreign direct investment.

The Foreign Investment Promotion Board, the Indian regulator that is vetting the transaction, has yet to be persuaded that the deal will not push the overall foreign shareholding in the operator above the threshold of 74 per cent.

Minutes of a March 29 FIPB meeting obtained by the Financial Times show a number of government departments voicing particular concern at the arrangement in which two Indian nationals would hold a 15 per cent stake in Hutchison Essar on Vodafone’s behalf.

Although the Indian government in principle welcomes Vodafone, concern is mounting that the transaction would set a precedent that weakened foreign direct investment rules, which are restrictive in several industrial sectors.

The FIPB, which draws on several government ministries, has twice delayed approval of the Vodafone deal, which would be the largest foreign direct investment made in India. It is likely to do so again when it meets on April 23.

Crucially, this 15 per cent stake, held by Asim Ghosh, Hutchison Essar’s managing director, and Analjit Singh, chairman of the healthcare group Max India, does not count towards the foreign ownership ceiling while it is in their hands.

Vodafone signed an agreement in February to buy a 67 per cent economic interest in Hutchison Essar from Hutchison Telecommunications International, a unit of the Hong Kong tycoon Li Ka-shing’s Hutchison Whampoa.

HTIL owns 52 per cent of Hutchison Essar, with a further 15 per cent stake held on its behalf by companies owned by Mr Ghosh and Mr Singh, over which it has call options. The options give HTIL the right to buy back the stake at a substantial discount.

Vodafone plans to replicate this shareholder arrangement.

The rest of the 74 per cent quota is filled by Essar, an Indian conglomerate that owns 33 per cent of Hutchison Essar and has organised its stake so that 22 per cent is held offshore.

This leaves Vodafone unable to own directly more than 52 per cent.

Minutes of the March 29 FIPB meeting say that Vodafone, HTIL and Hutchison Essar officials “could not give [a] satisfactory reply to the specific queries raised by the board” regarding Mr Ghosh’s and Mr Singh’s freedom to sell the 15 per cent or enjoy the economic benefits of ownership.

Vodafone said: “We believe the [shareholder] structure is compliant with the foreign direct investment legislation.”

Copyright The Financial Times Limited 2018. All rights reserved.

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