Foreign direct investment (FDI) in the Indian telecom sector dropped from $1.99 billion during April 2011-January 2012 to $93 million during the same period in 2012-13. The industry, which was among the major attractions for FDI, witnessed the biggest fall in such investments among various sectors during this period. The uncertain regulatory environment regarding spectrum auctions, the one-time spectrum fee and retrospective amendments; intense competition; and low profitability have impacted market growth. Even the high subscriber market image of the telecom sector failed to attract investments.
Past trends
The declining FDI trend started in 2010-11 when 3G spectrum auctions were held. Prior to this, the sector witnessed unprecedented growth during 2005-09 owing to the entry of new players, fall in tariffs, proliferation of feature phones and expansion of 2G networks across the country. The wireless subscriber base witnessed a compound annual growth rate of 70 per cent to reach 315 million in the quarter ended September 2008 from 65 million in the corresponding quarter in 2005. India was seen as one of the biggest telecom markets in the world. Moreover, companies such as France Telecom, which had exited in the past, wanted to re-enter to garner a share of one of the fastest growing telecom markets.
The decision to enter/re-enter India was also influenced by the lack of growth opportunities in their home countries. In major European economies, growth of the voice market had stagnated while data uptake did not pick up, thereby forcing operators to look at overseas opportunities for revenue growth.
Global operators planning to enter the Indian market received a fillip with the government increasing the FDI limit for basic cellular services from 49 per cent to 74 per cent in 2005. This provided these companies with the opportunity to acquire majority shareholding in Indian operators, thereby providing them control over the latter?s operations.
This resulted in a series of acquisitions by global players, starting 2007, when the UK-based Vodafone Plc acquired Hutchison Whampoa?s stakes in Hutchison Essar. Vodafone Plc acquired a controlling 67 per cent stake from Hutchison Telecommunications International Limited for $11.1 billion in an all-cash transaction. Subsequently, Russia?s Sistema, Norway?s Telenor, UAE?s Etisalat, the Bahrain Telecommunications Company (Batelco) and Japan?s NTT DOCOMO made acquisitions which resulted in FDI inflows of Rs 51 billion and Rs 117 billion in 2007-08 and 2008-09 respectively. This was despite the fact that developed economies were facing a slowdown and global companies were reducing costs, which showed the potential of the Indian telecom market. The acquisition of equity stake by international players provided domestic operators the much-needed capital to expand operations and bid for spectrum in the auctions.
Domestic manufacturers struggle
While domestic operators gained from the entry of foreign players, Indian equipment manufacturers struggled to compete with global manufacturers that entered the market after the removal of the FDI cap. State-owned ITI Limited had a monopoly due to the absence of foreign vendors, which found this market financially unviable in the late 1990s and early 2000s. However, India took several initiatives to establish itself as a global telecom equipment manufacturing hub. The government removed the FDI cap for manufacturing and started promoting special economic zones. Government initiatives, along with the advantage of low-cost labour and the high demand for network equipment, drove global equipment vendors such as Nokia, Ericsson, Alcatel-Lucent, Huawei and ZTE to set up manufacturing units in the country. This provided a fillip to indigenous equipment manufacturing, which helped telecom service providers to scale up operations. Besides driving domestic production, foreign equipment vendors also led to an increase in the export of telecom equipment.
In contrast, ITI Limited failed to capitalise on the growth of the Indian telecom market and now caters primarily to the equipment needs of Bharat Sanchar Nigam Limited and Mahanagar Telephone Nigam Limited. The major reason for the decline in its market share was allocation of limited funds by the government, which resulted in reduced spends on research and development.
The government?s decision to allow 100 per cent FDI in manufacturing has been criticised for its failure to promote technology transfer from foreign to domestic vendors and for allowing the former to dominate the domestic equipment market. In contrast, China restricted its operators, most of which are government owned, from purchasing equipment from global vendors.
Current status
Following the cancellation of 2G licences by the Supreme Court in February 2012, FDI inflow into the sector has reduced significantly. International telecom players, which had acquired stakes in domestic companies at high valuations during the peak of the telecom revolution in the country (2008), incurred huge losses after these companies were forced to close operations. While operators such as Batelco and Etisalat exited the market, others like Telenor and Sistema decided to continue operations by buying spectrum. However, these companies suffered losses due to shutdown of operations in certain circles.
Uncertain policies and the government?s inability to address challenges have discouraged global companies ? service providers and vendors ? from investing in the country. Also, domestic operators, which have been competing in the low-tariff Indian market, have accumulated a huge debt, and, therefore, do not offer significant business prospects at current valuations.
Though Indian operators have taken measures including hiking tariffs and removing promotional offers, to revive profitability, disputes between the government and telecom service providers will continue to affect the latter?s operational performance in the near term. In this scenario, global telecom companies have adopted a wait-and-watch policy before firming up investments for the Indian market.
In order to revive growth in the telecom sector, the government may consider removing the FDI cap for various segments. In fact, the Deepak Parekh Committee on Infrastructure has recommended that 100 per cent FDI be allowed in the sector to facilitate infrastructure development. Removing this cap may encourage investments, but foreign players will not be interested in acquisitions until the government resolves the current impasse.
Going forward, growth opportunities in the rural voice service and data service segments will drive future investments in telecom, provided the government addresses the regulatory challenges facing the sector. Companies such as Batelco are still looking to re-enter the market and could soon acquire stakes in debt-laden operators.
Also, the government is targeting an investment of Rs 9.43 trillion in telecom in the Twelfth Plan (2012-17). Of this, Rs 8.71 trillion (92 per cent) would be contributed by the private sector. Given that most domestic operators are facing declining or stagnating revenues and high debt, FDI is being looked upon as a key contributor to meet the sector?s investment targets.
