The Hindu Business Line : The `option' issue unlikely to trip the Hutch deal

Chennai April 3 It is a labyrinthine structure that characterises the Hutch deal, now hanging fire at the FIPB (Foreign Investment Promotion Board). To decode the deal, Business Line interacts with Mr George Vivek Durai of IndoJuris Law Offices, Bangalore (http://techlawindia.com).

The background, to begin with.

In March last year, Hutchison Telecommunications International Ltd (HTIL) reorganised its investments in Hutchison Essar Ltd (HEL) to comply with the new telecom sector-specific FDI (foreign direct investment) norms laid down by Press Note 5 of 2005.

The reorganisation involved the simplification of HTIL's investment structure, the exit of Kotak as a shareholder and the entry of companies controlled by Mr Asim Ghosh and Mr Analjit Singh, as new shareholders.

HTIL succeeded in adhering to the June 2 deadline that was set for complying with the norms. Or so they thought...

Why, what happened?

The FIPB is now closely examining transaction documents relating to this reorganisation with a view to understanding if any aspects of the transaction breached FDI laws, as has been alleged by several third parties. Two key issues are likely to be carefully examined by the FIPB.

What are the issues?

First, the fact that Hutch has retained the right to increase its shareholding in HEL by exercising subscription rights or call options at different levels in the investment structure.

The levels in question are the three layers of investment companies used by Mr Asim Ghosh and Mr Analjit Singh to invest in Telecom Investments India Private Limited (TII), a joint venture with a HTIL subsidiary.

On the first issue, it is unlikely that the right to subscribe to shares or the option to buy out Mr Asim Ghosh and Mr Analjit Singh's interests will be used as a ground for holding back approval. Even if they wanted to, there would be little documentary evidence to pin Hutch down.

And the second issue?

Credit support provided by HTIL to two of these investment companies, Centrino Trading Company Pvt Ltd (Centrino) and ND Callus Info Services Pvt Ltd (NDC).

On the terms in the agreement.

The Shareholders Agreement dated March 1, 2006 entered into between CGP, TII, NDC and Centrino requires NDC and Centrino to ensure that 100 per cent of their issued share capital is held, either directly or indirectly and ultimately beneficially by resident Indian citizens. Failure to do so is an event of default under the agreement. Furthermore, the options are exerciseable only after Indian law permits an increase in the foreign holding.

Aren't there discrepancies in the filings?

Discrepancies in the declarations on shareholding between the SEC (Securities and Exchange Commission, US) filings and the submissions to the Indian authorities are obviously attributable to differences between US GAAP/Hong Kong GAAP on the one hand and Indian GAAP (generally accepted accounting principles) on the other hand.

On the RBI's anxiety.

What has caused agitation at the RBI is that these options/right were extended as consideration for credit support provided by HTIL to Centrino and NDC. During the reorganisation, the cash consideration for Centrino's subscription to TII shares and for NDC's acquisition of TII shares, was funded by rupee loans of Rs 489.85 crore and Rs 792.44 crore respectively, credit enhanced by standby letters of credit (SBLC) of $124.5 million and $200 million respectively, issued by foreign financial institution to the domestic lenders at the request of HTIL.

What do RBI guidelines stipulate?

Under current RBI guidelines, loans from overseas or external commercial borrowings (ECBs) are allowed to be utilised only for specific permitted purposes and the guidelines specifically prohibit the utilisation of ECB proceeds for acquiring a company (or a part thereof). Domestic loans are not subject to these end use restrictions and hence the RBI also requires prior approval for arrangements that involve domestic loans being credit enhanced by international banks, financial institutions or joint venture partners since these might be used to circumvent end use restrictions on ECBs.

On the hazy areas.

It isn't quite clear if approval was sought for this facility or even whether the provisions requiring approval for credit enhancement were in force at the time of the loan agreement. There usually isn't smoke without fire, but it really boils down to the fine print of the transaction documents — the loan agreement, SBLC facility agreement, shareholders agreement and other related documents. In the event the RBI and the Finance Ministry conclude that there has been a violation of foreign exchange laws, they will then have to wrestle with the possible courses of action before them and the signals such action might send out to foreign investors.

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