Close call for telcos with cross-holding

Written by Sunil Jain | Rishi Raj | New Delhi | Updated: Mar 3 2011, 07:51am hrs
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The ongoing investigations into whether Reliance Communications and the Essar Group owned/own more than a 9.9% stake in Swan and Loop are all set to change dramatically. In the bargain, the government will also have to plug loopholes in the law on cross-holding patterns in the telecom industry Vodafone, for instance, holds an indirect stake of around 4.4% in Bharti Airtel.

In the Swan case, the CAG pointed out and the CBI is investigating whether RCom held a large stake in Swan. The CAG pointed out that of Swans capital base of R1,100 crore, R1,000 crore was contributed by RCom in the form of preference capital. Preference capital is not considered equity under Indian law but the corporate affairs ministry is having another look at this. In Loop's case, the Ruias are on record saying 98.5% of the equity belongs to the promoters' sister and brother-in-law. The CBI investigations are about whether it can be proven if the relatives were passive shareholders and the company was really being run by the Essar Group.

This is where Clause 1.4 (ii) of the UASL comes in. The Clause says: No single company/legal person either directly or through its associates, shall have substantial equity holding in more than one licensee company in the same service area for the access services namely; basic, cellular and unified access service. 'Substantial equity' herein will mean an equity of 10% or more. It then goes on to add, A promoter company/legal person cannot have stakes in more than once licensee company for the same service area.

FE spoke to several former telecom secretaries, the current one R Chandrasekhar, and several telecom lawyers on the matter. Most said the first part of the clause, the one that talks of a 10% equity, applies to non-telecom firms/financial investors; the second part, the one that talks of promoter companies, applies to existing telecom firms. That is, while financial investors/non-telecom firms can hold up to 10% in two telcos in the same service area, a telco cannot hold even a 1% stake in another telco in the same service area.

For the record, Chandrasekhar is of the view even telcos can buy up to a 10% stake. An Essar group spokesperson said that since they were not a promoter in Vodafone the clause did not apply to them. Essar is not a promoter of Vodafone Essar Ltd and hence this clause does not apply to us. We are in compliance of UAS licence norms, the spokesperson said.

If Chandrasekhars predecessors are correct in their opinion, this casts a huge shadow over the licences of Swan and Loop, apart from the officials who overlooked this while granting them licences.

This also impacts Bharti Airtel and Vodafone since Vodafone owns around 26% of Bharti Infotel which owns 36% of Bharti Telecom which, in turn, owns 45% of Bharti Airtel.

It is true Bharti Infotel is not a licensee company which is what the clause talks of, but since Vodafone has a beneficial interest in Bharti Airtel which is the licensee company, this is a loophole the government will have to fix when it comes up with clear guidelines on direct and indirect ownership rules.