Vodafone says Indian law bars it from owning all of the 67% of Hutchison Essar it plans to buy in a controversial $11.1 billion deal, the Financial Times reported on Thursday.
In a letter to the Indian finance ministry obtained by the newspaper, Vodafone acknowledged that it would be breaching a 74% ceiling on foreign direct investment if it attempted to take direct ownership of all of the stake in the mobile operator.
Vodafone has agreed to buy a two-thirds interest in Hutchison Essar from Hutchison Telecommunications International, a unit of Hong Kong tycoon Li Ka Shing's Hutchison Whampoa, but an Indian foreign investment regulator has delayed approval of the deal.
Hutchison Telecom owns 52% of Hutchison Essar directly, with a further 15% stake held on its behalf by companies owned by two Indian nationals, over which it has call options, the FT reported.
Vodafone is planning to replicate these shareholder and accounting arrangements. The 15% stake held by Asim Ghosh, Hutchison Essar's managing director, and Analjit Singh, chairman of healthcare group Max India, does not count towards the foreign ownership ceiling while it is in their hands, according to the newspaper.
The rest of the 74% quota is filled by Essar, an Indian conglomerate that owns 33% of Hutchison Essar and has structured its stake so that 22% is held offshore. This leaves Vodafone unable to own directly more than 52%, the FT reported.
The FT said Vodafone had pointed out that its statement had put its interest in Hutchison Essar would be 52%. The proposed shareholder structure was legal, the company added.