Sterlite Industries (India) Limited - Sterlite Industries India Ltd.

Options to Increase Interests in HZL and BALCO
Call Options Over Shares in HZL
On April 11, 2002, we acquired a 26.0% interest in HZL from the Government of India through our subsidiary SOVL. At the time of the
acquisition, we owned 80.0% of SOVL and STL owned the remaining 20.0%. In February 2003, STL transferred its 20.0% interest in SOVL to
us and SOVL became our wholly-owned subsidiary. SOVL subsequently acquired a further 20.0% interest in HZL through an open market
offer. The total cash consideration paid by SOVL for the acquisition of the 46.0% interest in HZL was Rs. 7,776 million.
Upon SOVL’s acquisition of the 26.0% interest in HZL, the Government of India and SOVL entered into a shareholders’ agreement to
regulate, among other things, the management of HZL and dealings in HZL’s shares. The shareholders’ agreement provides that as long as
SOVL holds at least 26.0% of the share capital of HZL, SOVL is entitled to appoint one more director to the board of HZL than the
Government of India and is entitled to appoint the managing director. In addition, as long as the shareholders’ agreement remains in force, the
Government of India has the right to appoint at least one director to the board of HZL.
There are also various other matters reserved for approval by both the Government of India and SOVL, including amendments to HZL’s
Articles of Association, the commencement of a new business, non-pre-emptive issues of shares or convertible debentures, a discounted rights
issue and the granting of loans or provision of guarantees or security to other companies under the same management as HZL.
Under the shareholders’ agreement, the Government of India also granted SOVL two call options to acquire all the shares in HZL held by
the Government of India at the time of exercise. SOVL exercised the first call option on August 29, 2003 and acquired an additional 18.9% of
HZL’s issued share capital at a cost of Rs. 3,239 million on November 12, 2003, taking our interest in HZL to 64.9%.
The shareholders’ agreement provides that prior to selling shares in HZL to a third party, either party must first issue a sale notice offering
those shares to the other party at the price it intends to sell them to the third party. However, a transfer of shares, representing not more than
5.0% of the equity share capital of HZL, by the Government of India to the employees of HZL is not subject to such right of first refusal by
SOVL. The Government of India has transferred shares representing 1.5% of HZL’s share capital to the employees of HZL. The shareholders’
agreement also provides that if the Government of India proposes to make a sale of its shares in HZL by a public offer prior to the exercise of
SOVL’s second call option, then SOVL shall have no right of first refusal.
The second call option provides SOVL a right to acquire the Government of India’s remaining 29.5% shareholding in HZL, subject to the
right of the Government of India to transfer up to 3.5% of the issued share capital of HZL to employees of HZL, in which case the number of
shares that SOVL may purchase under the second call option will be reduced accordingly. This call option became exercisable on April 11,
2007 and remains exercisable thereafter so long as the Government of India has not sold its remaining interest pursuant to a public offer of its
shares. Under the shareholders’ agreement, upon the issuance of a notice of exercise of the second call option by us to the Government of India,
we shall be under an obligation to complete the purchase of the shares, if any, then held by the Government of India, within a period of 60 days
from the date of such notice. The exercise price for the second call option will be equal to the fair market value of the shares as determined by
an independent appraiser. In determining the fair market value of the shares, the independent appraiser may take into consideration a number of
factors including, but not limited to, discounted cash flows, valuation multiples of comparable transactions, trading multiples of comparable
companies, SEBI guidelines and principles of valuation, the minority status of the shares, the contractual rights of the shares and the current
market price of the shares. Based solely on the market price of HZL’s shares on the NSE on July 3, 2009 of Rs. 602.75 ($11.85) per share, and
not including the other factors that the independent appraiser may consider, one possible estimation of the exercise price to acquire all of the
Government of India’s 124,795,059 shares of HZL would be Rs. 112,830 million ($2,218.0 million). If the Government of India sells its
remaining ownership interest in HZL through a public offer, we may look into alternative means of increasing our ownership interest in HZL.
It has been reported in the media that the Government of India is considering asserting a breach of a covenant by our subsidiary SOVL and
may seek to exercise a put or call right with respect to shares of HZL. See “Item 3. Key Information — D. Risk Factors — Risks Relating to
Our Business — The Government of India may allege a breach of a covenant by our subsidiary SOVL and seek to exercise a put or call right
with respect to shares of HZL, which may result in substantial litigation and serious financial harm to our business, results of operations,
financial condition and prospects.” If the Government of India makes such an assertion, we intend to contest it and believe we have meritorious
defenses.
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