Corporate Nov 16, 2011
By R Jagannathan
It's not easy protecting your property from jail. This is what 2G scam accused Sanjay Chandra of Unitech Wireless must have felt when the Foreign Investment Promotion Board cleared a proposal by the company's board to make a rights issue of Rs 8,250 crore.
The rights issue, if it finally goes through without judicial or Company Law Board intervention, will effectively squeeze Chandra out of the company.
With a majority stake of 67.25 percent in Unitech Wireless, Norway's Telenor has been pushing for the rights issue probably because it knows that Unitech is in no condition to bring in its share of the equity.
The Unitech real estate group, which is facing its own debt overload, balks at the idea of coughing up around Rs 2,700 crore as its share of equity.
However, it is not about the money alone. For what the Telenor-driven Unitech Wireless board has decided is to value the company's share at Rs 28, which means even after Rs 8,250 crore is invested in it, the entire company's valuation will fall to just Rs 400 crore after paying off the debt. This is a huge scaledown from the Rs 9,100 crore that Unitech values the company at.
Calling this scheme of equity infusion "oppressive and malafide", Unitech has been battling in the courts and at the Company Law Board to fund Unitech Wireless through debt rather than equity. It accuses Telenor of declining a Rs 9,000 crore loan offered by State Bank, but Telenor says nothing of the kind was offered.
The Punjab and Haryana High Court has okayed the rights issue subject to the condition that if arbitration proceedings between the estranged partners went against the rights issue, the whole amount would be treated as debt.
The relationship between Unitech and Telenor has been deteriorating ever since the former got embroiled in the 2G scam - with Unitech's promoters being accused of selling spectrum illegally to Telenor soon after Andimuthu Raja allocated it licences in 22 telecom circles for around Rs 1,650 crore. Unitech then quickly sold 67.25 percent of the company to Telenor for a huge premium - over Rs 6,200 crore.
However, after the 2G scam surfaced and Sanjay Chandra went to jail, Telenor has been eager to dump Unitech.
It first forced Chandra off the company's board, and would now like to use the rights issue to lower the value of the Unitech stake and/or get them to opt out. The Economic Times quoted Telenor Group CEO Fredrik Baksaas as saying in September that if Unitech did not want to subscribe to the rights issue, Telenor would seek another partner.
The interesting bit is this: the 2G case involving Unitech hangs on the premise that Raja allowed Sanjay Chandra to sell spectrum at a "huge premium" to Telenor even before it had begun operations. Both Raja and then Finance Minister P Chidambaram agreed that Unitech was only diluting its stake in Unitech Wireless - not selling it.
The unstated logic of the scam will also be upended if Telenor gets its way on the rights issue. The accusation is that Sanjay Chandra sold something he bought for Rs 1,650 crore for four times that amount to Unitech after doing literally nothing to build value. So there must have been something fishy in the way the government allotted him the telecom licence and spectrum in 22 circles.
But after two years of operations and racking up huge debts and losses, Unitech finds that its partner has reduced the value of its stake to a quarter of what it had paid for the licence. In fact, the reverse of the scam has happened: Unitech, far from reaping an undeserved bonanza, will see a whittling down of its initial investment to a quarter of its value.
The irony is the company had a sky-high valuation even before it started business. Now, with a 3.1 percent share of India's telecom market, its value is heading south.
Whether this is poetic justice or just fate depends on whether you think 2G was a scam or just much ado about nothing.