According to the Reserve Bank of India, foreign direct investment (FDI) in the Indian communication services sector reached $8.81 billion in 2017-18, a nearly 50 per cent jump from $5.88 billion in 2016-17. In fact, between 2013-14 and 2017-18, the communication services sector has witnessed a sevenfold increase in FDI inflows. These statistics indicate that the Indian telecom sector continues to remain a preferred destination for investors from across the world.
Recognising the fact that foreign investment is necessary not only to supplement domestic capital in the telecom sector, but also to secure scientific, technical and industrial knowledge, the government had liberalised the FDI norms in 2013, allowing up to 100 per cent FDI in the sector. Of this, FDI of up to 49 per cent is allowed under the automatic route while for FDI beyond 49 per cent, the permission of the Department of Telecommunications (DoT) is required. This policy is applicable for all kinds of basic, unified licences, cellular, national/international long distance, commercial, very small aperture terminal (VSAT), public mobile radio trunked, and global mobile personal communication services as well as internet service provider licences, resale of international private leased circuits, voicemail/audiotex/unified messaging services and mobile number portability services. Meanwhile, FDI of up to 100 per cent is also permitted for infrastructure providers offering dark fibre, electronic mail and voicemail services.
Reasons for increased FDI inflows
The upsurge in foreign inflows has been driven by the strong growth that the Indian telecom market has achieved in the past few years. The country is currently the world’s second largest telecom market with a subscriber base of 1.18 billion, a broadband subscriber base of 460.24 million and teledensity of 90.44 per cent, and is also the second largest smartphone market in the world. Led by a fall in smartphone costs, an accelerated roll-out of 3G and 4G services and the availability of affordable tariffs, data consumption in the country has also increased considerably in the past few years.
The recent change in market dynamics has also made the Indian telecom industry an attractive option for foreign investors. The sector is currently in a phase of consolidation and transition. To raise funds for merger and acquisition activities as well as absorb the heavy losses resulting from the fierce tariff war, telecom companies have put their assets up for sale, which has caught the attention of international investors.
Vodafone and Idea Cellular have merged to create the country’s largest service provider in terms of both revenue market share and subscriber numbers. Prior to the merger, Idea had sought DoT’s permission to allow up to 100 per cent FDI in the company, up from the previous 67.5 per cent. Vodafone had also infused greater private equity to fund its merger with Idea Cellular.
In the infrastructure space, US-based American Tower Corporation has signed a deal with Vodafone and Idea to buy their stand-alone tower assets. Canadian investment group, Brookfield had also agreed to buy the telecom towers of Reliance Com-munications (RCOM), but the deal fell through after the latter called off its proposed merger with Aircel. Brookfield is now looking to buy towers from other players in the country.
Government initiatives to attract foreign investment
In order to attract foreign investment into the sector, the government has fast-tracked reforms and continues to be proactive in providing further room for growth to telecom companies. It has allowed spectrum sharing and spectrum trading, thereby facilitating merger and acquisition activity in the industry. In March 2018, the union cabinet approved two key measures to facilitate investments in the telecom sector and enhance the ease of doing business. These include restructuring the deferred payment liabilities of the spectrum auction of telecom operators and revising the cap on spectrum holding.
In another key policy move, the government has allowed the entry of virtual network operators, thus allowing telecom operators to monetise their unused airwaves and infrastructure. This has provided an opportunity to foreign players to operate in the Indian market as an extension of existing network service providers, with the freedom to create their own service delivery platforms for customer services, billing and value-added services.
In the infrastructure space, the government has issued right-of-way rules for the roll-out of communication networks to facilitate the installation of mobile towers, optic fibre and copper cables in a time-bound and non-discretionary manner. The rules, which came into effect in November 2016, lay down a clear framework to provide approvals and settle disputes in a time-bound manner as well as improve the coordination between telecom companies and government authorities. This has lent greater policy clarity in the sector.
In the recently approved National Digital Communications Policy, 2018, the government has envisaged attracting long-term, high quality and sustainable investments worth $100 billion in the telecommunications sector by 2022. To serve this objective, the policy aims to pursue further regulatory reforms to ensure that the regulatory structures and processes remain relevant, transparent, accountable and forward-looking. Additionally, the policy aims to remove regulatory barriers and reduce the regulatory burden that adversely affects investments, innovation and consumer interests.
Meanwhile, the Telecom Regulatory Authority of India (TRAI) has submitted several recommendations
to improve the ease of doing business in the sector. The regulator has proposed faster, time-bound approvals for merger and acquisition proposals, more options for conforming to spectrum holding limits post a merger, and the streamlining of the penalty levy process. Further, the regulator has suggested that the government should spell out a definitive timeline, not exceeding 30 days post the receipt of approval from the National Company Law Tribunal, for granting approval to the transfer or merger of licences. TRAI has also suggested that if a merger results in spectrum holding beyond the permissible cap, the resultant entity should be given the option to either surrender or trade its spectrum holding within the stipulated period of one year. Also, TRAI has proposed that licences for demonstrating new equipment or experimentation for new technologies like 5G or internet of things (IOT) should be granted within 15 days and 30 days respectively.
Future foreign investment avenues
For both telecom sector operators and infrastructure players, the next growth impetus will come through exploding data usage, roll-out of 5G networks and the increased proliferation of next-generation technologies such as IOT, cloud computing, artificial intelligence and augmented reality. The Indian telecom market is likely to grow by 10.3 per cent year on year to reach $103.9 billion by 2020. Further, a rise in smartphone penetration and a decline in data costs will add 500 million new internet users in the country over the next five years. The monthly data usage per smartphone in India is expected to increase from 3.9 GB in 2017 to 18 GB by 2023.
It is imperative for operators to upgrade their network to be able to handle the massive growth in traffic and deliver content and services with low latency. Meanwhile, infrastructure companies will need to step in and set up a large number of additional data sites, backed by high-bandwidth fibre backhaul over the next few years. This calls for higher investments in the sector and, given the current weak financial position of the industry, a major part of this investment is expected to come from foreign investors. Moreover, a large amount of foreign investment is also necessary to catalyse the government’s ambitious schemes such as the Smart Cities Mission, Digital India and BharatNet.
Going forward, consistency in tax policies, coupled with a conducive and predictable regulatory framework, is imperative to attract more FDI in the Indian telecom sector.
