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Foreign cash invited to India's telecom party
By Indrajit Basu
KOLKATA - Finally delivering on its promise made in the annual budget last
year, India's Congress-led United Progressive Alliance government has managed
to overcome significant left resistance to allow foreign direct investment
(FDI) of up to 74% in India's telecom companies. The cabinet approval to raise
this ceiling from the present 49% came on Wednesday, putting an end to the
two-year long wait of foreign investors who had almost given up hope of the FDI
cap being raised any higher.
The hike in the ceiling finally came with just a whimper from the left parties,
on which the Congress government is heavily dependent in parliament and which
vehemently opposed a higher cap. The government, apparently, managed to placate
them with a massive hike in employees' pension fund interest rate (to 9.5%), a
lollipop big enough to make 40 million Indians happy.
However, while clearing the proposal of hiking the FDI ceiling, the government
has included several stiff riders that, according to Finance Minister P
Chidambaram, "carefully address all security concerns of the country and the
left parties". Concerns that opening the telecom sector to foreigners would
potentially weaken the country's security were a big force stalling the
clearance of the now-on, now-off hike for two years. One of main complaints of
the left against the proposed hike was this security issue as well.
While clearing the hike, the government, however, inserted a few riders aimed
at ensuring that Indian telecom companies retain their "Indian entity" despite
high foreign stakes. The riders include a clause that the top management,
including the chairman, chief executive, chief technical officer and chief
financial officer of telecom companies should be resident Indians. "Besides,
the licensor - India's Department of Telecom shall be empowered to notify any
other key positions that it feels should be held by a resident Indian citizen,"
Chidambaram said. Resident Indians would need to hold at least 26% in any
telecom company at all times and to ensure that at least one Indian investor
retains reasonable shareholding, the riders stipulate that such a resident
investor shall hold at least 10% equity.
The security concerns that the riders address - and somewhat placates the left,
which was consulted by the government before it went ahead with its decision -
come in the form of restrictions on telecom operators to share information with
outside agencies about their subscribers and network design. Operators will
also have to provide traceable identity of its subscribers. Calls made within
India cannot be routed through networks in other countries. Similarly, no
foreign company can undertake the maintenance and repair of telecom networks in
the country.
"We welcome this decision," said Rajan Mittal, joint managing director of
Bharti Telecom in which Singapore Telecom owns 48% stake. And as Mittal says,
"It has been a long-pending demand from the industry and the riders are hardly
a dampener." But this big ticket decision failed to jazz up telecom stocks on
Wednesday, with prices of few telecom shares showing any gains. And that's
because the new policy simply does away with the opaqueness of the older
policy. "FDI, as defined, will be subject to the laws of India and not the laws
of the country from where the investor comes ... This will bring transparency
to the rather opaque policy," Chidambaram said.
Although the earlier policy capped FDI at 49%, at least two foreign investors
had found ways of dodging the cap by investing about 73% through holding
companies. Therefore to simplify the equity structure, the new policy states
that the 74% cap will include the shares held by foreign institutional
investors and non-resident Indians, depository receipts, foreign currency
convertible bonds and convertible preference shares. In addition, the foreign
investment in holding companies will also be taken into account while
calculating the foreign investment limit. Companies will be required to
disclose the holding pattern every six months and also certify that their
foreign investment is within the 74% cap.
According to Kobita Desai, principal telecom analyst of Gartner India, "The new
policy is an attempt to find the right regulatory and commercial drivers that
will help to further the growth that we are observing in the Indian telecom
industry." Indeed, much has been said about the booming Indian telecom sector.
The country is the second-largest telecom market in the world after China and
has emerged as one of the fastest growing mobile telephony markets that adds
over 2 million mobile phones each month.
Still, with just about eight telephone connections for every 100 Indians, few,
despite 15 years of reforms, have access to a telephone line. This means that
"the requirement of funds to take tele-density to the targeted 300 million
telephone connections by 2007 is huge", said Mittal. The industry estimates
that the investment needed to achieve this is in the range of $25 billion and
admits that kind of money is not available within the country.
Clearly, domestic consolidation would be the first consequence of the new
policy. "Telecom companies would now be able to access low-cost capital for
their expansion plans. A higher FDI ceiling would also spur merger and
acquisition activities in the sector, particularly in cellular space," said
analysts at Refco Sify Securities. Refco added that at least $2 billion of
foreign investment could come in immediately and this hike in FDI is expected
to help the three private-sector telecom players - Bharti, Idea and Hutch - the
most.
Other major players like Reliance Infocomm, Tata Teleservices, BSNL and MTNL
(the latter two are state-owned telecom giants) may not benefit immediately
since they have already scaled up operations rapidly and funding has not been a
problem despite the earlier cap. "Nevertheless, the prospect of getting a
majority stake may lure more global telecom players to India," said Firdose
Vandrevala, chairman of Tata Teleservice. "It also opens up many more
opportunities for all operators and I think it will not only accelerate growth
in terms of subscribers but also the width of applications and services that
Indians are getting."
Industry sources say that a number of Asian carriers that are waiting in the
sidelines could now move in. Last year, Asian companies emerged as front
runners on the domestic telecom deal street when the Singapore Technologies
Telemedia-Telekom Malaysia combine picked up a 47.7% stake in India's Idea
Cellular. "Idea can now get in additional funds, which will give it the
much-needed money to increase their presence in the country," said Anand Tandon
of Gryffon Investment Consultant. "In fact, other Asian carriers could be the
first to come following the relaxation."
Nonetheless, a section of industry pundits still feel that a hike in the FDI
limit is not sufficient for foreign investors to rush into India's telecom
sector. They say that continuing lopsided policymaking on areas such as access
deficit charge (where private players have to pay fees to state-owned BSNL and
MTNL for accessing their monopoly network), prolonged wait for spectrum (the
required frequency range, the lack if which is hampering the quality of mobile
voice calls) and high license/regulatory fees (through which the government
demands its pound of flesh from the "lucrative telecom industry") could
possibly act as dampeners. "I do not think that hiking the cap is a big deal,"
says T V Ramachandran, director general of the Cellular Operators' Association
of India. "There may be a marginal impact at best."
Indrajit Basu is a Kolkata-based equity-analyst-turned-journalist with
more than 12 years of experience in business/finance and technology journalism.
Besides writing for Asia Times Online, he also writes for US-based
publications, as well as IT companies.
(Copyright 2005 Asia Times Online Ltd. All rights reserved. Please contact us
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