Vodafone, Essar feud heats up

UK telecom giant Vodafone has alleged that its Indian joint venture partner, the Essar group, may be involved in violation of insider-trading regulations.

The dispute between the two came into the open after Essar proposed a reverse merger of group company Essar Telecom Holdings (ETHPL) into listed entity Indian Securities (ISL).

The Essar group controls 75 per cent of ISL's equity. The amalgamation is awaiting clearance by the Madras High Court.

In a strongly-worded letter to the Securities & Exchange Board of India (Sebi) dated January 18, Vodafone International Holdings requested the regulator to "conduct an investigation" into the nature and effect of the amalgamation and "possible violation of the insider-trading regulations ".

ETHPL holds 11 per cent stake in Vodafone Essar, while the remaining 22 per cent is held through Essar Telecom. Vodafone owns the rest. Under an agreement, Essar has a put option to sell its entire 33 per cent stake at $5 billion to Vodafone by May. It can also sell less than 33 per cent, but at a fair market price determined by both sides.

In its letter, Vodafone stated that the closing price of ISL shares from March 1 to 31, 2010, was at an average of Rs 13.89.

Based on equity capital disclosures, the company's market capitalisation was Rs 272 crore at the end of last March.

However, in its annual report, ISL disclosed that it had issued 200,000 compulsorily convertible preference (CCP) shares in March 2010 at a face value of Rs 2,000 each to two FIIs for an aggregate subscription of Rs 360 crore. This is much higher than the total market cap of the company at that time.

But in the scheme for amalgamation and in the notice issued to ISL shareholders last month, the company stated that upon completion of the merger and conversion of preference shares into equity shares, FII shareholding would be 20.42 per cent.

Vodafone, in its letter, argues that "there does not appear to have been any disclosure made to the public shareholders of ISL, which would prompt such an investment in March 2010".

The letter also raises other questions. Vodafone states that "the fact that the (amalgamation) might have been under consideration at the time of issuance of the CCP shares to the two FIIs in March is also indicated by the fact that on March 9, 2010, ISL obtained shareholder approval to shift its registered office to Tamil Nadu, presumably in preparation for the filing of the scheme".

When asked for a response to the concerns made public by its partner, an Essar spokesperson said, "The proposed merger of Essar Teleholdings with India Securities is in full compliance with all regulations and is being done in an open and transparent manner."

Vodafone has also demanded "examination" of the rapid increase in ISL's share price by more than 11 times over a year.

On January 14, 2010, the shares were priced at Rs 6.25, but hit Rs 69.05 on Monday. The UK company argues that pursuant to the announcement of the merger scheme after a board meeting on June 4, 2010, ISL shares had doubled "in spite of the fact that ISL has disposed of its major businesses".

The UK company argues that given the intended objective of the merger to facilitate price discovery, "The illiquidity of the ISL stock with the public shareholding (other than Essar group and two FIIs) being reduced to 5 per cent after the completion of the merger , the huge price increase needs to be scrutinised by Sebi."

The Essar group, however, has hit back. In a communication to stock exchanges, it argued that according to a mechanism laid down under the Sebi (Substantial Acquisition of Shares & Takeover) Regulations, 1997, ISL "cannot be regarded as an infrequently traded company".

In 2007 Vodafone with its associates had picked up a 67 per cent stake in the company from Hutchison for $10 billion. Vodafone has attacked the merger scheme on various other grounds, which include non-disclosure to ISL shareholders.