Probe Essar co stock rise: Voda tells Sebi

MUMBAI: London-based Vodafone group, the majority shareholder in leading mobile service provider Vodafone Essar, has asked market regulator Sebi to investigate the sudden increase in the share price of Essar group-promoted India Securities (ISL). A few days ago Vodafone had also objected to the merger of ISL into Essar group's telecom holding arm, Essar Telecommunications Holding Private (ETHPL), on the grounds that the value of ISL may get misinterpreted as the fair market value of Vodafone Essar. The reverse listing exercise by Essar is seen as anattempt to ascertain the value of its 33% stake in Vodafone Essar.Ina letter to Sebi, the British telecom company said that on January 14, 2010, theshare price of ISL was Rs 6.25. However, on January 17, 2011, it had increasedmore than eleven times to Rs 69.05. It further said that the share price of ISLincreased in spite of the company disposing of its major businesses. "The rapidincrease in the share price of ISL in a year may require further examination,"Vodafone said in the letter to the market regulator. It also alleged that therewas a possible violation of the Sebi (Prohibition of Insider Trading)Regulations, 1992. "We request you to conduct an investigation intothe nature and effect of the movement in the price of ISL shares, and also,possible violation of ICDR (Sebi's Issue of Capital and Disclosure RequirementsRegulations), the insider trading and other applicable regulations," the letterstated. The letter is part of Vodafone group's opposition to Essar group's movesto merge ISL and ETHPL.The Essar group, too, has responded stronglyto Vodafone's moves. ISL recently informed its shareholders that Vodafone had no"locus standi" to raise such objections to the merger, "since it is neither ashareholder nor a creditor of both ETHPL and ISL.''"The proposedmerger of Essar Teleholdings with India Securities is in full compliance withall regulations and is being done in an open and transparent manner," a companyspokesman said on Wednesday. As a policy, Sebi does not comment on issues whichare under investigation. The Essar group has two put options with its holding inVodafone Essar: the underwritten put option and fair market value put option.On exercise of underwritten put option, Essar can sell stake its 33%stake in the Indian telecom joint venture to Vodafone for an agreed value ($5billion) whereas on exercise of fair market value put option the stake sale willhappen at the fair value. Thus, the underwritten put value is the minimumassured value that Essar will receive on sale of Vodafone stake, a communicationfrom Essar group to ISL's shareholders noted. According to the agreement, incase of a sale at the fair market value, the valuations will be determined bybankers.The merger of two of Essar group companies, will indirectlylead to valuing of Essar's stake in Vodafone Essar. This perhaps also indicatesthat the Essar group might decide on a partial stake sale and hence this attemptat price discovery.On June 4, 2010, the ISL board had passed aresolution to merge ETHPL with itself when the stock on the BSE was quoting atRs 29. Since then the ISL stock has more than doubled to its multi-year high ofRs 76 on January 19. On Thursday, however, the stock lost 4.6% to close at Rs66. According to block deal disclosures on BSE, on January 7, 2010, EssarCapital had bought 21.34% stake in ISL from Essar Investments, hiking theformer's stake in the company to 74.22%.