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Vodafone has admitted that Indian law prevents it from owning all of the 67 per cent shareholding in Hutchison Essar that it said in February it was planning to acquire in a controversial $11.1bn (£5.6bn) deal.

In a letter to the Indian finance ministry obtained by the Financial Times, Vodafone acknowledges that it would be breaching the 74 per cent ceiling on foreign direct investment if it attempted to take direct ownership of all of the stake in the mobile operator.

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

HTIL owns 52 per cent of Hutchison Essar directly, with a further 15 per cent stake held on its behalf by companies owned by two Indian nationals, over which it has call options.

Vodafone is planning to replicate these shareholder and accounting arrangements.

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

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 structured its stake so that 22 per cent is held offshore.

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

In the letter dated March 27 to D.K. Singh, director of the Indian finance ministry, a top Vodafone executive explains why its press release of February 11 stated $11.08bn as being the “consideration paid by Vodafone to acquire 67 per cent of Hutch Essar”.

Erik de Rijk, managing director of Vodafone International Holdings, says it “intended” to give “a simplified tabular summary of a complex transaction”.

Vodafone was aware that “the [call] options could not be exercised within the existing shareholder structure if they resulted in a transfer to us or to another non-resident entity”.

India’s foreign investment promotion board has delayed approval of the deal.

Vodafone said the press release also stated the group’s “interest” in Hutchison Essar would be 52 per cent. The proposed shareholder structure was “legal”, the company added.

Copyright The Financial Times Limited 2017. All rights reserved.
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