In a big move in 2005, the government raised the FDI limit for telecom. Our coverage from 2005


FEBRUARY 2005: The long-awaited moment of jubilation finally came. By responding to the industry’s demand for foreign investment in telecom companies to be raised from 49 per cent to 74 per cent, the government triggered a wave of euphoria in the industry while plunging the communists, who had abhorred such a move, into black depression.

Now badly needed investment in the world’s fastest growing telecom market is expected soon. The mobile industry in particular, which employs both GSM and CDMA technologies, is delighted. The industry as a whole hopes to increase the total number of fixed and mobile phone connections in India to more than 200 million by 2007 from the current figure of about 95 million.

With the demand for funds pegged by the telecom ministry at Rs 1 trillion to Rs 1.5 trillion ($23-$34 billion) such resources would simply not have been available within the country. Experts believe that even the market value of the top telecom firms, such as Bharti Tele Ventures, is only $9.4 billion. Therefore, as Communications Minister Dayanidhi Maran pointed out, “part of this has to come as foreign direct investment”.

Supporters view the FDI hike as a prerequisite for industry growth. It will help Indian telecom companies to expand their operations and promote competition that will result in falling tariffs.

“It is a well-thought-out move by  the government that will fuel the growth of telecom in India. The telecom sector, especially the mobile services sector, is poised to grow dramatically over the next three-five years. In order to support and sustain this growth, additional investments will be needed not only in the networks, but also in the support system to cater to the large customer base,” says Vikram Mehmi, CEO, Idea Cellular.

However, as a conciliatory gesture to address the security concerns of the comunists, the government has added several riders. Maran said that foreign firms would need state approval to raise holdings beyond 49 per cent; the majority of board directors, the chief executive, the chief technology officer and the chief financial officer must be Indians; and the key Indian shareholder should not own less than 10 per cent.

More specifically, it means that the 74 per cent cap now relates to the composite foreign holding, including investments by foreign institutional investors, non-resident Indians/overseas corporate bodies, foreign currency convertible bonds, American depository receipts/global depository receipts, convertible preference shares, and proportionate foreign investment in Indian promoters/investment companies including their holding companies.

So, 74 per cent foreign investment can be made directly or indirectly in the operating company or through a holding company. However, the company will have to disclose the status of its foreign holdings and certify that the ceiling is within 74 per cent on a half-yearly basis. The remaining 26 per cent equity will be held by Indian citizens or an Indian company. A single Indian promoter will hold at least 10 per cent equity of the licensee company.

The FDI will be subject to the laws of India and not those of any other country. The new conditions will apply to new as well as existing licensees. To ensure monitoring of the network, the companies will not be allowed to transfer sensitive information relating to subscribers and accounts to destinations outside India.

In companies where foreign equity is in excess of the prescribed limit, they will have to divest the excess within seven years to be computed from the date the level of foreign equity exceeded 49 per cent. Any violation invites cancellation of the licence.

The new policy also gives the government sweeping powers by notification through a “golden share” to restrict any service in the telecom sector to a foreign holding of less than 74 per cent. It also insists on a security clearance to be worked out by the Ministry of External Affairs, the Intelligence Bureau, the Research and Analysis Wing (RAW), and the Department of Industrial Policy and Promotion.

However, even with these stringent safeguards in place, the left parties are predictably voicing their opposition to the move, threatening direct action against the government. They see the move as compromising the country’s security interests. To justify their criticism, they cite Intelligence Bureau reports saying that “as a security doctrine, communication is vital for the country and the control of telecom companies should remain in Indian hands”.

Further, they argue that lack of FDI does not restrict telecom growth. The examples they give are the Philippines, Thailand and China, which maintain similar restrictions on FDI but have telecom growth rates far in excess of India.

The communists believe that it would be equally effective to reform the current policy framework. Another concern is that the loopholes in the current policy framework –­ which allow foreign companies to cross the total 49 per cent mark (both direct and indirect holdings) –­ need to be addressed rather than do what the government has done and lift all such restrictions, rewarding the companies that have breached these limits.

These reservations aside, the industry is looking forward to a multiplier effect kicking in with the raising of the FDI ceiling to 74 per cent. The move is likely to benefit GSM carriers and players with substantial overseas holdings such as Bharti, Hutchison and Idea, in which Singapore Technologies Telemedia Pte and the international investment arm of Telekom Malaysia Bhd (TM) hold 47.7 per cent. Singapore Technologies and Telekom Malaysia welcomed the higher limit, saying their consortium “would evaluate the option to buy more Idea shares at the appropriate time”.

While larger telecom companies with a pan-Indian presence will undoubtedly benefit, the new FDI coming in will be particularly helpful for mid-sized firms as well. These firms, unlike giants such as Bharti and Reliance Infocomm, find it difficult to raise money at low interest rates to fund expansion.

“It is a positive development for carriers and the investment community is looking to take a longer-term view of the huge growth potential in the Indian telecom market,” says Kobita Desai, principal analyst at research firm Gartner.

The FDI hike is also expected to have a long-term effect on telecom scrips, with a number of new listings expected on the stock exchange. A national newspaper has reported that the FDI hike could also impact the sponsored ADR issue planned by Bharti to help Warburg Pincus, one of the early investors, to exit the company. Bharti had earlier mentioned that they were looking at an overseas listing. It is now possible that Bharti might opt for a fresh ADR issue where existing investors could offload part of their stakes.

Further, the higher limit may also help the possible divestment in public sector telecom companies such as BSNL and MTNL, either before or after a merger. Currently, the stock market is starved of investment options in telecom since the sector has only four listed entities: Bharti, MTNL, VSNL and Tata Teleservices (Maharashtra).

In the larger scenario that has just been opened up by the government’s decision, the telecom industry can expect a flurry of activity on the mergers and acquisitions front.

European, Korean and Japanese telecom majors are likely to enter India, drawn by the rapid growth of the telecom sector.

What will all this mean for the consumer? More foreign investment will undoubtedly benefit them as it will offer wider access to technologies and that, in turn, means more choice.