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Thursday, Apr 11, 2002

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FII investment in telecom to be outside FDI cap

G. Rambabu

NEW DELHI, April 10

IN a significant decision that should give a boost to telecom companies starved of funds, the Government proposes to exclude FII investments from the 49 per cent FDI sectoral cap that is currently applicable.

According to official sources, a note to this effect has been prepared for consideration by the Union Cabinet, which would exclude the issuance of non-voting shares from the sectoral cap, and allow FIIs/foreign investors to acquire up to 100 per cent non-voting shares in basic, cellular and long-distance telecom companies.

Currently, the FDI cap is applicable in the case of telecom services and also on investment companies set up for the investment in the telecom sector.

In addition to this, FDI up to 100 per cent is permitted for investment in preference shares provided such shares do not carry conversion option.

Since FIIs are generally not interested in gaining management control of the companies, it has been argued that this would not stand counter to the current telecom policy of retaining control with the Indian shareholders.

"If the FII investment are excluded from the 49 per cent, the telecom companies will be able to attract significantly higher FDI. The telecom sector requires huge investment for rapid expansion of telecom infrastructure.

This will help maximise foreign investment and at the same time, keep management control with the Indian shareholders," the sources noted.

They pointed out that Cabinet note also sought to amend the Companies Act to disallow foreign investors from gaining management control over telecom companies through the issuance of non-convertible preference shares.

As per the present guidelines of the Department of Economic Affairs (DEA), non-convertible preference shares do not attract a sectoral cap.

Foreign investors in the telecom sector have preferred this route in the telecom sector, since such shareholders get voting rights under certain conditions. In a bid to put a stop to this "back-door control," it is now proposed to limit the voting rights of foreign investors to the FDI cap of 49 per cent by amending Section 87 of the Companies Act.

The sources noted that this amendment would deprive the foreign investors of their voting rights as well as dividend and might prove to be counter-productive.

But the Department of Telecommunications (DoT) is pushing for this because it wants to ensure that management control stays with the Indian shareholders.

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