An Indian NGO (non-government organization) called Telecom Watchdog has filed a petition with the High Court of Delhi, alleging that foreign shareholding in mobile services operator Hutchison Essar is in breach of the Indian government's regulations on foreign direct investment (FDI).

Hutchison Telecommunications International Ltd. (HTIL) announced in February that it had entered into an agreement with a subsidiary of Vodafone Group to sell its 67 percent direct and indirect equity and loan interests in Hutchison Essar for a total cash consideration of $11.1 billion.

India's Essar Group, HTIL's joint venture partner in Hutchison Essar, holds 33 percent of the equity in the joint venture, with some 22 percent of this held by an Essar group company registered abroad.

Indian government regulations allow a maximum of 74 percent foreign holding in an Indian telecom services company.

If one were to add HTIL's 67 percent interest in Hutchison Essar with the 22 percent held by an Essar entity abroad, it would appear that the total foreign equity is in excess of the 74 percent limit, but there are other Indian shareholders besides Essar also involved, said an informed source. Telecom Watchdog was not immediately available for comment.

HTIL spokeswoman Mickey Shiu said Thursday that Hutchison Essar was fully compliant with Indian rules on foreign direct investment. Shiu confirmed that there were other Indian shareholders besides Essar, but declined to give a breakdown of its 67 percent interest in Hutchison Essar.

The petition by Telecom Watchdog alleges that as a result of HTIL's arrangements with Indian shareholders of Hutchison Essar, the foreign shareholding in Hutchison Essar is in breach of the foreign direct investment (FDI) regulations in India. It alleges that HTIL provided loans to its Indian partners to help them acquire equity in Hutchison Essar.

HTIL shareholders vote Friday on the proposed sale of HTIL's interest in Hutchison Essar to Vodafone.

The Indian government's Foreign Investment Promotion Board (FIPB) is meanwhile looking into all aspects of the transaction between HTIL and Vodafone. The scrutiny by the FIPB follows Vodafone's request for government approval for the proposed sale of HTIL's interest in Hutchison Essar to a Vodafone subsidiary, and is not an investigation into any irregularities in foreign holding in the company, Shiu said. The FIPB had approved HTIL's reorganization of its holding and the shareholding pattern in Hutchison Essar last year as way back as July last year, she added.

Negotiations are still going on between the Essar Group and Vodafone on a shareholder agreement. The Essar Group wants joint control of strategic decisions at Hutchison Essar.