Videsh Sanchar Nigam Ltd (VSNL) is considering demerging its telecom business into a separate entity.

The existing company is expected to continue as the holding arm of its huge real estate assets.

The proposed new company may be listed on the stock exchanges. Discussions between the Tata group and the government, which holds a 26 per cent stake in VSNL, on the issue are in initial stages, sources close to the developments said.

The broad contours of the plan suggest that the shareholding pattern of the new company, whose name has not yet been chosen, will almost be a mirror image of VSNL's.

This means the Tata group and the Union government will continue to hold 50 per cent and 26 per cent, respectively. The institutional and public shareholding will also continue at 24 per cent.

VSNL, on the other hand, will witness the Tata group transferring 26 per cent of its stake, of the existing 50 per cent, in favour of the government. The government's holding in VSNL is proposed to go up to 52 per cent from the existing 26 per cent.

When contacted, a VSNL spokesperson said the company is not considering demerging all its telecom businesses into a separate entity. The Tata group's public relations agency gave the same response.

Sources said the Tata group did not mind handing over its 26 per cent stake in VSNL, which would primarily be a real estate company after the demerger.

VSNL is in the process of hiving off its retail business undertaking comprising broadband and internet services into a subsidiary, DIL Internet, for up to Rs 400 crore (Rs 4 billion). The proposed demerger is independent of the hiving off of the retail business undertaking.

The advantage of the demerger of the telecom business over the previous plan of spinning off VSNL's real estate assets is that it will attract lower stamp duty.

VSNL would have to pay an estimated Rs 500 crore (Rs 5 billion) as stamp duty if it were to demerge its real estate assets into a separate entity.

On the other hand, the demerger of the telecom business would cost VSNL only Rs 25 crore (Rs 250 million), the sources said.