Sunil Mittal's adventurous second round run with South Africa's MTN to outsmart Reliance Communications may still have to face some regulatory hurdles, say analysts familiar with the situation.

 The Reliance-MTN merger proposal last year went down the drain due to dispute on ownership of the combined entity and political sensitivities in each country. It is also said that the deal flopped as the US regulators were against it because of MTN's growing presence in Iran, and MTN needed money from US banks to complete the deal.

A merger of MTN, with a current market cap of $27 billion, and Bharti, valued at $34 billion, would create one of the top 10 global telecom players. (See: Bharti, MTN revive merger talks).

According to analysts, the $23-billion cash-and-share deal will need the approval of India's foreign investment promotion board (FIPB), which still lacks a clear policy on share swaps. The deal also needs green signal from the Reserve Bank of India (RBI).

The current foreign direct investment (FDI) policy allows cashless issue of shares through instruments such as warrants after FIPB approval.

The Press Notes 2 and 3 issued on 13 February 2009 outline the revised FDI guidelines announced by the cabinet committee on economic affairs. It simplified the method for calculating FDI and broadly stated that as long as Indian promoters hold a majority stake (that is, more than 51 per cent) in an operating-cum-investment company, they can bring in investments up to 49.9 per cent through FDI. (See: New FDI norms baffle analysts).

 In the telecommunications sector, including basic, cellular, and other value added telecom services, equity has been capped at 49 per cent through the automatic route via FDI, FII, NRI, FCCBs, ADRs, GDRs, and convertible preference shares, and up to 74 per cent through the FIPB route subject to guidelines. (See: Government details revised FDI regulations).

These press notes raised certain issues regarding the clarity of their content. In response to some of these, Press Note 4 was issued on 26 February; however, confusion is still present and the guidelines leave much to be desired.

Before the February press notes were issued, all FDI was calculated on the basis of beneficial interest and this position is likely to be restored, one expert said.

The proposed deal between Bharti Airtel and MTN will be the first telecom company that will test the new FDI norms. Deals in other sectors awaiting clearance are UTV Software Communications' plan to enhance its holding to 49 per cent in UTVi, and Kishore Biyani-owned Pantaloons India's idea to bring in FDI by creating multi-layer holding-cum operational companies.

Since the effective foreign ownership in Bharti Airtel (including the proportionate foreign ownership through the parent company), is set to cross the threshold limit of 74 per cent after this transaction, it is expected to approach the government for approval under the new norms.

However, some say that under Press Notes 2, 3 and 4, the foreign holding in the parent company - in this case Bharti Telecom, which owns 45 per cent in Bharti Airtel - will not be counted, since the Indian promoters own more than 50 per cent in it.

Therefore, Bharti Telecom's entire stake of 45.3 per cent (pre-transaction) in Bharti Airtel and 28.78 per cent (post transaction) will be considered Indian holding under the new norms.

In Bharti Telecom, the foreign holding is a little above 40 per cent. Singtel, currently the largest foreign investor in Bharti Airtel, with 30.4 per cent, owns 28 per cent of Bharti Telecom (as a result, it has a 12.86 per cent pro-rata ownership in Bharti Airtel) and another 15.58 per cent directly in Bharti Airtel. In addition, Vodafone also owns nearly 10 per cent in Bharti Telecom, which gives the European service provider a pro-rata control of 4.4 per cent in Bharti Airtel.

If the Bharti Airtel-MTN deal sails through, Sunil Mittal's effective ownership in the combined entity is expected to come down to below 18 per cent. Mittal will then become the third-largest shareholder, after MTN and Singtel, which could see its shareholding being cut to around 20 per cent.

The deadline for the deal has been fixed at 31 July.