The much-awaited hike in the foreign direct investment (FDI) limit in the telecom sector from the current 49 per cent to 74 per cent has been cleared. EndOctober, the government formally gave its approval to the proposal with certain modifications and relaxations.
Simply put, for the telecom sector, it means that 74 per cent foreign investment can be made directly or indirectly in the operating company or through a holding company. Twenty-six per cent will remain with resident Indian citizens or an Indian company.
The FDI can come from FIIs, NRIs, overseas commercial borrowings, FCCBs, ADRs, GDRs and convertible preferential shares. Under the new rules, even proportionate foreign investment in Indian promoters and investment companies, including their holding companies, would be taken into account in the 74 per cent limit.
Every six months, the operating companies will have to disclose the status of such foreign holdings and certify that the foreign investment does not exceed the stipulated ceiling.
While the cabinet has decided that the foreign shareholding in private sector banks such as ICICI, IDBI and HDFC will be considered as foreign equity for the purpose of determining the 74 per cent cap, the foreign stake in state-run banks will be excluded. The total holding of Indian public sector banks and Indian public sector FIs will be treated as “Indian holding”.
To provide greater safeguards for the Indian promoters, the government has retained the condition that the majority directors on the boards of telecom companies with a foreign stake, and the senior management, including the chairmen, managing directors, chief executive officers, chief technical officers and chief financial officers will necessarily have to be resident Indians. This move will impact companies like Bharti and Tata Teleservices Limited (TTSL), which have foreigners on their boards as chief technical officers.
It has also been clarified that remote access will not be allowed to any equipment manufacturer or any agency outside the country for maintenance/repairs by the operator. However, remote access may be allowed for catastrophic software failure that would lead to a major part of the network becoming non-functional for a prolonged period of time. The Department of Telecommunications will define the terms of catastrophic software failure.
The decision to raise the FDI limit has been welcomed by the telecom industry. Analysts expect the hike to spur a fresh round of investments, especially from the Asia-Pacific region and Europe.
Analysts also believe that the move to exclude foreign holdings in Indian public sector banks and FIs from the 74 per cent ceiling will encourage increased FI activity in the sector.
Sunil Bharti Mittal, chairman, Bharti Tele Ventures says he is pleased that the notification has been approved finally. “Now we expect large investments to flow into the telecom sector.
According to Kobita Desai, principal research analyst, Gartner India, “The decision will send the right signals to the global community as it will make the process more transparent. It will bring in more clarity to the financial institutions, which may now want to invest in the sector. This will also benefit telecom companies that are planning IPOs.”
Already a number of foreign telecom majors such as Vodafone, STT, KDDI, Telekom Malaysia and AFK Sistema have shown interest in claiming a stake in India’s rapidly growing mobile market.
“We have come across a number of investors who are keen to put money into India. Now they will have more clarity in terms of policy and we are sure of inflow of some funds in the coming months,” says T.V. Ramachandran, director-general of the Cellular Operators Association of India.
The obvious gainers of the hike in FDI will be telecom operators such as Bharti, Hutchison, Idea and TTSL, which have been looking for funds especially in the post-unified access service licence scenario. With access to more foreign funds, the cash-strapped cellular industry, which has been accumulating losses, can now fund its mega expansion plans to acquire a panIndia footprint, covering small towns and rural areas ?? without having to raise funds through debt alone.
For operators like Hutchison Essar, which have been looking at raising capital through the IPO route, the hike will be especially beneficial in increasing its valuation. It will also allow telecom companies to restructure their equity holdings in a more transparent manner. In fact, the government has allowed such companies four months to clarify the equity structure and bring the levels to 74 per cent.
According to telecom analysts, while listed companies including Bharti, Tata Teleservices (Maharashtra) and VSNL are likely to see more FI interest, companies such as Idea Cellular and Spice Telecom, which have been scouting for foreign partners, should tie the knot shortly after the FDI hike. As Mahesh Uppal, telecom analyst, puts it, “A 49 per cent cap would not have attracted larger strategic investors.
As per the industry, $5 billion worth of FDI is expected to flow in in the next 1218 months. Though the net foreign funds inflow has increased from Rs 20.6 million in 1993 to Rs 99.5 billion as of March 2004, analysts believe that the industry requires over Rs 1,500 billion to meet the national target of 250 million telephone lines by 2007.
Finally, for users, the hike will mean enhanced services with more competition. An increase in funds flow will give access to better technology, better quality of services, and wider choice as operators invest more on their networks. It is believed that DoT is keen to move fast now that the cabinet approval has come through. It is expected to issue guidelines on the change in FDI norms by end-November.
