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As Indian regulators pore over Vodafone's proposed acquisition of a controlling stake in Hutchison Essar, the U.K. cellular giant has acknowledged that it cannot pick up the entire 67% controlled by Hutchison Telecom because that would be a violation of Indian law.
In a letter to the Finance Ministry obtained by the Financial Times, Vodafone said it would breach the 74% cap on foreign ownership in telecom companies if it acquired the entire stake.
Hutchison Telecom has a 52% direct stake in Hutchison Essar, and about 15% is held on its behalf by firms run by two Indian nationals, Asim Ghosh and Analjit Singh, over which it has call options. Vodafone had agreed to buy the Hong Kong firm's stake for $11.1 billion.
India's Essar Group holds the remaining 33% in Hutch Essar, the fourth-largest mobile player in India, and the stake is structured in such a way that two-thirds of it is held offshore.
In its initial statement on the deal on Feb. 11, Vodafone had said its interest in Hutchison Essar would be 52%.
It also intended to acquire Hutchison's call options on the 15% held by Ghosh and Singh.
But the confusion stems from the fact that it also said that it was forking over $11.1 billion as "consideration paid by Vodafone to acquire 67% of Hutch Essar."
In the letter, Erik de Rijk, managing director of Vodafone International Holdings, reportedly said the company was aware "the [call] options could not be exercised within the existing shareholder structure if they resulted in a transfer to us or to another non-resident entity."
India's foreign investment promotion board has deferred a decision on the deal twice, amid questions on whether the level of foreign holdings in the company is compliant with regulations.