Vodafone, Essar Group lock horns over management

Vodafone Group and the Essar Group could lock horns over the Indian company's demand to share management of Hutchison Essar, a large Indian mobile phone network operator.

Essar claims it has the right to first refusal for any sale of equity in Hutchison Essar by Hutchison Telecommunications International Ltd. (HTIL), a claim denied by both Vodafone and HTIL.

"We want joint management and a partnership of equals," a spokesman for Essar Group in Mumbai said Tuesday. Although the Essar Group would leave the day-to-day management of the company to Vodafone, it wants to be consulted on all strategic decisions, the spokesman said.

The Essar Group, which holds 33 percent of the equity in Hutchison Essar, is scheduled to negotiate later this week a shareholder agreement with Vodafone, which has agreed to acquire a 67 percent interest in Hutchison Essar from HTIL.

The Essar Group claims that in its shareholder agreement, it has the right of first refusal if HTIL sells its equity, and that it may use this clause in the agreement to bargain with Vodafone.

That view, however, isn't shared by Vodafone CEO Arun Sarin, who last week told reporters that the Essar Group's right of first refusal doesn't apply to its agreement to acquire HTIL's stake.

Nor does HTIL agree with the Essar Group. The right to first refusal applies only to the sale of equity by HTIL to local Indian competitors, the company said.

The Essar Group is not a portfolio investor in Hutchison Essar and wants a say in running the business, the spokesman said. The arrangement would be similar to the one that the Essar Group had with HTIL and that helped grow the business for Hutchison Essar, he added.

While announcing its agreement to acquire a controlling stake in Hutchison Essar, Vodafone also made an offer to acquire Essar Group's stake at the same price per share offered to HTIL. If the Essar Group sells its stake, Hutchison's local partners, which together have a 15 percent interest in Hutchison Essar, will increase their interest to 26 percent, Vodafone said.

Current Indian rules restrict foreign ownership in telecom service providers to 74 percent.

Vodafone expressed interest, however, in having the Essar Group continue as a joint-venture partner.

Indian joint ventures of multinational technology companies have typically ended with the foreign company buying out the local joint venture partner. In 1991, for example IBM set up a 50:50 joint venture with India's Tata Group to meet Indian government regulations restricting foreign ownership in computer companies. When that restriction was eased, IBM bought out Tata's share.

Last week, however, the Essar Group said it would not exit from Hutchison Essar and would even be interested in increasing its stake in the mobile phone operator if an opportunity arose, the spokesman said.