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The cost to Vodafone of acquiring a 67 per cent economic interest in Hutchison Essar, India’s fourth largest mobile operator, may end up being more than the $11.1bn the UK group agreed to pay in February.
In a briefing paper to the Indian regulator vetting the proposed deal, the country’s law ministry said Vodafone will not now be allowed to fix the price at which it could eventually exercise an option over a 12.26 per cent stake in Hutchison Essar.
The paper, seen by the Financial Times, raises questions about whether Vodafone could buy the 12.26 per cent stake held indirectly by two Indian businessmen for as little as $430m.
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 law 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, the central bank.
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, and agreed to pay $11.1bn in cash.
HTIL owns 52 per cent of Hutchison Essar, with a further 12.26 per cent stake 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 per cent 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 on April 9, seen by the FT, HTIL said Vodafone, Mr Ghosh and Mr Singh had agreed that, assuming an equity valuation for Hutchison Essar of $25bn, the two men’s 12.26 per cent stake would be worth $430m.
But an executive at a rival telecoms company claimed Vodafone would have to pay “a full market price, probably over $3bn”.
Vodafone said: “Vodafone has no additional liability to Mr Singh and Mr Ghosh below a market value of $25bn.”
People close to Vodafone defended the $430m valuation of the 12.26 stake held by the companies owned by Mr Ghosh and Mr Singh.
They said these companies were unlisted, with high levels of debt.
The remaining 33 per cent of Hutchison Essar is held by Indian conglomerate Essar, of which 22 per cent is in offshore companies.