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India's telecom sector opens up - sort
of
By Indrajit Basu
KOLKATA -
India's government is finally moving towards privatizing
the telecommunications system, a contentious issue that
has frustrated operators for two years and foreign
investors for much longer. Nonetheless, the government
is still unwilling to hand over complete control to
foreigners, insisting that management control of all
operators remain with the Indian partner, despite
allowing foreign investment up to 74 percent.
"The FDI limit will be 49 percent, but foreign
institutional investor [FII] investment will not be a
part of this limit. So the total foreign investment cap
will be 74 percent," Communications and IT Minister Arun
Shourie said after a meeting of ministers, which was
chaired by Finance Minister Jaswant Singh.
Management control of all telecom operators
should remain with the Indian partner, according to the
recommendations. "While the FDI-FII limit can go up,
management control will have to remain in Indian hands,"
Shourie said. This means that the domestic partner in a
telecom company can hold management control with a mere
26 percent.
However, analysts say, that does not
necessarily mean that foreign investors won't hold
beneficial or operational control. Management control in
this instance is interpreted to mean higher board
representation, which doesn't always result in
operational control.
"Normally when such
[foreign investment] agreements are spelt out, there are
some fundamental control factors or check mechanisms
that are implemented," says Kobita Desai, telecom
analyst for Gartner India Research Advisory Services.
"So, while directly they may not get management control,
the conditions within the agreement and check mechanism
ensure that a foreign investor has sufficient control on
operations and finance."
Although foreign
ownership is capped at 49 percent, beneficial ownership
depends on the number of tiers of holding companies,
which can go above 90 percent. Such beneficial foreign
ownership does not trigger a breach in the 49 percent
FDI sectoral cap since the equity routed through these
holding companies is structured as Indian investment
vehicles where the 51 shareholding pattern in maintained
at every layer.
The two foreign investors that
ensure operational control in their venture this way are
Singapore Telecom, which has invested more than US$400
million in India's largest cellular operator Bharti
Cellular, and Hutchison Whampoa of Hong Kong, which has
invested through its Indian subsidiary Hutchison India,
which now controls the next largest cellular network in
the country.
The committee also recommended that
mergers among phone operators be allowed provided the
number of operators in each region within which players
are allowed to operate does not fall below three.
Debate over whether 74 percent FDI should be
allowed in companies running telephone networks started
around early 2001 when the country's security agencies
warned that allowing foreign investors to hold a
majority of Indian telecom companies could lead to
foreign control over communications - a situation that
throws up the threat of espionage and sabotage.
Currently, there is a 49 percent FDI cap on foreign
capital –including FII investor limit of 25 percent, in
areas like fixed-line, cellular phones, very small
aperture terminals (V-Sat), national long distance,
international telephony and global mobile personal
communications services.
According to the
industry lobby Confederation of Indian Industry (CII),
this recommendation comes after the communications
ministry and privately-owned telecom operators convinced
the home ministry, which is in charge of the country's
security, that increasing the cap on FDI in telecoms to
74 percent would not compromise the security shield.
Undoubtedly, the recommendation has come as a
relief for the industry, particularly the
privately-owned telecom companies, which include foreign
operators like Hutchison Whampoa, Singapore Telecom and
AT&T, who, along with their Indian partners, have
been waiting anxiously for this relaxation for years.
"Now," say analysts, "these telecom operators would be
able to raise funds in the international markets through
the equity route. Some of the non-serious players would
also be able to exit easily."
Industry observers
say that Bharti Cellular and Hutchison India – the
Hutchison Whampoa subsidiary that operates cellular
networks in India along with Indian affiliates, may
benefit the most because of their ability to grow mainly
through mergers and acquisitions, and by raising funds
from FIIs. Bharti already operates in 15
government-designated regions of operations (called
telecom circles) and has more than 4 million
subscribers, while Hutch operates in 10 circles with
more than 3 million subscribers.
