Essar seeks RBI nod to sell 11% stake to Vodafone at discount

DCF or Discounted Cash Flow valuation is a method of valuation where the future expected cash flows and profits of the company is taken into account for valuing the company. Other methods such as book value and profit earning capacity value which were used under the CCI pricing guidelines focus on the cash flows of the company in the past as opposed to the future.

Standard Chartered is said to have valued the Vodafone Essar Limited (VEL) equity at Rs 1,701 a share while JM Financial pegged it at Rs 1,693 a share. This is much higher than Rs 1,179 a share for the deal to value the 10.97 per cent equity at USD 1.2 billion.

Going by this,the sources said,either Vodafone would have to shell out USD 500 million more to buy the shares directly or it would have to find an Indian buyer to front the transaction.

RBI’s nod is necessary due to a change in RBI pricing guidelines for sale of equity shares by an Indian entity to a non-resident (foreign) entity.

Under this guideline,issued in April 2010,any transfer of shares of an unlisted company by resident to non resident entities cannot be done at a price lower than the fair value of the shares calculated using the DCF method by either a category one merchant bank or a chartered accountant,Essar claimed.

This comes after Vodafone and Essar exercised their respective call and put options with regard to Essar’s stake in the joint venture which was pegged at USD 5 billion with a clause that the parties can adopt methods to get fair valuations at later stage.

When contacted,Essar declined to comment,citing confidentiality obligations. Essar has earlier gone on record saying that it fully intends to honor all its rights and obligations under the various agreements with Vodafone and also expects Vodafone to do the same. This will be done in accordance with all applicable laws and regulatory approvals.

In absence of RBI approval for the sale,the question will be whether Essar was willing to continue to hold on to the 10.97 per cent shareholding held through a subsidiary or

not.

Vodafone officials could not be contacted for their comments.

The deal was announced recently wherein Essar exercised its option to sell 22 per cent equity held by overseas entities and Vodafone in turn exercised its call option for the remaining 10.97 per cent stake held by ETHL Communications Holdings Limited.

Vodafone,which is already fighting a bitter legal battle for waiver of USD 2.5 billion withholding tax and penalties,may face some anxious moments due to this deal.

The deal may also have to be approved by the Foreign Investment Promotion Board with a view to ensure that the deal is FDI compliant.