Lets look at Vodafones objections. The Essar group, which holds 33% stake in the mobile firm, holds it through an unlisted firm Essar Telecom Holdings Pvt Ltd (ETHPL). However, it has recently transferred 11% stake to its other firm India Securities Ltd (ISL), which is listed on the bourses. The Essar group wants to merge ETHPL into ISL. Once this happens, though the main firm Vodafone-Essar is not listed, the shareholders of ISL will get a beneficial stake in the company. This is what is being objected to by Vodafone, which feels that the value of ISL can then erroneously be seen as a fair market value of Vodafone-Essar. In technical terms, what the Essar group is resorting to is reverse listing and Vodafone has written to the stock exchanges and the Securities and Exchange Board of India asking for the matter to be examined.
The Essar groups response is that since Vodafone is neither a shareholder nor a creditor of ISL or ETHPL, theres no basis to any such objections. However, they have said that after studying the matter in detail, they will respond appropriately to Vodafones concerns.
Without getting into the merits of arguments being put forward by either of the sides, one can safely conclude that the bigger issue is of the lack of trust and communication between the JV partners. And it is here that the history of this JV becomes relevant. In 2006, Egyptian mobile operator Orascom had acquired 19.3% stake in Hutchison Telecom International Ltd (HTIL), a listed firm in Hong Kong. It was HTIL that owned 67% stake in Indias Hutch-Essar and the 19.3% stake provided Orascom a beneficial stake of around 4% in the company, along with two seats on the board. Around that time, even Orascom was looking at a full merger with HTIL. However, this deal wrecked the relations between the Ruias and the promoters of HTIL. Apparently, HTIL had not consulted the Essar group with regard to the stake sale to Orascom. Since Orascom has operations in Pakistan and Bangladesh, it was easy to beat Hutch with the security bogey and thats what the Essar group did. It wrote to the government reasoning that since Orascom has operations in Pakistan and Bangladesh, in the interest of national security, it should not HTIL have sought governments approval before selling the stake. In Indias security-paranoid environment, this was a holy argument and a plain case of corporate rivalry fuelled by lack of trust and communication got debated in terms of public policy.
It was around this time that the National Security Advisor gave a set of recommendations empowering the government to review any foreign direct investment deal if it had implications for national security. The relationship between the Ruias and Hutch deteriorated further in this environment of acrimony. Whether this had any direct role in HTILs final exit from India is difficult to say, but the company finally sold its 67% stake for around $11 billion in February 2007 to Vodafone.
The Ruias did not have much of a role in the day-to-day operations of Hutch-Essar and even today, with Vodafone in the driving seat, the arrangement remains the same. However, in a departure from the past, Essars Ravi Ruia was made the chairman of Vodafone-Essar.
The fresh round of trouble between Vodafone and Essar is quite similar to the one recounted above, only that there has been a role reversal. How it pans out this time remains to be seen.