Vodafone objects Essar's reverse listing of telecom holding co

"Vodafone has written to both BSE and Sebi to express its concerns regarding reverse listing of Essar Telecommunications Holdings Private Ltd (which owns an indirect 11 per cent in Vodafone-Essar) into India Securities Ltd and has asked for the matter to be examined," Vodafone said in a statement.

Vodafone-Essar is the third largest mobile operator in India. Vodafone had aquired nearly 67 per cent stake in 2007 while Ruias-led Essar have little over 33 per cent equity in the joint venture.

India Securities Ltd (ISL) is a group firm of Essar and is listed on the bourses. Transfer of 11 per cent stake held by Essar Telecommunications Holdings to ISL would allow shareholders of ISL to participate in Vodafone-Essar.

Essar is doing so to get to know the fair (market) value of its 33.02 per cent stake, for which the company has the right to exercise the Put Option, a contract that gives the seller the right to sell a specified quantity of securities at an agreed price within a specified time period.

According to the foreign partner, "There has been no disclosure to the shareholders of ISL on Vodafone Essar, which would become a substantial asset of ISL. Therefore, the investors in ISL have no basis on which to form a valuation judgement."

It (Vodafone) also said that Essar Telecommunications's wholly-owned subsidiary has stated in its Information Memorandum of September 2009 and January 2010 that it would use the proceeds from the bonds secured against Essar's Put Option to invest internationally in sector like coal, steel and refining. Vodafone pointed out that it was not clear what assets or liabilities ISL would have following the possible exercise of the Underwritten Put Option or the Fair Market Value Option issued to Essar in 2007.
"ISL is a highly illiquid vehicle and post merger over 95 per cent of the shares will be under the control of the Essar Group and two other shareholders. Accordingly, small amounts of buying or selling could distort ISL's share price," it said.

"Vodafone does not wish a company in which it holds a majority interest to become the subject of a false market. Vodafone is concerned that the value of ISL could be misinterpreted as a Fair Market Value of Vodafone Essar," the statement said.
The foreign firm has also served its objections on Essar's counsel in the Madras High Court.