Telecom department still reluctant to okay Essar-Vodafone deal

Essar’s stake sale to Vodafone is unlikely to get the Department of Telecom’s (DoT) nod anytime soon, with the government still having some inhibition on the foreign equity holding after the transaction between the two partners.

As per the current telecom policy, there is a foreign direct investment (FDI) cap of 74% in a telecom entity. Apparently, with Essar’s stake sale of around 22% to Vodafone, the FDI in the firm has crossed that limit.

A top DoT official said the Foreign Investment Promotion Board (FIPB) had sent the Essar-Vodafone stake sale proposal to the department with its comments but refused to give the final approval for the deal.

“It is still not very clear what would be the FDI after the Essar’s stake sale. Vodafone group is massive with 20-25 companies under it with cross-holdings. Since DoT is the custodian of spectrum, it would take the final decision on it (on stake sale) and it is not yet confident about giving the nod,” he said.

The official said the proposal is currently being studied by R K Pathak, deputy director general (DDG-IP), DoT, who will give his view on whether it meets the government’s FDI rule. 

“It wouldn’t be resolved soon,” he said.

The probe into the breach of FDI cap was initiated after a Member of Parliament raised the issue in May this year leading the Prime Minister to order a probe into it.

Initially, Essar had agreed to sell 33% stake to Vodafone for $5.46 billion. However, this would have violated the FDI norm as Vodafone’s stake would have jumped to over 74%. In a bid to save the situation, Piramal Healthcare entered into the picture and signed a pact with Vodafone Group to pick up a 5.5% stake in Vodafone-Essar for around Rs2,900 crore from Essar Group company ETHL Communications Holdings.

Some months before the Essar-Vodafone deal, its former chief executive Asim Ghosh made an exit by selling his 2.38% stake in the company to Max India founder Analjit Singh for an undisclosed sum. This pushed up Singh’s stake in the company to 6.24%.
Currently, the shares of Essar-Vodafone are split between the UK firm, Essar, Analjit and IDFC and if Essar’s stake sale to Vodafone goes through then the company would be left with three shareholders —- Vodafone, IDFC and Analjit Singh.

The company plans to soon come out with an initial public offer (IPO), which could see IDFC and Singh exiting, resulting in Vodafone becoming the majority private shareholder with the remaining shares with retail and institutional investors.