An Indian consumer pressure group has warned that a proposed deal between Bharti, the country's largest mobile operator, and South Africa's MTN could breach the country's foreign ownership rules.
The two companies are exploring a possible tie-up that would most likely see Bharti acquire MTN in a cash and stock deal worth up to $45bn, which would create one of the world's largest telecom operators in emerging markets.
But Telecom Watchdog, a non-profit organisation based in Delhi, has warned that the stock element of any deal could lift Bharti's foreign ownership above the 75 per cent limit allowed under Indian law, and has threatened a lawsuit if there is a breach.
The consumer watchdog is already involved in legal action over Vodafone's $10.9bn deal last year to take control of Hutchison Essar, India's fourth-largest mobile phone group.
Telecom Watchdog alleges that the deal breached India's foreign ownership limits. That case will be heard by the Delhi High Court in August.
Telecom Watchdog raised the prospect of similar court action over any Bharti-MTN tie-up with MTN chairman Cyril Ramaphosa at the weekend.
In a letter to Mr Ramaphosa seen by the Financial Times, the watchdog wrote: "In case of merger we have apprehensions of possible breach of Indian regulatory norms related to foreign investment . . .
"In case of any regulatory breach, we will not hesitate in going to Indian courts for a legal recourse to stop any illegalities."
Bharti is likely to have to use its own paper to fund any deal and any such transaction would see MTN's leading shareholders take a significant stakes in the merged entity, according to people familiar with the matter.
It would also allow MTN to ease political concerns about one of South Africa's largest companies becoming foreign owned.
Telecom Watchdog contends that Bharti is already 65 per cent foreign-owned, including a 31 per cent stake held by Singapore Telecommunications.
"Bharti can offload only up to a maximum of 9 per cent of its Indian equity in favour of foreign investment," the watchdog said in the letter.
It cautioned MTN from "accepting any possible suggestion of consultants which would lead to circumventing of regulatory caps".
Telecom Watchdog is scrutinising talks between Bharti and MTN. "We are happy if [Bharti] buys 51 per cent of MTN," Anil Kumar, secretary of Telecom Watchdog, told the Financial Times.
"But in case of a share swap, they will definitely breach the FDI cap. We will oppose it. If the deal is hung in court, who will suffer? South Africa will suffer," said Mr Kumar.
Bharti declined to comment. MTN could not be reached for comment.
Telecom Watchdog is an India-registered non-profit organisation that aims to protect the security interests of the country, according to Mr Kumar.
