What Raja said about PM & what rules say

(From top) Singh, Raja and Chidambaram

July 25: Former telecom minister A. Raja today sought to defend himself by citing the names of Prime Minister Manmohan Singh and former finance minister P. Chidambaram.

The specific deposition by Raja related to equity allocation by two telecom licensees — Swan and Unitech — to foreign investors, which fuelled 

 charges that they had made a killing on the 2G licences.

“Then finance minister P. Chidambaram had told Prime Minister Manmohan Singh that the issue of sale of equity by spectrum licensees Swan Telecom and Unitech to attract FDI did not amount to sale of licence as per corporate law. Let the PM deny it,” Sushil Kumar, Raja’s counsel, told a special court.

Kumar later said he was not shifting blame but defending his client. ( )

The issue is different from the questions dogging the allocation of spectrum to the two companies, such as charges of favouritism and an arbitrary change in the deadline to submit applications.

A perusal of the Companies Act suggests that infusion of equity — the key question raised by Raja — was permissible. But the timing of the deal does raise some red flags.

Chidambaram, now home minister, said the only issue examined by him as finance minister in 2007 and by the Prime Minister was if Swan and Unitech were divesting (selling their stake) or diluting stake through fresh equity.

The question was whether the two companies had sold off the spectrum or offered equity to others.

Chidambaram said it was found that spectrum had not been sold and that the foreign partners had been inducted through fresh shares.

Chidambaram is drawing a distinction between divestment and dilution. In divestment, the promoter sells either all or a part of his equity holding in the company. In such a case, the total equity capital will remain the same.

However, in dilution, a company issues new shares. This widens the equity base. While doing so, the promoter’s share goes down. But this is beneficial to the company as it raises the equity capital. By raising the equity capital, a company is able to either lower or eliminate its need for debt or create greater headroom for future borrowings.

Typically, companies favour a 1:1 debt-equity ratio (equal parts of equity and debt). But infrastructure companies sometimes opt for a 4:1 ratio (four parts debt to 1 part equity). Banks favour lending to companies with a low gearing ratio (that is 1:1 debt-equity ratio rather than 4:1).

Chidambaram seems to be saying that an issue of fresh shares and the induction of a partner are entirely business decisions — and, therefore, cannot be linked to the spectrum acquisition. His argument seems to go like this: a business needs to expand; so it gets a new partner. There’s nothing wrong with that.

Section 81 of the Companies Act, which deals with the issue of further capital, says a company can after the expiry of two years from formation or at any time after the expiry of one year from the allotment of shares in the company, whichever is earlier, increase the subscribed capital of the company by allotment of further shares.

All it needs to do is: (a) pass a special resolution at a general meeting (support of 75 per cent of members attending the meeting and voting) or (b) hold a show of hands or poll with the rider that the “central government is satisfied, on an application made by the board of directors in this behalf, that the proposal is most beneficial to the company”.

Effectively, this means that new shares can be issued by passing a special resolution. In such a case, no reference has to be made to the Centre. If it’s a poll or a show of hands, then government concurrence is required.

If, however, the promoters sold their stake immediately after acquiring spectrum, there might be a causal link to buttress the charge of profiteering. The argument here would go like this: Company A got spectrum and this increased its enterprise value. The promoters sold their stake and cashed out — either entirely or through the sale of a part of their holding.

On this count, Swan’s action can raise questions. The telecom licence was allotted on January 10, 2008, and spectrum on August 28. Less than a month later, on September 23, Swan issued 45 per cent equity to the UAE-based telecom operator, Etisalat, for $900 million (Rs 4,000 crore at Monday’s exchange rate).

“The additional equity issued to Etisalat was less than 49 per cent, and hence entitled to automatic route (which does not need permission from the government) as per existing FDI policy,” telecom minister Kapil Sibal said today.

Unitech was given approval by the Foreign Investment Promotion Board on August 21, 2009, to issue equity to Norway’s Telenor. It was also cleared by the cabinet committee on economic affairs on October 19 the same year.

Sibal said: “Infusion of additional equity was the accepted policy framework approved by the NDA government, in spite of the then prevailing lock-in period of five years during which the licensee could not transfer the licence.”

In 2003, the NDA government revoked the five-year lock-in clause. On July 23, 2009, the UPA government introduced a three-year lock-in period.

“The new clause, however, did not prevent the licensee company or holding company from seeking infusion of additional equity by third parties. This was done both in the case of Swan and Unitech,” Sibal said.

Although Sibal, a lawyer, defended the infusion of equity, he sought to distance the government from Raja’s statement by saying that the “submission by an accused before a court at the time of framing of charges cannot be construed as evidence”.