The Indian telecom industry has been facing several challenges in the past two years. Operators have been struggling with low ARPUs, dwindling margins and mounting debt. This has adversely impacted the entire telecom ecosystem as operators have curtailed their infrastructure investment plans. According to the Cellular Operators Association of India, the sector?s total debt stood at Rs 1,857.2 billion at end-2012 ? debt of Rs 935.94 billion from domestic lenders and Rs 921.26 billion from external sources.
To help the industry raise funds and reduce its financial burden, the cabinet has given its approval to a proposal to increase the ceiling of foreign direct investment (FDI) in telecom companies to 100 per cent. Currently, foreign companies can hold upto 74 per cent in a local operator.
In June 2013, a panel headed by a senior finance ministry official had proposed that higher foreign investment be allowed in sectors like defence, telecom, retail and commodity exchanges to revive investments and attract long-term investments.
?The Telecom Commission had earlier approved increasing the FDI limit to 100 per cent from 74 per cent. At present, 49 per cent foreign investment is allowed through the automatic route. The Foreign Investment Promotion Board?s approval is required for acquiring a larger stake,? notes a senior government official.
The policy is expected to have a positive impact on the sector. Complete ownership will allow foreign players to launch operations directly in the domestic market, while existing players like Vodafone, Telenor, Aircel and Sistema will not require domestic partners to operate in the country.
Russian operator Sistema, which has 53 per cent stake in Sistema Shyam TeleServices Limited, has supported the proposal for 100 per cent foreign holding in telecom companies by calling it a pro-industry and pro-consumer move.
Malaysian firm Maxis Communications, which holds 74 per cent stake in Aircel, is also optimistic about the increase in the FDI limit. ?The move will help the industry bring in more FDI to fund the high capex requirements of the sector, especially in areas where coverage needs to be increased and 3G and broadband wireless access services would be launched. This will undoubtedly lead to huge benefits for our customers and higher licence fees for the government,? says a company official.
Incumbent operators, which are looking to partner with strategic investors, have also welcomed the move. The move can improve the valuation of their shares and help them partner with foreign operators interested in entering the Indian market. ?100 per cent FDI in telecom will enhance the value for all stakeholders,? says an official from Reliance Communications.
Bharti Airtel, which has a large debt on its balance sheet, may benefit from the move as it will provide the company additional flexibility to bring in foreign investments through equity.
The telecom market, which has attracted about $13 billion of foreign investments since early 2000, is one of the leading sectors in terms of FDI equity inflow. Analysts say that the move to increase the FDI limit would provide a fillip to the sector and is likely to attract about $10 billion of investments in the near to long term.
The move could provide a breather for the burdened telecom industry. ?There is an expectation for further consolidation and buyouts in the telecom space, as cash-rich foreign companies may seek to buy out smaller players after the entry barriers are significantly reduced. In the longer term, this will enable additional capital inflow and improve the overall financial viability of the sector,? says Prashant Singhal, partner, Ernst & Young.
However, some analysts say that merely allowing 100 per cent FDI, without ironing out regulatory and policy uncertainties, may not attract foreign investors. They feel that additional measures need to be taken to help India-based players offload or offset their debt burden.
Meanwhile, the Telecom Commission plans to establish the Telecom Finance Corporation (TFC) to address the sector?s funding challenges. The TFC is proposed to be set up on the lines of financing bodies such as the Power Finance Corporation and the Tourism Finance Corporation of India. The proposed TFC would aim at providing Rs 380 billion of funds over a five-year period.
