Aimed at preventing the new telecom licensees from making windfall gains overnight, the Department of Telecommunications (DoT), after several rounds of deliberation, has finally decided to impose a three-year lock-in period on the equity stake held by promoters of new telecom companies.
Prohibiting promoters of new telecom companies from selling their stake in the first three years of the companies’ getting their licences, DoT has notified an amendment to the unified access services (UAS) licence stating that a lock-in period for sale of equity will be enforced on an entity if its share capital is 10 per cent or more in the UAS licensee company. The lock-in period will be effective from the date of issue of the UAS licence, if the entity’s net worth has been taken into consideration for determining the eligibility for grant of the UAS licence. This enforcement will be valid till three years are complete from the effective date of the UAS licence issue, or till all rollout obligations have been met.
While DoT has permitted the companies to raise money by issuing fresh shares through private placement or a public issue, the declaration of dividends and/or special dividends is not permitted during the lock-in period.
Moreover, entities on which the lockin condition is applicable will not be able to transfer their share capital directly or indirectly during the lock-in period, implying that the amount invested in the shareholding by the equity holder shall not be reduced under any circumstances during the lock-in period.
However, the lock-in period will not hold in the event that a UAS licensee defaults in making requisite payments to a lender bank or financial institution and the latter calls in or enforces its payment.
While DoT recommended the lock-in period primarily in response to global firms like Telenor buying stake in the new telecom licensees, the amendment will not impact deals already entered into by companies such as Swan and Unitech, as they claim that fresh equity was issued to the foreign partners. While Swan offloaded 45 per cent stake to Etisalat for $900 million, Unitech divested up to 60 per cent stake in its telecom venture to Norwegian operator Telenor for $1.1 billion. These companies have maintained that they did not offload stakes but only issued fresh equity to their foreign partners.
During a stake sale, the proceeds go to the owners, but when fresh equity is issued, the revenues get reflected in the company’s balance sheet. For instance, the $1.1 billion that Telenor paid for a 60 per cent stake is reflected in the books of Unitech’s telecom arm and does not accrue to the owners.
According to industry experts, the lock-in period is not likely to serve its purpose as it will not prevent companies from bringing in foreign partners through expansion of equity capital. According to T.V. Ramachandran, director general, Cellular Operators Association of India, the clause disallowing dividends is also meaningless as no telecom company gives dividends early on.
“I do not think imposing a three-year lock-in period will address the issue. If the perception is that these players are not serious, the government should work towards expediting their exit rather than allowing them to continue, as their presence is likely to harm the sector,” says Dr Mahesh Uppal, director, ComFirst.
While the move is likely to impact new licensees including Datacom and Loop Telecom, which are scouting for strategic investors, the extent of its impact remains to be seen as these operators too can take the fresh equity route and witness huge increases in their valuation, thereby defeating the purpose of the notification.
