Vodafone accuses Essar of insider trading

In a written complaint to Indian market regulator Securities and Exchange Board of India (SEBI), world’s largest telecommunications firm Vodafone Group Plc has accused Indian conglomerate Essar Group — and 33% partner in Vodafone Essar Ltd —  of possible violation of insider trading norms.

The letter signed by Erik de Rijk, a director in the holding company Vodafone International Holdings BV, sought a Sebi investigation into possible violations of insider trading norms in connection with Essar’s scheme to merge Essar Telecommunications Holdings Pvt Ltd (ETHPL) with another listed group company, India Securities Ltd (ISL).

Vodafone also flagged India Securities’ issuing of preference shares to two foreign institutional investors (FIIs).

In March 2010, ISL issued 2 lakh compulsorily convertible preference shares to two FIIs at Rs2,000 a piece to raise `360 crore, at a time the company’s market capitalisation was only `277 crore and the average trading price was only around `13 per share. When converted to equity shares, the FIIs would own 20.42% equity stake in ISL.

Vodafone’s contention is that for the FIIs to buy the preference shares at such premium, they would have been privy to information that public shareholders of ISL may not be aware of.
Sources at SEBI acknowledged Vodafone’s complaint but added that prima facie it is not clear whether the issue falls under the regulator’s purview, and said the matter has been forwarded to an internal team that looks at corporate restructuring.

Rebutting Vodafone’s charges, an Essar group spokesperson said, “Proposed merger of Essar Teleholdings Pvt Ltd with India Securities Ltd is in full compliance with all regulations and is being done in an open and transparent manner.”

In another development, the merger proposal scheduled in the Madras high court on Thursday, did not come up for hearing.
A spokesperson for the Essar Group confirmed this, saying a future date will be given for it later.

ETHPL has an 11% stake in Vodafone Essar, and the proposed merger will pave the way for India Securities to own that stake, and eventually enable price discovery of Vodafone Essar shares — because an initial public offering of Vodafone Essar looks distant at present.

Essar holds about 33% in Vodafone and has a guarantee — through what is called a put option — from the majority shareholder Vodafone Group that they will buy entire stake for $5 billion. The put option, lapses on May 8, 2010.

Flagging off the rapid rise in the price of ISL shares on the Bombay Stock Exchange over the last year, Vodafone wrote in a letter to Sebi, “On January 14, 2010, the share price of ISL was Rs6.25, however on January 17, 2011, the share price of ISL had increased by more than eleven times to Rs69.05.”

The letter further added, “Given the objective of the Scheme (of merger) to facilitate price discovery in Vodafone Essar and the illiquidity of the ISL stock with public shareholding being reduced to less than 5% upon completion of the merger and other corporate actions contemplated in the Scheme, the rapid increase in the share price of ISL by more than eleven times in one year may require further examination.”

Besides possible violation of insider trading norms, Vodafone also raised said that ISL shareholders have not been informed of the fact that ETHPL’s indirect 11% holding in Vodafone Essar is already encumbered and hence ISL shareholders may not be entitled to it post merger.

Using the $5billion floor price guarantee from Vodafone, Essar has already pledged its holding in Vodafone Essar to raise funds.
“Proceeds of any sale of equity interest in Vodafone Essar” will be held for the benefit of such “financing parties,” Vodafone informed SEBI.

Further, if Essar does not exercise the put option and sell its holding to Vodafone, then the financiers “shall have the right to enforce the security and exercise the put option.”

“It follows that the indirect equity interest in Vodafone Essar, the only material Indian telecom asset of ISL will stand transferred without the consent of the shareholders of ISL. This may result in asset stripping of ISL by its promoters. Further the shareholders may also not be entitled to the proceeds of the sale of such asset since the proceeds are already encumbered,” Vodafone contended.