The Department of Telecom has raised objections to a proposal from Tata Communications Ltd (formerly VSNL) to increase public holding in the company from 16.85 per cent at present to over 25 per cent.

The DoT has taken a view that no dilution of stake can take place till the dispute over hiving of company's surplus land is resolved. Also, the DoT does not want to support any move that will result in the Government's shareholding in the company to fall below 26 per cent.

Tata Communications had written to the DoT in April seeking permission to offload equity stake to the public to meet the stipulations under the Securities Contracts (Regulation) Rules.

The Rules, amended in 2010, requires all listed private companies to have a minimum 25 per cent public holding before June 2013.

Tata Communications had given three options to meet the requirement including issuing additional shares to public through a fresh offer, offering shares held by promoters through secondary market or offering shares held by promoters through a private placement or rights issue.

Currently, the Tatas hold 51 per cent stake in the company and the Government owns 26 per cent. The Bank of New York Mellon holds just under 7 per cent as custodian to the company's ADR issue.

While making the application to the DoT, Tata Communications also said that the company was in dire need of shareholders' funding and wants to increase authorised capital of the company from Rs 300 crore to Rs 2,000 crore.

However, the DoT officials said that a view has been taken that the Government will not subscribe to any additional shares in the event of offer of rights issue or invest otherwise. The DoT has also refused any move that would dilute the Government's shareholding in the company.

“The Government stake of more than 25 per cent is required to prevent any unwarranted resolution to be passed by the majority shareholders of the company. We have taken the opinion of the Ministry of Corporate Affairs also on this issue and they agree that the company should give special voting powers to the Government so that its stake in the company does not fall below 26 per cent,” a senior DoT official told Business Line .

The Tatas and the DoT have been at loggerheads with each other over VSNL for over five years now.

In 2009, the Tatas had written a letter to the DoT seeking permission to raise funds. This was rejected by the department. The biggest block between the two sides is the dispute over 773 acres of surplus land.

In 2002, VSNL's majority stake was acquired by the Tata Group. But the 773 acres of land, spread over five locations in Delhi, Kolkata, Chennai and Pune, was not part of the deal.

The DoT had proposed to hive off the surplus land held by VSNL into a separate company in order to unlock the value by selling it.

However, the process hit rough weather with Tatas raising a number of issues, including clarity on who will bear the cost of creating the new company. The Telecom Commission, the apex decision-making body in the DoT, in its last meeting decided to take the views of the Law Ministry on the proposal to demerge surplus land held under Tata Communications into a new company.

It is expected to take a final view on the land issue at the next meeting on July 22.