Foreign direct investment (FDI) in the Indian telecom sector seems to be reviving at last. Foreign investment in the sector had decreased sharply in the past two years following the 2G controversy and the resultant policy and regulatory uncertainty. The telecom industry, which once attracted the highest FDI in the country, accounted for a little over 1 per cent of the total FDI inflow during 2012-13. However, the government?s decision to allow 100 per cent FDI in the telecom sector, along with several other measures to liberalise the policy and regulatory framework, has helped attract significant foreign investment into the sector. Consequently, the industry witnessed an impressive growth of over 100 per cent in FDI inflows between November 2013 and January 2014. According to the Ministry of National Planning and Economic Development, the telecom sector is expected to attract the largest share of the country?s total FDI inflow in 2014-15.
Trends in FDI inflows
The Indian telecom sector witnessed spectacular growth between 2005 and 2009. This was largely driven by a favourable policy and regulatory environment, increasing consumer appetite for wireless services, entry of new players, declining tariffs, proliferation of affordable handsets and expansion of 2G networks by operators. The country?s total wireless teledensity stood at 4.8 per cent in 2005, indicating significant growth potential. Further, the Indian telecom industry was adding almost 4 million subscribers per month and was considered one of the fastest growing markets in the world. This attracted significant interest from global players who were keen to tap this growth.
In such a scenario, the government?s move to relax the FDI limit from 49 per cent to 74 per cent in 2005 was a strategic one. It helped attract foreign investments by encouraging international players such as UK-based Vodafone Plc, Russia?s Sistema, Norway-based Telenor, the UAE?s Etisalat, Bahrain-based Batelco and Japan?s NTT DOCOMO to foray into the Indian telecom market. The FDI inflow grew at a compound annual growth rate of 77.81 per cent from Rs 21.55 billion in 2006-07 to Rs 123.3 billion in 2009-10. Further, it doubled between 2007-08 and 2009-10 when several global players acquired equity stake in domestic operators to help the latter expand their operations and bid for 2G spectrum.
However, this trend suffered a setback in 2010-11 when the sector was hit by the 2G scam. It witnessed a sharp decline in FDI inflows, from Rs 123.3 billion in 2009-10 to Rs 75.42 billion in 2010-11. Further, the saturation in the voice market and declining ARPUs due to hypercompetition heavily impacted operators? profitability. The situation worsened in February 2012 when 122 2G licences were cancelled by the Supreme Court, jeopardising global investments worth billions of dollars. Several telecom ventures, which were largely driven by investments from global operators, were forced to shut shop or downsize their operations. While Vodafone, Telenor and Sistema continued their operations despite the challenges, Batelco and Etisalat opted to exit completely from the Indian telecom market. Thereafter, the sector faced regulatory and policy uncertainty and its share in the total FDI continued to decline. While it accounted for nearly 8 per cent of the total FDI inflows in the country during 2010-11, the share reduced sharply to 1.5 per cent in 2012-13.
Reviving foreign investment
Taking stock of the situation, the government finally made the much-awaited announcement of removing the FDI cap for telecom services in August 2013. The move was aimed at reviving investor interest in the sector and helping operators to reduce their huge debt burden by accessing foreign funds. As per industry estimates, the telecom sector faces a staggering debt of Rs 2,500 billion owing to payments related to 3G spectrum acquisition and roll-outs. The debt pile is likely to increase further with the recent acquisition of additional spectrum in the 900 MHz and 1800 MHz bands.
Allowing 100 per cent FDI in the sector has sent out a positive signal to foreign investors with regard to the country?s regulatory climate. The policy will provide them with the opportunity to gain complete ownership and control of their telecom ventures in India, thereby not being restricted by the funding capacity of their local partners. However, the approval of the Foreign Investment Promotion Board (FIPB) is mandatory for any foreign investment above 49 per cent. Meanwhile, the relaxation in the FDI limit will also facilitate capital flows for domestic telecom operators such as Bharti Airtel, Idea Cellular and Reliance Communications, which will now have easy access to overseas financing.
The policy move has been well received by foreign investors as the sector has already started witnessing early signs of FDI revival. After a negligible increase in FDI inflow during August-October 2013, foreign investment in the industry grew sharply from an estimated Rs 1.98 billion in November 2013 to Rs 10.63 billion in January 2014, which was brought about by the first few FIPB approvals. In October 2013, Singapore-based SingTel?s proposal to buy out its Indian partners in SingTel Global (India) was approved by the FIPB. The deal, valued at an estimated Rs 29.8 million, would enable SingTel to provide telecom and internet bandwidth services through a fully owned subsidiary in India. The next approval came in December 2013 for Vodafone Plc?s stake acquisition in Vodafone India. According to the proposal, Vodafone Plc intends to pay stakeholders Analjit Singh Rs 12.41 billion and Piramal Enterprises Rs 89 billion for their stakes in Vodafone India.
Other foreign operators that are expected to benefit from the removal of the FDI cap include Telenor, which had earlier received FIPB approval to increase its stake to 74 per cent in Telewings and is now contemplating taking full control of the company. Similarly, Sistema, which currently owns a 56.68 per cent stake in Sistema Shyam Teleservices Limited, is also considering full ownership of its Indian subsidiary. However, analysts believe that only raising stakes in Indian ventures will not be sufficient for reviving business growth. Operational revenues have been adversely impacted after these companies were compelled to withdraw their services from several circles of operations. Consequently, they are likely to opt for mergers and acquisitions (M&As) in the coming years for ensuring business sustainability and long-term profitability.
Supporting regulatory framework
Besides increasing the FDI limit, the government has undertaken several other policy and regulatory measures to build investor confidence in the sector. The finalisation of the M&A guidelines by the Department of Telecommunications is a step towards facilitating consolidation in the sector. The guidelines state possible arrangements for operators to expand their reach and drive business efficiencies. Although various M&A deals are reportedly in the pipeline, operators are awaiting further clarity on the M&A guidelines as well as on spectrum trading and sharing.
The introduction of the unified licence regime has also allowed operators to offer a host of services through a single licence. The spectrum acquired in the 1800 MHz band during the 2012 and 2013 auctions is liberalised and can be used to offer 2G as well as high speed data services.
The way forward
The challenges notwithstanding, India continues to be one of the fastest growing telecom markets in the world. The huge untapped rural potential and surging data traffic in urban areas make it a key target for global telecom majors looking to expand their operations. Further, the government?s attempt at bringing in a liberalised regulatory framework by introducing positive changes in the past one year has helped increase foreign interest and investments. Moreover, active participation by Indian subsidiaries of foreign players in the February 2014 auction reflects their commitment to India?s telecom sector growth. Going forward, the Indian telecom sector is expected to return to its high FDI levels with foreign capital playing a key role in catalysing this growth.
