UPDATE 2-UAE's Etisalat sues Indian JV partners for fraud

Thu Feb 23, 2012 9:38am EST

* Etisalat accuses Indian partner of fraud

* Indian partner refutes claims

* Etisalat says faces significant financial losses

* UAE telco wrote off $827 mln in India venture (Recasts, adds DB Group quote, analyst comment)

By Matt Smith

DUBAI, FEB 23 - UAE telecoms operator Etisalat on Thursday said it had launched legal proceedings against its Indian joint venture partners alleging fraud in an attempt to recover some of the losses arising from its scandal-hit investment in the country.

Etisalat said the action being prepared was against Vinod Goenka and Shahid Balwa, top executives at its India partner DB Group, and against Majestic Infracon Private Limited, a DB Group company, for fraud and misrepresentation.

Majestic denied the charges. "No notice of demand or suit papers have been received by us," the company said in an emailed statement. "There is no wrongdoing by us or our directors."

On Wednesday, Etisalat said it would shut down the operations of the venture, Etisalat DB (EDB), in which it owns a 45 percent stake, after the unit's 15 licences were among 122 India's Supreme Court ordered to be scrapped.

Etisalat paid $900 million in 2008 for its stake in Swan Telecom, later renamed Etisalat DB, with Majestic owning 45.7 percent.

"Etisalat's case is that it was induced into its investment in the company without any disclosure of the matters that are now alleged to have occurred in connection with the obtaining of 2G licences by EDB," Etisalat said in an emailed statement.

"Those events occurred a year before Etisalat's investment. Etisalat is facing very significant financial losses on its investment in EDB despite its having no involvement in the 2G license application or award process and being entirely innocent of any allegations relating to it."

On Feb. 9, the UAE firm wrote off $827 million relating to EDB.

The unit has licences for 15 of India's 22 telecom zones and its 1.7 million subscribers as of December ranked it 14th in a 15-operator market.

"Etisalat had problems from day one in India - it could only do a soft launch of its services and its market share was non-existent," said a Gulf-based telecoms analyst who asked not to be identified. "Whether Etisalat wins the case will depend on what sort of warranties were built into the contracts between the parties. It is likely to take years to resolve."

"There were complaints about the 2G auction before Etisalat bought into Swan, so Etisalat will have difficulty saying it had no idea there could be problems with the licences."

EDB was slow to roll out services, for which it was rebuked last year by the Indian government, while in January network host Reliance Communications said it had cut off the operator over non-payment of fees for using its towers.

"Etisalat will still be liable for money owed to Reliance," added the analyst.

Relations between Etisalat and its joint venture partner have been tense for some time.

Last year, Majestic filed a case against Etisalat with India's company law board, alleging mismanagement of their joint venture, which was under the management control of the UAE firm.

Separately, DB Realty, a listed property company of the DB Group, said in a statement the shutdown of Etisalat DB would have no bearing on its financials because this was an investment by its founders in their personal capacity.

DB Realty's shares ended 4.7 percent lower in Mumbai on Thursday. (Additional reporting by Devidutta Tripathy; in New Delhi; Editing by Dinesh Nair and Andrew Callus)

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