Fresh problems have arisen over Vodafone's deal to acquire Hutchison-Essar, India's fourth-largest mobile service provider, from Hong-Kong-based Hutchison Telecom International, with the Department of Telecommunications raising questions about the indirect shareholdings by Asim Ghosh and Analjit Singh.

The DoT has said Ghosh and Singh's 12.26 per cent shareholding in Hutchison-Essar may have to be included as foreign direct investment if it is held by offshore entities.

Thus DoT's views suggest that Hutchison-Essar's shareholding pattern could violate the FDI cap of 74 per cent for telecom service companies.

The race for Hutch-Essar

The department's view is also in line with that of the Joint Intelligence Committee in the National Security Council Secretariat, which has said that Hong Kong was a "country of concern" in terms of national security and the deal needed fresh scrutiny since the company's former major shareholder was based in Chinese territory.

In view of the JIC's comment, the DoT has suggested that Vodafone Plc should be asked to make full disclosures of its projects, joint ventures, branches, business interests and collaborations in all other countries, to help the process of security vetting ahead of an FIPB approval.

The DoT's objections come soon after the Reserve Bank of India said that HTIL's deal with Ghosh and Singh violated provisions of the Foreign Exchange Management Act, a view that has been strongly contested by the two shareholders. The deal has been referred to the law ministry.

The department conveyed its opinion on March 28 to the Foreign Investment Promotion Board, which is scrutinising an application of February 23 by UK-based Vodafone, the world's largest telecom company, to acquire a direct and indirect interest in Hutchison-Essar from HTIL.

HTIL controlled a 52 per cent interest, which was recently bought by Vodafone, and claimed an indirect interest through Ghosh and Singh's shareholding, taking its interest to a little over 67 per cent (this includes a 2.7 per cent stake held by IDFC).

Complications have arisen because Hutchison-Essar's Indian partner, the Essar group, has 22 per cent of its 33 per cent stake in the company through overseas entities.

Therefore, if Ghosh and Singh's shareholding were counted as foreign shareholding, the total FDI in the company would be 89 per cent.

The DoT's objections follow questions raised last month by the FIPB and the Reserve Bank of India over the shares held by Ghosh, Hutchison-Essar managing director, and Singh, promoter of healthcare and insurance conglomerate Max India, on behalf of HTIL (and now Vodafone) through a complex pattern of offshore companies.

The FIPB is expected to take a final view on the matter after it receives all inputs, including the crucial report from the law ministry.