Essar seeks RBI nod to sell stake to Vodafone

Amid the spat over valuation, Essar has approached the Reserve Bank of India seeking its nod to sell 10.97% equity in the joint venture Vodafone Essar for $1.2 billion, which the company claimed is lower than the fair value of shares of $1.72 billion.

According to sources, Essar has submitted application together with the Discounted Cash Flow (DCF) valuations from two merchant banks -- Standard Chartered Bank and JM Financial.

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% equity at $1.2 billion.

Going by this, the sources said, either Vodafone would have to shell out $500 million more to buy the shares directly or RBI 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 $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% shareholding held through a subsidiary or not.