According to the Indian Economic Survey 2017, the country received the highest ever foreign direct investment (FDI) equity inflow of $43.4 billion in 2016-17, emerging as one of the most open economies for receiving FDI. While the surge in FDI was evident in most sectors, the telecom sector was amongst the key recipients of FDI, with the second highest FDI equity inflows (12.8 per cent) in 2016-17. This is largely on account of various initiatives taken by the government to improve transparency and ease of doing business in the sector, a favourable regulatory environment and a positive investment climate.
Policy push
As per the latest data released by the Department of Industrial Policy and Promotion, the telecom sector, including radio paging, cellular mobile and basic telephone services, witnessed a significant increase in FDI, from Rs 86.37 billion during 2015-16 to Rs 374.35 billion during 2016-17. The cumulative FDI inflows as of March 2017 stood at Rs 1,301.64 billion, accounting for around 7 per cent of the total FDI inflows into the country.
A major reason for the growth in FDI in the sector is adequate government support. The Digital India and Make in India programmes have been instrumental in attracting foreign investments to the sector. The Make in India programme has given a major impetus to the handset manufacturing segment. As a result, a number of China-based handset players including Gionee, Xiaomi, Vivo, Oppo and Zopo have invested in establishing manufacturing units in the country. Further, South Korea-based Samsung Electronics has recently invested Rs 49.15 billion to double the production capacity of its manufacturing unit in Noida. Meanwhile, Taiwan-based contract manufacturer Foxconn has committed an investment of $5 billion in Maharashtra in addition to $20 million-$30 million for establishing a manufacturing unit in Navi Mumbai. Meanwhile, the Digital India programme has encouraged global majors such as Juniper Networks and Google to invest in the Indian telecom sector. In December 2016, US-based Juniper Networks announced its plans to invest $1 billion in India to tap opportunities arising from the Digital India programme. The programme, being led by cloud-based services, presents a big opportunity for the company. Further, Google chose Navi Mumbai as one of its eight global Google Cloud regions, which will include locally hosted data centres.
Improved regulatory environment
The improvement in the overall investment climate can also be attributed to the intervention of the Telecom Regulatory Authority of India (TRAI) and other regulatory bodies. The efforts of the regulatory bodies to resolve pending legal cases with foreign investors have brought clarity on legal matters. For instance, the Delhi High Court’s approval of the terms of settlement agreed upon by Tata Sons and Japan-based NTT DOCOMO put an end to an almost three-year-long judicial battle between the companies. Further, the Income Tax Department’s recent directive to Hutchison Holdings to pay over Rs 320 billion as capital gains tax, penalty and interest in the deal for sale of its mobile business to Vodafone in 2007 is a step towards resolving the retrospective tax issue.
Meanwhile, to increase FDI inflow into the sector, TRAI is trying to eliminate multiple clearance processes for companies. To this end, it released a consultation paper, in March 2017, on ease of doing business in the sector. Through the paper, TRAI aims to identify the issues in the existing regulations that affect mergers and acquisitions in the sector, and complicate the allotment, sharing and trading of airwaves. According to TRAI, this will improve operations and bring in greater foreign investments into the country. Further, TRAI’s active involvement in resolving key issues related to call drops, points of interconnection, etc. has created a positive and investor-friendly regulatory environment.
Competitive landscape
Another significant reason for the influx of FDI into the telecom sector is the changing competitive landscape. The entry of Reliance Jio Infocomm Limited (RJIL) has deeply impacted operators’ profitability. The rising competition has also compelled them to seek funds to compete with RJIL’s disruptive offerings, thus opening up avenues for foreign investors. In October 2016, the Canada-based Brookfield Infrastructure Group signed a non-binding agreement with Reliance Communications to acquire 51 per cent stake in its tower arm, Reliance Infratel, for Rs 110 billion. Further, a consortium of investors including private equity firm KKR and the Canada Pension Plan Investments Board acquired a 10.3 per cent stake in Bharti Airtel’s tower arm, Bharti Infratel, for Rs 61.94 billion. Meanwhile, Vodafone India attracted an investment of Rs 480 billion from its UK-based parent company, Vodafone Group Plc, in 2016-17.
The way forward
The government’s attempt to bring in a liberalised regulatory and policy framework has encouraged foreign players to invest in the country. The evolving competitive landscape has, moreover, attracted a significant amount of FDI. As most domestic operators are currently faced with declining revenues and high debt, FDI is being looked at as a key source of funding to meet the sector’s investment targets. As such, higher FDI levels are expected to play a key role in catalysing industry growth in the future.
Kuhu Singh
