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RBI nixes Essar pledging shares

May 31, 2007 09:32 IST

The Reserve Bank of India has rejected Essar Communications' application to pledge its equity in Hutchison Essar Ltd to Standard Chartered Bank, London, on the ground that the proposal would result in the transfer of equity holding of a resident entity from one non-resident entity to another one.

"As the utilisation of the proceeds of the loan taken after pledge of shares would be used for acquisition of more shares, we propose to reject the proposal," the RBI said in a letter to the Department of Economic Affairs on May 21.

In normal course, the RBI would not need to refer such a matter to the government, but it has done so on the ground that the case involves indirect equity interest.

"Since the telecom sector is under a separate Foreign Direct Investment regime, the case is being referred to the government," the RBI letter said.

The RBI's move to involve the finance ministry appears to have been influenced by recent controversies surrounding Vodafone's recent acquisition of the majority stake in Hutchison Essar.

"In view of concerns relating to leverage of shares of companies incorporated in India as well as the recent controversies on foreign holding in Hutchison Essar Ltd, the government is requested to examine the issue and to advise us in the matter," it said.

The DEA's foreign trade wing is considering the RBI missive.

Essar Communications (India) Ltd, an overseas company, holds 100 per cent equity capital of Essar Communications Ltd, another non-resident company.

The latter (ECL), in turn, currently holds 100 per cent equity capital of Essar Telecom Investments Ltd, a company incorporated in India.

ETIL, in turn, holds 15.85 per cent (176,788,207 shares) of the total paid-up equity capital of Hutchison Essar Ltd.

ECIL has availed of a credit facility from Standard Chartered Bank, London, and proposed to pledge its current and future equity shareholding in ETIL in favour of the bank.

An Essar spokesperson said, "We have not received any intimation from the RBI so far, and hence cannot comment."

Siddharth Zarabi in New Delhi
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