Several international telecom operators have reportedly asked the government to reconsider three clauses in the foreign direct investment (FDI) norms: the restrictions on transfer of accounting, international transit routing of domestic traffic, and remote access for maintenance/repairs from India. Analysts discuss the impact and relevance of the move for Indian telecom…
There is a demand that the government reconsider three clauses in the FDI norms.Do you think these clauses will deter telecom investment in the country. If so, how?
Vishal Malhotra: A number of global players are today keen to enter the Indian telecom space. Though the hike in the foreign investment limit and the reduction in licence fee and revenue share have spurred them to make investments in India, the above conditions have been a major deterrent. These conditions bar international telecom operators from using their global shared service centres for undertaking these activities, necessitating establishment of additional infrastructure and incurring additional costs for undertaking these activities in India. Accordingly, the funds that could have been utilised for establishing new networks will be spent on establishing finance and accounting functions in the country and incurring costs on specialists from overseas for repair and maintenance of network equipment. However, with multinational telecom equipment vendors proposing to establish network operating centres in India, some of these hardships may be addressed in the near future.
Rajat Sharma: Telecom infrastructure is the basis of a progressive nation. Even if the infrastructure lies in the hands of private operators, it is still the government’s responsibility to protect national security and the larger interest of the public, and ensure adequate competition in the marketplace. The restrictions have been put by the government to offset the security concerns envisaged while increasing the FDI limit. Hence, while the FDI limit has increased, the three clauses are here to stay for this reason. Also, these clauses are helping India build up expertise. For example, remote access is allowed only from a location within India. This means that international players will put up capabilities within their Indian operations. The clauses will really not deter investment in the country considering that the Indian market is very lucrative. These clauses are more operations based rather than strategic. Whether these clauses remain or not, the players will continue to get the kind of return on their capital that this market has to offer.
Biju Thomas: After considerable debate for two years, the Government of India has enhanced the FDI limit in the telecom sector from 49 per cent to 74 per cent in respect of services such as basic, cellular and unified access. This move has been generally welcomed as foreign investors were earlier unwilling to bet on the country without having a majority control of the Indian entity. It is being argued that notwithstanding the liberalisation, the restrictions in the FDI policy may deter telecom investment in the country. It may, however, be noted that such “restrictions” should not pose any significant hindrance to the operations of the service providers and to their ability to reap profits. Further, exceptions have been provided in the FDI policy with respect to some of the restrictions mentioned above, like remote access allowed in case of catastrophic failure and provision for providing accounting information for statutory disclosures. In view of the same, these restrictions should not ultimately deter fresh investments in the sector. Moreover, it is pertinent to note that the benefits under the liberalised regime are far more attractive than the minor irritants and the revised guidelines should not hamper the flow of FDI into the country. Industry experts expect investments worth $5 billion to flow into India in the next 12 to 18 months.
Moreover, it is encouraging to note that there has been a continued effort to ease regulatory constraints by the government and create conducive conditions for increased growth, investment and consolidation in the telecom sector. The regulatory trend of the last few years is in fact testimony to this and operators can only expect a gradual decrease in strict regulatory restrictions. On a separate note, if the government is able to find answers to some of the concerns of the telecom industry such as interconnection, ADC, spectrum allocation and utilisation, 3G policy, and a level playing field to the satisfaction of most service providers, the same would promote competition in the market and more players would be willing to invest in India irrespective of the restrictions mentioned.
Mahesh Uppal: International corporate networks transcend national borders. Their operations are not structured on a country-by-country basis. Indeed, it is this ability to optimise these networks on a much larger “footprint” that gives them their advantages in serving multinational customers more effectively and flexibly. Telecom operators that manage their international network from overseas would be disadvantaged by this provision. They would find it difficult to serve their existing international customers who may, for instance, want a consolidated picture of operational parameters such as flow of traffic between their offices, or other data that can be processed to improve efficiencies or profitability. A provision like this can particularly hurt BPO and other IT services, where many multinational corporations are active. This can only hurt investor sentiment.
What legitimate restrictions can be imposed on international players in this market, given the security concerns?
Vishal Malhotra: Instead of imposing restrictions, it may be adequate if the government and/or intelligence agencies have complete access to monitor traffic as well as books of accounts of the operators. This should be sufficient to take security aspects into consideration while allowing international players to enter the domestic market.
Rajat Sharma: The clauses listed by the Department of Telecommunications are legitimate restrictions. If followed strictly, these clauses will take care of security-related concerns.
Biju Thomas: The events during the last decade bear testimony to the terror threat the country faces every day. In light of this grim scenario, when the Intelligence Bureau and the Directorate of Revenue Intelligence were asked to respond to the issue of increasing the FDI limit in telecom, they emphasised that management control should remain in Indian hands on the ground that communication networks are a vital national infrastructure with a critical role in the security of the nation. It is obvious that the government has sought to impose restrictions on the present FDI norms. Reasonable restrictions that could be imposed on international players include restrictions relating to the control of the Indian entity, flow and access of critical communication information outside the country, and control of the communication infrastructure in the country.
Mahesh Uppal: This is obviously a question for security experts since it is unlikely that the data on which analysis can be based is hardly ever publicly available. Having said this, it would be reasonable to question restrictions, such as the ones being proposed, if they are not being imposed by a majority of countries including China, which is similar in size, and Israel, which faces comparable levels of terrorism and threats to its security.
What is the international practice with respect to limitations on foreign investors in comparable markets worldwide?
Vishal Malhotra: To my knowledge, the above restrictions are unique to India and do not exist in comparable markets which are vying for foreign investment.
Rajat Sharma: International markets have a mixed practice. While foreign ownership restrictions are still prevalent in countries such as the US, Canada and France, there are no restrictions in countries like the UK and Germany. However, most of the 29 OECD (Organization of Economic Cooperation and Development) countries have FDI restrictions in the telecom sector.
Biju Thomas: There are a number of countries that have restrictions concerning foreign investments in the telecom sector. Many of the developing countries and some of the developed countries in the world have restrictions on FDI. Some countries like China, Korea, Malaysia and Mexico (where the developments in the telecom sector are similar to India) have similar or more stringent restrictions on FDI. It is pertinent to mention that China, a country that is considered to be the immediate rival of India in terms of investments, will allow FDI of 49 per cent in the telecom sector only from 2007 onwards. Certain countries have a higher FDI limit for telecom investment, with several governmental agencies examining investment proposals and potential investors have to go through stringent security/legal measures for approval. For example, in the US, the Committee on Foreign Investments in US (CFIUS), an inter-governmental agency consisting of the FCC, Homeland Security, CIA, Department of Justice, etc., examines all proposals for investment in the telecom sector.
Mahesh Uppal: As discussed above, most countries do not have similar restrictions. There is hardly any country comparable to India in size, economic or security concerns, which treats this subject like India has.
