India received massive foreign investment in the energy, services, construction, telecommunications and real estate sectors during 2007-08, as high economic growth attracted multinationals to set up or expand operations. While the services sector witnessed the biggest spurt in foreign direct investment (FDI) inflows, from Rs 12.35 billion in 2003-04 to Rs 265.89 billion in 2007-08, the telecom sector saw FDI going up from Rs 5.32 billion to Rs 51.03 billion. On a cumulative basis (April 2000-April 2008), the telecom industry has been the third largest FDI recipient, accounting for 6.7 per cent of total inflows.
Key trends
Since the opening up of the telecom sector in 1991, FDI has increased significantly. The cumulative FDI inflow into the sector was about Rs 95.28 billion during the period August 1991 to June 2002. Following the introduction of the unified access service (UAS) licence regime, telecom companies saw tremendous growth in terms of subscriber additions as well as revenues, thereby leading to an upward valuation graph for most operators. A look at FDI trends in various telecom segments…
Mobile
The mobile sector has been a key area of growth, and has attracted a huge amount of foreign investment since the 1990s.
With the government increasing the FDI limit to 74 per cent, 2005 became a landmark year in Indian telecom history. During 2005-06, foreign investments worth Rs 27.76 billion came into the country, compared to Rs 5.7 billion in the previous year.
One of the first major investments following the announcement of the new liberalisation policy was that by Vodafone, which bought a 10 per cent stake in Bharti for Rs 67 billion. Soon after, other international telecom majors started queuing up to set up telecom bases in India. In December 2005, Maxis Communications paid $1.08 billion to buy 100 per cent stake in Aircel. With this acquisition, Maxis directly holds 65 per cent equity stake in Aircel.
In March 2006, Telekom Malaysia (TM) acquired a 49 per cent stake in Spice Communications from Ashmore Investments and Deutsche Bank for $178.8 million. While Spice has since been acquired by Idea Cellular, TM continues to hold about 15 per cent in the Idea-Spice combined entity and is likely to increase its stake in the future.
The next big buy was Vodafone’s $10.9 billion acquisition of Hutchison’s 67 per cent stake in Hutchison Essar. While Hutchison earned a near 700 per cent return on its equity investments in India, the country itself received only $801 million as FDI from the deal, representing a mere 7.34 per cent of the total transaction. The remaining sum of $10.1 billion went to Hong Kong. Analysts feel there is a lesson to be learnt here, as the deal is a telling example of India’s policy failure to retain large-scale FDI in telecom.
The latest to enter the Indian telecom market is Russia’s Sistema, which bought a 10 per cent stake in Shyam Telelink for $11.4 million in September 2007. Subsequently, it increased its stake in Shyam to 74 per cent and is now looking to become a pan-Indian player.
Adding over 8 million subscribers a month, the Indian telecom sector has become a favoured destination not only for foreign telecom players but also for financial investors looking for higher returns on their investments. In fact, it was the telecom sector that really ignited private equity (PE) interest in India. In 1999, New York-based Warburg Pincus made a $300 million bet on then regional carrier Bharti Airtel, which has since grown into the country’s biggest cellular company. Over the past few years, Warburg has sold the stake for a total of $1.6 billion.
Most private operators have divested minority stake to at least one PE player. Idea Cellular, for instance, saw multiple investments from various PE groups prior to its initial public offering in 2006. UKbased GLG Partners picked up an 8 per cent stake in the company for $213 million. ChrysCapital invested another $116 million for a 5 per cent stake. Recently, the company diluted 20 per cent stake in its subsidiary, Aditya Birla Nuvo, to Providence Equity for $640 million.
Manufacturing
While in terms of volume, the mobile segment has been the major recipient of FDI, the other vertical that has emerged as a key recipient of foreign investment is manufacturing. Players like Nokia, AlcatelLucent, Elcoteq, Motorola, Flextronics and Samsung have all invested in this sector. Nokia alone has put in about $210 million till date in its plant in Sriperu budur and is planning to bring in another $75 million in 2008-09. Several other players like Sony Ericsson, ZTE and Huawei are also planning to invest heavily in telecom manufacturing and research and development in India.
