Sources involved in negotiations said Essar Commvision's (ECL) equity capital of Rs 60 crore is being expanded to allot shares to HFCL, since Essar cannot sell its existing 90 per cent stake due to the five-year lock-in condition which is valid till the year 2002.

HFCL chairman Mahendra Nahata, when contacted, confirmed that negotiations were on. "The details are still being worked out," he said. Sources added that the exact percentage of the equity holding to be acquired would be finalised in the next few weeks.

Sources said that HFCL will become the sole turnkey supplier of equipment to the project. The turnkey contracts are expected to be around Rs 750 crore over the next five years for the 500,000 line project using a mix of wireline and wireless in local loop (WLL) equipment.

The deal marks HFCL's return to the basic telecom service industry. The company shot to fame when it bid a whopping Rs 60,000 crore for basic licence when the telecom services sector was opened to the private sector. The company, however, did not execute the projects and has been involved in legal wrangles with the department of telecom over various issues related to the award of the licences.

The company's move to return to the service sector has its roots in the strong manufacturing and R&D base which it has for a variety of telecom equipment. HFCL now hopes to bag major hardware orders from service providers in which it acquires equity stakes.

The current project cost estimate of Rs 2000 crore for the Punjab project is being revised downwards to Rs 1200 crore, in light of the downward trend in equipment prices and a fresh rollout plan that has been prepared by ECL.HFCL is expected to provide technical in puts and turnkey project implementation skills that have already been availed by several other private sector networks. HFCL plans to offer a state-of-art basic telephone network, alongwith a number of value added and intelligent network services in the state. ECL also plans to offer high quality and cost effective Internet services throughout Punjab. The company plans to deploy most modern fibre optic and WLL solutions in order to cover the entire state.

Essar group currently holds 90 per cent stake in ECL while remaining 10 per cent is held by Bell Atlantic and GTE of the US. The company has so far paid Rs 200 crore to the government as licence fee.

ECL was awarded the Punjab licence in 1997 and had hoped to start operations by now. However, problems with acheiving financial closure in the deal caused delays. ECL also ran into trouble due to the astronomical licence fee of Rs 14,000 crore that it had promised to the government.

Sources said that the Punjab licence offered immense potential on account of it having the highest per capita consumption in the country.