Loop Telecom to get showcause notice for violating norms

NEW DELHI: The telecom department will issue showcause notice to mobile company Loop Telecom, asking why its licences in 21 regions across the country not be cancelled for violating rules that govern the communication sector.

An internal probe by the department has revealed that the Essar Group held more than the 10% permissible stake in Loop Telecom, one of the companies that bagged pan-India mobile permits in 2008 under controversial circumstances.

Indian laws prohibit a single group, which already has more than 10% stake in one mobile operator, from owning more than 10% in another. Essar is a 33% shareholder in Vodafone Essar.

The department, in its draft showcause notice reviewed by ET, said, "Essar Group under a corporate veil and its complex web of companies is indirectly holding substantial equity in Loop Telecom as well as the Vodafone Essar Group of companies which had mobile permits for the 21 circles for which Loop had applied and obtained licences in violation of the licence agreement".

It also lists the different companies as well as the financial transactions between Essar Group and Loop Telecom to substantiate its findings.

A top telecoms department official confirmed that Loop Telecom would be issued a showcause notice, but said that the observations in the draft show cause may not necessarily reflect in the final one issued to the company.

"We confirm that we are in compliance with UAS Licence norms," the Loop Telecom spokesperson said.

India is divided into 22 telecom circles. Loop Telecom hold mobile permits in 21 circles and its subsidiary Loop Mobile operates in Mumbai.

Last week, the Enforcement Directorate had charged Loop Mobile for FEMA violations of 431 crore and said the company had failed to report 'receipt of funds from abroad and issuing of shares to foreign investors within stipulated time frame'. Loop Telecom too was involved in similar violations resulting in contraventions of Rs 184.28 crore, the agency had added.

The Essar Group said it was aware or received any such communication from the telecoms department and the company added that it was in compliance with UAS license norms. Its CEO Prashant Ruia had recently told ET that the Ruias were only a minority investor with a 1.5% stake in Loop Telecom and had no say in its running its businesses, nor had any intention of increasing their holding in the embattled mobile operator in the future.

He said, Loop was now 98.5% owned by the Dubai-based Khaitan group. Loop's main shareholders include Ruia's aunt Kiran Khaitan and her husband IP Khaitan. Kiran is sister of Essar group's founders Shashi and Ravi Ruia .

Investigating agencies have been specifically examining investments of 1,592 crore made by the Essar Group into Loop's controlling companies to find out whether this was used to bankroll its application for mobile permits in 2007.

The DoT in its draft showcause said the 1592-crore investment was outstanding as of May 19, 2009. "This means as of March 19 2009, Loop Telecom continues to be an Essar Group company and the directors on board of Loop Telecom represent the Essar Group," the draft notice said.

Its findings further add that two companies that held stake in Loop Telecom - Essar Teleholdings Ltd and Essar Investments Ltd - both belonged to the Essar Group and has been accepted as "associate companies".But during the earlier interaction with ET, Ruia said Essar and Khaitan group companies had a financial relationship that pre-dated Loop's application for permits.

He had said the Khaitan Group has invested around Rs 2,951 crore in Essar debt between October 2005 and July 2006, while Essar had invested Rs 1,592 crores in debt securities of Khaitan company Santa Trading between July 2005 and December 2006.

"Therefore, as of the date of the application (September 3, 2007), the net investment by the Khaitan Group in debt securities of the Essar Group was approximately Rs 1,358 crores. There was therefore no question of any net lending to Khaitan Group by Essar Group as has been alleged," Ruia had said. Loop came into being after Essar's 2005 acquisition of the erstwhile BPL Mobile, which saw three of the acquired firm's operations, merged with the then Hutchison Essar (now Vodafone Essar) and its Mumbai operations spun off into a separate company.