The Department of Telecommunications (DoT) has expressed concerns regarding Russian conglomerate Sistema JSFC’s proposal to raise stake in its Indian unit Sistema Shyam Teleservices Limited (SSTL) beyond 74 per cent. According to the department, Sistema  JSFC’s plan will need an approval from the Reserve Bank of India (RBI) as the proposed methodology of raising stake in its Indian unit has been structured in line with an overseas debt deal.

According to DoT, the instruments of investments that Sistema wants to use - redeemable preference shares and optionally convertible redeemable preference shares do not qualify as foreign direct investment (FDI) as per the current policy of the government. The department has stated that redeemable preference shares are classified as external commercial borrowing, a debt instrument for which approvals can by granted only by RBI.

Earlier, Sistema JSFC had approached the Foreign Investment Promotion Board to raise its stake in SSTL from 73.95 to 100 per cent. Sistema JSFC, together with the Russian federation, holds about 74 per cent stake in the Indian subsidiary, and the proposal, once approved, will pave the way for the Russia-based player to buy out its Indian partner Shyam Telecom, which holds the remaining stake. Meanwhile, SSTL had simultaneously sought raising stake in the internet arm of the company Shyam Internet Services Limited (SISL).

In its proposal, Sistema JSFC has claimed that the shareholding structure of SISL is a mirror image of SSTL. Therefore, any change in share holding pattern in SISL would result in a similar change in the share holding pattern of SSTL. Sistema JSFC has sought to change the term of redeemable preference shares, issued or being issued, to optionally convertible redeemable preference shares, which will be convertible into equity shares within 10 years from the date of issue.

ISPL has claimed that, upon conversion, FDI in SISL will cross the 74 per cent mark from 73.95 per cent currently. Similarly, FDI in SSTL will also exceed 74 per cent. However, according to DoT, both instruments - redeemable preference shares and optionally convertible instruments would be considered as debt, and would need to conform to guidelines on external commercial borrowings and limits.