The Reserve Bank of India has informed the Foreign Investment Promotion Board that transactions involving the acquisition or holding of shares in Telecom Investments India Ltd by Analjit Singh and Asim Ghosh, through which they hold shares in Hutchison-Essar, circumvent the Foreign Exchange Management Act.

Based on this, the FIPB referred the matter to the law ministry today. This could delay the completion of the deal with Vodafone, which bought Hutchison Telecom International Ltd stake in India's fourth-largest mobile service provider in February this year.

Meanwhile, the internal security wing of the home ministry has informed the FIPB that it would like to examine the deal in the context of "security" implications.

The central bank has questioned the lack of mandatory reporting of share transfers from a non-resident to a resident � between HTIL, the mobile company's former Hong Kong-based foreign owner, and Ghosh and Singh.

Stating that many financial transactions in Hutch-Essar had not been reported to it, the RBI feels the transactions would be considered a "circumvention of the external commercial borrowing guidelines issued under FEMA regarding the eligible lender as well as the end use of funds".

This is because the multi-layered transaction (for Ghosh and Singh's stake) has been funded by a local finance company, backed by a stand-by letter of credit issued by a Hong Kong entity at the instance of HTIL.

RBI has called for details on these transactions, but had not received a reply till around a week ago.

"Given the nature and magnitude of the irregularities, we are of the view that there is a need to conduct a thorough investigation to assess the complexities of the transaction and establish the actual foreign holding in the company," the central bank said in its reply to a month-old query by the FIPB.

Ghosh, who is Hutchison-Essar's managing director, and Singh hold a 12.26 per cent stake in the mobile service provider as associates with, first, Hutchison Telecom and now Vodafone, which recently bought HTIL's stake.

HTIL/Vodafone have a call option on these shares, and the joint venture through which the shares are held has been treated as a subsidiary of HTIL.

This indirect holding has been questioned over whether it violates the 74 per cent foreign direct investment limit for domestic telecom service providers. The questions arise because HTIL holds 52 per cent beneficial interest in Hutch-Essar.

The Indian partner, Essar, holds nearly 22 per cent out of its 33 per cent through overseas companies. That takes the total FDI in the company to 71 per cent. If the Ghosh-Singh shares are added as de-facto HTIL/Vodafone shares, the FDI limit is exceeded.

Announcing the deal in February, Vodafone Chief Executive Arun Sarin had stated that it "control(s) a 67 per cent interest in Hutch-Essar from HTIL". Added to Essar's overseas holdings, this takes the total FDI holding to 89 per cent.

The FIPB is scheduled to meet on March 29 to discuss the Vodafone Hutch-Essar deal.

Sources close to the developments said while HTIL could buy Ghosh and Singh's holdings at par, the options cannot be invoked because they would violate FDI rules and FEMA.

The clauses, they said, were incorporated to provide assurance to HTIL which expected the FDI limit in telecom to be raised and the rupee to become fully convertible. In those circumstances, Hutchison would have been able to invoke the rights without violating any laws.