MUMBAI, DECEMBER 15: Hutchison Telecom of Hong Kong, which is close to buying the 49 per cent equity stake held by non-resident Indians and Swisscom in Sterling Cellular Ltd, is planning to buy the 51 per cent stake of the Essar group. The $ 425 million deal is being structured on the lines of Hutchison's earlier deal to acquire controlling stake in Hutchison Max Telecom in Mumbai circle by circumventing the 49 per cent foreign investment cap in telecom projects.With this, Hutchison will get 100 per cent control in Sterling Cellular and become a major player in the Indian telecom sector. The Hong Kong firm will be effectively controlling two big markets - Delhi and Mumbai which has the highest cellular traffic amongst each other.As per the plan, the Hong Kong company is likely to float a joint venture company to buy out the 51 per cent Essar stake in Sterling Cellular - which holds the cellular phone licence for Delhi - by avoiding the 49 per cent foreign investment cap. It may be recalled that Hutchison had floated a similar joint venture company (styled as Telecom India Pvt Ltd) through investment banker Kotak Mahindra to buy out the Max group's 51 per cent stake in Hutchison Max Telecom, the cellular licence holder for Mumbai.As per the government guidelines, foreign stake in telecom projects should not go beyond 49 per cent. However, the law is silent on whether a foreign company can form a joint venture to acquire equity stake beyond 49 per cent. The Hutchison-Max deal is currently under investigation and approval of further injection of capital is held up.When contacted, an Essar spokesman said there was no move to sell the 51 per cent holding in Sterling Cellular. The contention of Essar is that with a strong partner coming in with 49 per cent stake, Sterling Cellular will aim for further growth in the business. The Hutchison group, when contacted, refused to comment on the deal.While the Essar group holds the controlling 51 per cent stake in Sterling Cellular, 17 per cent is held by N Sivasankaran group of NRIs and 32 per cent by Swisscom. The Swiss company and the NRI group who decided to quit the company was negotiating with several telecom companies including Hutchison and the BPL group.The Hutchison group of Hong Kong is in the final stages of acquiring the 49 per cent, sources said. Apparently, the Delhi licence has been valued at about $ 425 million (around Rs 1,848 crore). As per the deal, Essar will get $ 50 million and also acquire the 49 per cent NRI/Swisscom stake for about $ 125 million. This 49 per cent holding will be offloaded to Hutchison later for $ 183.75 million. However, an Essar spokesman denied knowledge of any such deal and said there was no question of acquiring 49 per cent holding of NRI/Swisscom, people familiar with the deal say.Essar will be making a profit of $ 58.75 million by selling the 49 per cent NRI stake to Hutchison. Thus, the total profit for the group from the sale would be $ 108.75 million. Further, as the domestic shareholding of 51 per cent cannot be sold by Essar because of foreign investment sectoral caps, Essar would hypothecate this whole shareholding for a value of the equity less a 25 per cent discount.In order to facilitate this and to help Essar (as the current shareholder) to take over the offshore shareholding from the NRI/Swisscom group, Hutchison would be extending a loan of about $ 100 million offshore in tranches of $ 80 million and $ 20 million. This loan will be subsumed in the sale consideration of 49 per cent to be acquired by the Hutchison group.The Hutchison move to acquire 100 per cent holding in the cellular venture comes at a time when a government investigation into its first such deal is incomplete. The deal has already sent ripples in the telecom sector and many Indian companies are getting ready to challenge the acquisition.
