Indian Gov't Holds Up Vodafone Plans

Vodafone Group plc (NYSE: VOD) is shaping up plans for Hutchison Essar , once its acquisition of the Indian carrier is complete, including an expected deal with IBM Corp. (NYSE: IBM) and a potential fiber optic network to carry long-distance traffic. But approval is being held up by questions as to Hutchison Essar's ownership structure.

According to media reports, the operator is looking to outsource its IT operations to IBM in a contract worth between $1.4 billion and $1.6 billion. IBM signed a similar outsourcing deal with Vodafone late last year. (See Vodafone Outsources to IBM, EDS.)

The contract would be IBM's largest with an operator in India, following agreements with Bharti Airtel Ltd. (Mumbai: BHARTIARTL) worth around $750 million since 2004 and, more recently, with Idea Cellular Ltd. valued at between $600 million and $800 million. (See Bharti, IBM Team in India and IBM Wins at IDEA Cellular.)

Vodafone is also mulling over whether to invest up to $400 million to lay its own long-distance fiber optic network in India to carry its mobile traffic, reports India's Economic Times.

Since November, Hutchison Essar has been awarded seven additional mobile licenses to expand its coverage from 16 to all 23 regions of the country. (See Hutch Essar Expands, Scraps IPO.) Having its own optical network would allow the carrier -- to be renamed Vodafone Essar -- to become a national integrated services player and route its own mobile calls rather than paying to lease capacity from other operators.

India's long-distance market was opened to increased competition last year, with the likes of the Essar Group, Mahanagar Telephone Nigam Ltd. (MTNL) , Railtel Corporation of India Ltd. , and PowerGrid receiving licenses to take on Bharti, Bharat Sanchar Nigam Ltd. (BSNL) , Reliance Communications Ltd. (RCom) , and Videsh Sanchar Nigam Ltd. (VSNL) (NYSE: VSL). (See BT, AT&T Set Sights on India.)

The Economic Times notes that a key issue will be the Essar Group's role, since its national and international long-distance licenses are not included in Vodafone's acquisition.

As with the IBM deal, details will be finalized after the acquisition is cleared by the Indian government and completed. That clearance was set back yesterday when India's Foreign Investment Promotion Board (FIPB) deferred its decision, seeking clarification over Hutchison Essar's ownership structure.

Under the country's foreign direct investment (FDI) regulations, overseas shareholding in telecom companies is capped at 74 percent. Vodafone has acquired HTIL's 52 percent stake, while 15 percent is held by Hutchison Essar's CEO and managing director, Asim Ghosh, and Analjit Singh, chairman of healthcare group Max India. Essar Group holds the remaining 33 percent -- two thirds of which is held by an offshore subsidiary.

Earlier this month, India's Telecom Watchdog filed a petition with the New Delhi High Court stating that the company is in breach of the FDI rules and requesting the operator’s license be suspended. According to a filing with the Hong Kong stock exchange, Hutchison Telecommunications International Ltd. (NYSE: HTX) "believes Hutchison Essar is FDI compliant and the Transaction will not affect such FDI compliant status." The filing continues: "The Company and Hutchison Essar consider that the petition is entirely without merit and will take all necessary action to vigorously defend the groundless allegations made against them."

The FIPB has asked for documents from Ghosh and Singh to prove that they are not holding their stakes on behalf of Hutchison Telecom. Last year, Hutchison Essar sought to clean up its ownership structure in preparation for an IPO and to comply with the FDI rules. (See Hutchison Essar Preps IPO.)

— Nicole Willing, Reporter, Light Reading