The Hindu Business Line : Tango ends in tussle

When Kumarmangalam Birla flew down to Delhi to meet the Communications and IT Minister, Dayanidhi Maran, in early February this year, everyone in the industry sat up and sensed that something big was around the corner.

For, in all these years, the Aditya Birla Group, despite being one of the promoters of Idea Cellular, had been keeping a low profile in the telecom sector, even during the time when the players were at each other's throat fighting out the Wireless in Local Loop controversy.

And true to the expectation, the meeting has sparked off one of the biggest corporate battles between the Birlas and the Tata Group, the other promoter of Idea Cellular.

During the meeting, Kumarmangalam Birla sought the intervention of the Government in getting their joint venture partner for more than five years — the Tata Group — to exit Idea Cellular. The reason given by the Birla Group for such a demand was that the Tatas were frustrating the expansion plans of Idea Cellular.

To understand the issue, let's do a quick flashback. Idea Cellular was formed as a joint venture between three companies — the AV Birla Group, the Tata Group and the US-based AT&T Wireless, which held shares in Idea through a Mauritius company. In July 2005, AT&T took a decision to exit Idea and gave the other two promoters the first right of refusal.

Both Tata and Birla exercised their rights and picked up 16.45 per cent each. This took the Tata holding in Idea Cellular to just over 48 per cent with the balance held by the Birla Group. Meanwhile, even as Idea Cellular was rolling out services, the Tatas floated another company on their own, Tata Teleservices, to offer integrated telecom services, including mobile, across the country. Matters came to a flashpoint when the Department of Telecom refused to give Idea Cellular a licence to offer services in Mumbai because Tata Teleservices was already present. According to DoT's licence norms, no single promoter can have more than 10 per cent stake in two different companies in the same Circle (Circle is the area of operation equivalent to a State).

The refusal came as a big blow to Idea Cellular and Kumarmangalam Birla then decided to take the matter to the Communications Ministry, seeking an early exit by the Tatas from Idea Cellular.

Point and counterpoint

What followed was a series of letters from the Birla Group. The missives raised a number of issues. First they sought a probe into Tata's acquisition of AT&T's stake in Idea through the Mauritius company since it had no prior approval of the Government. Second, they termed the Tatas' holding in Idea Cellular as `illegal' and wanted the DoT's intervention in ousting it from the GSM cellular company.

"Anyone familiar with the Indian business knows that the Tata Group is a single management entity. It is totally inconsistent with the national telecom policy that a business group while maintaining its own telecom operation, should first build and continue for two years with the impermissible holdings in another competing company, further augment these holdings through impermissible means, compromise competition and erode competitiveness of the second company, impede investment, cause loss to government revenues and then seek protracted time to encash maximum value for holdings which were irregular in the first place," says a Birla letter dated February 22.

The Tatas were quick to respond with their own letters to DoT countering every claim made by the Birlas. (see box) They said that the allegations raised by the Birlas were misconceived and asked DoT to stay away from the controversy.

On the acquisition of AT&T's stake, the Tatas said "there are no restrictions for a foreign change of equity in a foreign shareholder company abroad as long as there is no change in the register of members of Idea Cellular in India. Everyday there are changes in the shareholding of listed AV Birla Group companies and these are not regulated by the DoT. Therefore the purchase of AT&T's shares by Tata did not require DoT's approval."

The Tatas also said that the promoters of Idea Cellular and Tata Teleservices were different and not under a single entity called "Tata Group" as claimed by the Birlas.

The Tatas then served a notice to Grasim Industries Ltd, the AV Birla Group's flagship company, which said, "The AV Birla are a defaulting founder and we shall proceed to purchase the shareholding of AV Birla group within 90 days of this notice at the default price. We hereby put you to notice that by disclosing the financial data of Idea Cellular (ICL) to Aditya Birla Nuvo Ltd's investors, ABNL has caused a material breach of the ICL Share Holder's Agreement (SHA)."

The Tatas said that being one of the founders of Idea Cellular, the Aditya Birla Group was bound by the terms of the agreement and was not permitted to use or disclose confidential information pertaining to Idea Cellular other than as permitted by the SHA.

In the notice, the Tatas said information had been shared at the investors meet presentation on September 12, 2005, by the Birla Group, and, thus, was a breach of the SHA.