Sony Ericsson, for instance, is known to have made an offer to buy the B.K. Modi Group’s handset manufacturing division, Spice Mobile. The group directly holds about 64 per cent stake in the handset company. According to sources, the Modi Group has demanded Rs 80-100 per share, valuing Spice Mobile at around Rs 7 billion.
Meanwhile, ZTE, which already has a unit in Manesar, is also planning to set up another plant in Chennai especially for manufacturing broadband equipment.
Long distance
The long distance segment has also been attracting considerable FDI, especially in the past few years. A large number of foreign players including British Telecom (BT), Cable & Wireless, AT&T and France Telecom have invested in obtaining licences to offer services in India.
Recently, the government cleared Singapore Telecommunications’ (SingTel) FDI proposal to set up a joint venture (JV) company for launching long distance telephone services. SingTel’s proposal includes FDI of Rs 4.8 million with equity of about 74 per cent in the JV. Prior to this, in February 2008, the Foreign Investment Promotion Board (FIPB) cleared ByCell Telecommunications India’s FDI proposal. The subsidiary of Swiss-based ByCell Holdings proposed an additional investment of $500 million in India to offer GSM-based telephony services on a pan-Indian basis over the next three-five years and increase the paid-up capital of the company.
Value-added services
Of late, value-added services (VAS) have emerged as an area of keen interest for both financial as well as strategic investors. Players such as Seqouia Capital, Northwest Venture Partners, Lehman Brothers and Matrix Partners are eyeing big growth opportunities in VAS and content aggregation companies. Lehman Brothers recently invested about $15 million in Cellebrum while Northwest Venture Partners and Nexus invested about $12-15 million in Mobile2Win.
Expanding scope of FDI
With the concept of retail chains gaining popularity, foreign investments have started coming into this space. For instance, in March 2007, Essar Telecom and Virgin Mobile entered into an alliance to enhance the Essar Group’s chain of mobile retail stores in India called “The MobileStore”. The two companies decided to invest $250 million and set up 2,500 stores across 600 cities. Virgin also provides consultancy on branding and marketing as a partner in the venture.
Mobile virtual network operations are another route through which international telecom companies are eyeing a stake in this lucrative sector. Virgin Mobile, for instance, has already begun operations in India through its tie-up with Tata Teleservices Limited (TTSL). With TRAI giving the go-ahead to MVNOs, this segment is expected to attract foreign investments in the coming years.
Besides, in light of the increased convergence expected in the telecom industry, TRAI has recommended allowing 74 per cent FDI in the broadcasting sector as well. The present policy allows 26 per cent FDI in TV news broadcasters, 20 per cent in FM radio, and 49 per cent in cable services. In direct-to-home services, a total of 49 per cent FDI is allowed. However, only 20 per cent of this can be direct foreign holding, the rest has to be foreign institutional investment.
Future potential
With the government granting telecom licences to nine companies, including both existing pan-Indian aspirants and new players, the potential of attracting large FDI has clearly increased. Most of these companies plan to sell some amount of stake in their telecom venture to a foreign strategic player to bring in the requisite capital.
Swan Telecom, which has received licences to operate mobile services in 13 of the 22 telecom circles, is reportedly in talks with foreign companies to dilute 26 per cent of its equity for around $470 million. Realty player Unitech has also announced plans to offload about 26 per cent stake in its telecom arm, Unitech Wireless, to a strategic foreign player. Videocon is another player that is in the process of finalising a buyer for a 51 per cent stake in its telecom subsidiary, Datacom.
Apart from this, a key route to get large-scale FDI in greenfield projects is also linked to the auction of 3G spectrum, which has now been opened up to international telecom players as well.
As telecom service providers rush to capture a bigger share of the market, comprising 250-350 million new subscribers, they will need investments of over $25 billion. A large part of this is expected to come from foreign players lining up to invest in the fastest growing telecom sector in the world.
