According to Fitch Ratings the government?s decision to remove the foreign direct investment (FDI) limit in the telecom sector will help players reduce leverage and strengthen their balance sheets in the medium term.
The move could encourage foreign investors to relook at making fresh investments in the Indian telecom sector. The move would pave way for foreign investors to increase their stake in subsidiaries to 100 per cent. Moreover, the complete ownership of a company would help foreign investors to stay away from intricate and at times complex dealings with a local partner.
The rating agency points out that following the increase in FDI limits, entities such as Vodafone, Telenor, Maxis Communications and Sistema Shyam TeleServices Limited could be among the first to take advantage of the new FDI rules as these players already hold 74 per cent stake in respective telecom service provider companies.
However, companies like Bharti Airtel and Idea Cellular where FDI limit is well below 74 per cent, would be able to take advantage of the revised FDI role only in the medium term. Such service providers could seek equity-injection from existing or new foreign investors to improve leverage. Singapore Telecom and Qatar Foundation Endowment own about 32 per cent and 5 per cent, respectively, in Bharti Airtel, while Malaysia-based Axiata Berhard owns about 20 per cent stake in Idea Cellular.
According to Fitch Ratings, home-grown telecom service provider Reliance Communications Limited, which has the weakest balance sheet among the top-four operators, could also benefit from the move. Moreover, the increase in FDI limit could potentially lead to bigger merger and acquisition (M&A) deals in an industry which is hyper competitive with the presence of a high number of players.
The rating agency emhasises that for a foreign investor, holding a 100 per cent stake in a telecom company will fast-track the decision-making process. Fitch Ratings expects a maximum of six of the existing 10 operators to survive in the long term, and that the industry will witness consolidation once the government relaxes M&A regulations.
