The Hutch-Orascom deal, which got the Egyptian company a 10 per cent stake in the Indian cellular firm Hutchison Essar Ltd, has run into rough weather with the Ministry of Company Affairs taking a view that the Indian promoter in the joint venture should be consulted before the agreement is formalized between the two international companies.

After taking the opinion of the Department of Legal Affairs, the Ministry has said necessary screening of the investor and approvals as per the guidelines of the Foreign Investment Promotion Board (FIPB) will have to be taken.

"The word consultation appearing in the guidelines does not mean mere opinion seeking. It implies meeting of minds, which has to be achieved through an integrated, participatory consultative process with Indian promoters. As far as the modality to enforce this requirement was concerned, it could be achieved by making necessary arrangements in the articles of association of the licensee company," said a note from the Ministry of Company Affairs.

The Ministry has requested the Department of Industrial Policy and Promotion to issue clarification as deemed appropriate. The view taken by the Ministry could have far-reaching implications for other foreign stakeholders in the Indian telecom sector, especially with the Government now permitting up to 74 per cent FDI in the sector.

While Hutch and Orascom may now have to seek necessary approvals from Indian authorities, other foreign investors such as SingTel, Vodafone and Maxis may also have to take note of the development if they plan to dilute their stake in the future. This comes even as the Department of Telecom had taken a decision to not to intervene in the matter and had given its nod to the Hutch-Orascom deal.

The equity sale by Hong Kong-based Hutchison Telecom International Ltd (HTIL) to Egypt's Orascom had got the latter a 10 per cent stake in the Indian mobile operating company Hutchison Essar, in which the Ruias promoted Essar Group is the largest shareholder with 33 per cent stake. Hutchison Whampoa holds 26.5 per cent stake while Analjit Singh and Telecom Investments India (TII) recently acquired 8.3 per cent in the cellular company.

The Hinduja Group holds 5.1 per cent and public holding through HTIL accounts for 16.4 per cent.

Essar had shot off letters to the Prime Minister's Office, the Communications Ministry and the Defence Ministry seeking clarity on whether sale of equity by Hutchison to another foreign firm Orascom, required Government approval.

While the existing guidelines do not specify that indirect purchases through overseas holding companies would require any approvals, "such indirect change of shareholding through a holding company, without the consent of the serious Indian investors in the telecom company, would constitute a serious threat to national security," the Essar Group has said in a letter to the Defence Minister, Pranab Mukherjee.

The view taken by the Ministry of Company Affairs will address the concerns raised by Essar.

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