The Ministry of Corporate Affairs has asked the Department of Telecommunications to reconsider its decision to issue Mumbai-based Loop Telecom an all-India mobile services licence, suggesting the company had links with Essar Group that violate restrictions on telecom cross-holdings by groups.

Under current telecom policy, a group that has a majority stake in one telecom company cannot hold more than 10 per cent in another. Loop is one of eight new players to be given a mobile service licence and is expected to start operations soon.

The Essar Group holds 9.99 per cent in a company called Santa Trading Pvt Ltd (STPL), which owns Loop Telecom via a complex structure involving BPL Communications and an indirect holding in BPL Mobile Communications.

Essar Group already owns 33 per cent in Vodafone Essar, India's third-largest mobile service provider. However, its indirect equity in STPL meets the letter of the law on cross holdings.

The MCA has said though Essar Group is not a major shareholder in STPL, it has invested a huge amount of money in that company's non convertible debentures and also appears to have provided the funding for STPL through BPL Communications.

In its letter, MCA has indicated that Essar Group has invested in Rs 1,592 crore worth of NCDs of STPL, "which is otherwise a small company with a paid-up equity of Rs 1 lakh".

STPL, in turn, has utilised this money to invest in BPL Communications in the form of equity (Rs 1,006 crore), preference shares (Rs 175.8 crore) and NCDs (Rs 410 crore), totalling Rs 1,592 crore.

Therefore, MCA says, it appears that STPL has been a conduit for investment for these funds in BPL Communications, which has a 48.76 per cent share in Loop Telecom.

BPL Communications, in turn, invested in convertible debentures issued by Essar Investment Ltd worth Rs 2,421 crore. As a result of this chain of investments, the Essar Group has invested a net amount of around Rs 800 crore in STPL.

"This means, STPL has operations and transactions that are substantially controlled or influenced by the Essar Group," the MCA source said.

Asked about the development, a Loop Telecom spokesperson said: "The shareholding structure of Loop Telecom was provided to DoT when the licence was issued. It is fully compliant with relevant guidelines and we will work with DoT if it requires any clarifications."