Differing interpretations by Hutchison and the Ruias of the first "right of refusal" clause in the shareholders' agreement may become a contentious issue in the sale of the former's 67 per cent stake in Hutchison Essar Ltd. The Ruias hold the remaining stake in the company.

Sources close to Hutchison said the shareholders' agreement might "come under review" and its "legal interpretation" implied that the Ruias did not enjoy even a limited first "right of refusal" as "some crucial conditions associated with its grant had not been met."

By this interpretation, Hutchison can sell its stake to Vodafone or a buyout equity fund without going to the Ruias at all.

However, sources dealing with the Ruias said the shareholders' agreement clearly stated that the first right of refusal would come into play once Hutchison's stake fell below 40 per cent and the buyers were a foreign telecommunication company or a buyout fund. Only if Hutchison sold 27 per cent or less of its stake was it not bound to take the Ruias' concurrence.

However, in case Hutchison sold equity (even 1-5 per cent) to an Indian company, the Ruias would have the first right of refusal, they said. Given that Hutchison planned to sell its entire stake, it had to grant the Ruias the first right of refusal. The Ruias are believed to have taken legal advice on the matter.

When contacted, a Hutchison Telecom spokesperson in Hong Kong said, "We do not comment on matters related to the shareholders' agreement". An Essar spokesperson also declined comment on the issue.

Sources close to Hutchison said the Ruias had the first right of refusal only if Hutchison sold its shares to an Indian company. For foreign telecommunication companies or buyout funds, there was no such restriction.

Also, many conditions were yet to be met and even the limited right of refusal that the Ruias enjoyed was no longer applicable, they said.

The Ruias, backed by international bankers, have already joined the race for their partner's stake in Hutchison Essar.

After the commissioning of the 10.5-million-tonne refinery in Gujarat and expansion of its steel capacity to 4.6 million tonnes, the group has been looking at opportunities for investment, which include higher stakes in the telecom sector.

The resolution of the first right of refusal issue could be important for all the possible suitors, including Reliance, Vodafone, and Maxis.

Meanwhile, Vodafone shares climbed 1.8 per cent on reports the telecom giant was less likely to acquire Hutchison Essar after the Financial Times said the Essar group had tied up financing for a potential bid for Hutchison's stake in Hutchison-Essar.

Bone of contention

Hutchison holds

• The shareholders' agreement may "come under review" and according to its "legal interpretation", there is no reason to give even a limited first right of refusal to the Ruias as "some crucial conditions associated with its grant had not been met"
• Hutchison could sell its stake to Vodafone or a buyout equity fund without going to the Ruias at all
• Hutchison will give the first right of refusal to the Ruias only if it sold its shares to an Indian firm

Ruias say

• The first right of refusal gets activated once Hutchison's stake falls below 40 per cent in the joint venture, in case the buyer is a foreign telecommunication company or a buyout fund
• If Hutchison decides to sell 27 per cent or less of its stake, it is not bound to take Ruias' concurrence
• In case Hutchison sells any equity to an Indian company, Ruias will have the first right of refusal