Sistema's plan to raise India stake faces snag over deal structure

NEW DELHI: Russian conglomerate Sistema JSFC's proposal to raise its stake in its Indian unit beyond 74 per cent has hit a hurdle with the telecom department saying that the plan will need an approval from the Reserve Bank of India as it has been structured like an overseas debt deal and not as foreign direct investment (FDI). 

Investment though the instruments that Sistema wants to use — redeemable preference shares and optionally convertible redeemable preference shares - doesn't " .. 

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Sistema Shyam's proposal to raise foreign holding hits roadblock

DoT has stated that the redeemable preference shares will be deemed as debt and must conform to ECB guidelines

BS Reporter  |  New Delhi  

June 6, 2014 Last Updated at 20:10 IST

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The proposal of Sistema Shyam Teleservices, which operates under the MTS brand in India, to increase foreign shareholding beyond 74 per cent by way of converting 7.8 million redeemable preference shares has hit a roadblock.

The Department of Telecommunications (DoT), in a recent communication, stated that the redeemable preference shares would be considered as debt and shall require conforming to the guidelines of External Commercial Borrowings (ECB) as redeemable preference shares, currently issued or being issued, and redemption of such shares are eligible capital instruments under the current foreign direct investment (FDI) policy.

Earlier, the Foreign Investment Promotion Board (FIPB) has asked the DoT to look into the matter following the proposal of Sistema Shyam Teleservices, stating that as there will not be any change in FDI in the company, the matter would not come under the jurisdiction of FIPB.

Following this, DoT had asked for details of number of shares to be converted, and the shareholding details of the company. The redeemable preference shares are currently held by Insitel Services issued in 2012.

Currently, Sistema JSFC holds 56.68 per cent in Sistema Shyam Teleservices, Russian government 17.14 per cent and 0.13 per cent other foreign entities.

Sistema Shyam Teleservices is the second cellular operator after Vodafone that has approached FIPB for raising FDI limit after the Government decided to permit 100 per cent FDI in telecommunications in July, 2013.

In April, British major Vodafone Plc acquired 100 per cent stake in Vodafone India in a phased manner by acquiring shares held by its non-executive Chairman Analjit Singh and his wife and a 10.97 per cent stake held by Piramal Enterprises, with total investment of Rs 10,142 crore.

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Company proposes to issue 2.1 lakh shares to Singapore-based subsidiary Insitel Services

NEW DELHI, JUNE 6:  

The Department of Telecommunications will ask Sistema Shyam to take the approval of the Reserve Bank of India for issuing fresh redeemable preference shares to a Singapore subsidiary.

The department has taken a view that since such instruments are considered debt, it falls under the rules governing external commercial borrowings (ECB) and not the Foreign Direct Investment laws.

Sistema Shyam had sent an application to the Foreign Investment Promotion Board (FIPB) seeking permission to issue an additional 2.1 lakh redeemable preference shares to Singapore-based wholly-owned subsidiary Insitel Services Pvt Ltd.

After the deal, Insitel would own a total of 10 lakh preference shares.

Sistema Shyam had also proposed to change these shares into optionally convertible redeemable preference shares, which will be converted into equity shares in one or more tranches within 10 years.

The company had approached the FIPB because the total FDI will increase if the shares are converted into equity at a later date. However, the DoT has taken a view that according to RBI guidelines, only compulsory convertible shares are considered FDI.

Other types of preference shares and debentures, including optionally convertible preference shares, are considered debt.

According to an internal note seen by Business Line, the DoT has said Sistema Shyam should be told to conform to the ECB guidelines, instead of the FDI rules.

Sistema JSFC owns a 55.88 per cent stake in Sistema Shyam, while the Russian Government has 17.14 per cent. Shyam Group is the Indian partner with a 26.05 per cent stake held through five subsidiaries.

After the Government recently allowed 100 per cent FDI in the telecom sector, a number of players have expressed interest in increasing their stake. Vodafone has already increased its stake in the Indian venture to 100 per cent.

AT&T has also sought to buy out its Indian partner Mahindra's stake.