But even as the
recommendation may be beneficial to the existing
players, perhaps the biggest beneficiary will be those
that haven't come in yet. According to ISI Emerging
Markets, a Euromoney Institutional Investor company,
despite the fact that India has the third largest
telecommunications network among the emerging economies
and is among the world's top 10 networks, telephone
penetration, in both basic and cellular services, is
among of the lowest in the Asian region.
"India
has hardly been able to make the level of investments it
needs to reach the teledensity it set out in its latest
telecom policy [crafted in 1999]," says Vivek Mehra,
executive director of global consultant
PricewaterhouseCoopers.
Indeed, India's
investment requirement in its telecom sector is huge.
Several studies have indicated that an FDI flow of
approximately $10 billion a year is required to achieve
the desired 8 percent annual GDP growth in India. In
fact, according to a special committee on FDI set up by
the government, the investment required is a huge $37
billion if India is to reach anywhere close to the
targets set out in the National Telecom Policy of 1999
of 7 percent teledensity by 2005 (from the current 3.5
percent).
Annual FDIs flow into India is a mere
$2 billion, against $45 billion in China, for instance,
which is way ahead of India in terms of its telecom
expansion.
"More FDI in such a scenario is,
therefore, imperative given the lack of domestic sources
for such huge investments," says Mehra, adding, "The
telecom industry is facing tough times and foreign
investors will invest large amounts in India only if
they have a majority stake."
Moreover, ISI
Emerging Markets says "sweeping reforms over the last
decade have facilitated the entry of private investment,
both domestic and foreign, in India's telecom industry
and rapid growth in demand combined with increasing
liberalization would provide great rewards to players in
India."
Yet, the group of Indian ministers'
recommendation has failed to silence skeptics. "While
this is good news," says telecoms industry analyst G
Rambabu, "even many in the industry who have long been
seeking a hike in the limit agree that such a step may
not open the floodgates. After all, this recommendation,
even if adopted without a whimper, is not a sufficient
condition for growth of the telecom sector, which
continues to be bogged down by other regulatory and
policy uncertainties."
That is because the FDI
cap of 49 percent is just one of the issues plaguing the
sector. Local players are also busy fighting the
government with demands for a unified licensing policy –
one license for offering all types of telecom services;
higher spectrum for cellular services; and other issues
like license fees and technology.
"The real
roadblock to fund inflow is not so much the 49 percent
ceiling but bureaucracy and corruption within the
government. It is these that are putting on the brakes,"
said Shashi Ullal, who chairs the convergence committee
of the industry lobby Associated Chamber of Commerce and
Industries.
According to Ullal, 100 percent FDI
already existed in sectors like power, but that did not
bring in the money, despite several steps like sector
reforms, placing power projects on the fast track, etc.
Moreover, "India became an attractive destination for
many foreign investors in telecoms in the mid-90s and
major global operators such as US West, BT, France
Telecom, First Pacific Canada, Telstra, etc rushed in,
only to beat back hastily as the wrangle over licensing
terms intensified," he adds.
Nevertheless, the
official statement of the Cellular Operators Association
of India said, "The recommendation for raising the FDI
ceiling is a step for significantly increasing foreign
investment inflows into the telecom sector and would go
a long way toward funding the expansion plans as well as
setting up of new infrastructure by telecom operators."
Already, analysts like Prashant Singhal, also a
director with Ernst & Young India, have started
predicting that Bell Canada, Telecom Italia and France
Telecom are coming in, soon.
Country-wise FDI
inflows into
the Indian telecom sector
(August 1991 to May 2003; US$ million, approx)
|
Country
source |
Amount |
| Australia |
15 |
| Canada |
9 |
| Finland |
8 |
| France |
22 |
| Hong Kong |
16 |
| Israel |
17 |
| Japan |
12 |
| Luxembourg |
2 |
| Malaysia |
13 |
| Mauritius |
1468 |
| Netherlands |
65 |
| Singapore |
1.15 |
| South Korea |
4.2 |
| Sweden |
33 |
| Thailand |
47 |
| United Kingdom |
189 |
| United States |
104 | Source: www.investindiatelecom.com
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