The AV Birla Group, meanwhile, told the Government that there was no substance in the termination notice served by the Tatas and it was an attempt to divert attention from real issues. Interestingly, in January this year, when DoT refused licence to Idea Cellular, the Tatas had themselves promised to bring down their stake in the cellular venture to below 10 per cent by June 2006.

The DoT asked the Tatas to declare the shareholding of Idea Cellular, Tata Teleservices and other Tata Group companies that had a direct or indirect stake in the telecom ventures.

This started a fresh round of letter warfare. The Tatas, replying to DoT's enquiry, said that there were 80 different companies using the brand name Tata and it did not have information on the stake holding in all the companies.

It also said that only Tata Industries had shares in both Idea Cellular and Tata Teleservices but since the holding in the second company was only about 4 per cent, it did not violate the DoT's licence condition on a single entity holding more than 10 per cent stake in two different companies. The Birlas alleged that the Tata Group was holding back vital information. They said that the Tatas did not have to declare shareholding in 80 companies but only five Tata companies - Tata Power, Tata Steel, Tata Chemicals, Tata Motors and Tata Industries. "These five companies hold direct and indirect stake in Tata Tele and Idea and a break-up of their shareholding would prove that the Tatas, through Tata Sons, is the common promoter of the two telecom ventures," said a Birla executive. The Birlas have produced a number of documents, including the Shareholders Agreement of Idea Cellular, old communication from DoT and Tata itself where the `Tata Group' is listed as one of the promoters of Idea Cellular. After a dozen letters exchanged between the two sides and more accusations and claims flowing thick and fast almost every day, this story, even as it is being written, awaits a decision from the Department of Telecom. Either way, this potboiler seems to be heading for a courtroom climax.

Other deals that didn't make it

This is not the first time that the licence condition that prohibits any single entity from holding more than 10 per cent equity in two different companies in the same circle has spiked some major mergers and acquisitions in the telecom sector.

Earlier, a joint bid by Telekom Malaysia and Singapore Technologies Telemedia (STT) to buy out AT&T Wireless' 33 per cent stake in Idea Cellular was shot down by DoT. The problem in that case was the existing joint venture between Bharti and Singtel. Both Singtel and STT have Temasek Holdings as the common promoter and with Airtel having presence in all the Circles where Idea is offering services, the proposed deal would have violated the DoT norm. Similarly, Hutchison's bid to acquire Aircel in Tamil Nadu fell through after DoT pointed out that Hutch was already offering services in the Circle through the joint venture with Essar.

Hitting a rough patch

Even as the Tatas and Birlas are slugging it out, another joint venture partnership in the telecom sector seems to be going through rough weather. The almost-decade-old partnership between the Ruias-promoted Essar and the Hong Kong-based Hutchison Whampoa is on the rocks with the former raising questions over a recent deal between the foreign partner and Egypt-based Orascom. The international deal, which saw Orascom picking up 19.3 per cent stake in Hutchison Telecom International Ltd (HTIL), resulted in the Egyptian company getting a 10 per cent stake indirectly in the Indian cellular venture Hutchison-Essar. The deal was apparently done by Hutch without informing its Indian partner, which prompted the Ruias to go on the offensive.

Essar shot off letters to the Prime Minister, Communications Minister, Finance Minister and Defence Minister drawing their attention to a loophole in the existing FDI guidelines. Essar sought clarification on whether the sale of equity in an Indian telecom joint venture by a foreign partner to another foreign company, directly or indirectly, necessitated approval and regulatory clearance, including from the Foreign Investment Promotion Board (FIPB). "It will be difficult to hold serious Indian investors responsible in a situation where the entire shareholding pattern has changed without the consent of the Indian investor," the letter said. Hutchison, however, maintained that the Orascom transaction had not resulted in the sale of HTIL, which continues to hold about 50 per cent stake in the JV. Market analysts have drawn similaritiesbetween the Tatas acquisition of Idea Cellular stake through the Mauritius-based company and Hutchison diluting its stake in Hutchison-Essar through a sale of equity in the parent company in Hong Kong. Both deals have been done without DoT approval. The key difference is that while in the case of Idea Cellular one party is an Indian company, in case of Essar- Hutch both are foreign companies. Hitting a rough patch

tkt@thehindu.co.in

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