The Hindu Business Line : Telecom: Barriers beyond the FDI cap

India needs huge investments to ensure that the growth rate of the telecom sector does not slacken. Nobody can quibble with this argument. However, the Government does not have with it a single letter from any foreign investor stating that it was or is unwilling to come into the country because of the 49 per cent FDI cap.

AMONG the various considerations that led to the Left opposing the Finance Minister, Mr P. Chidambaram's proposal to hike the cap on foreign direct investment (FDI) in telecommunications companies from 49 per cent to 74 per cent was the belief that such a move would benefit only a few private mobile operators. Mr Chidambaram has done little to dispel this perception.

There is at present a glaring loophole in the law. Any investment by a company that has foreign equity up to 49 per cent in an Indian telecom company is considered an investment by an "Indian" company. Thus, a telecom company can have 49 per cent direct foreign equity and another 24.99 per cent in such indirect foreign equity (49 per cent of 51 per cent) totalling 73.99 per cent.

The 49 per cent FDI cap currently applies to companies providing basic and cellular telephony, unified access, national and international long-distance telephony, V-SAT (very small aperture terminals), public mobile radio trunk (PMRT) and other value-added telecom services. For providing such services as Internet, radio paging and voice mail and for telecom equipment manufacture, 100 per cent FDI is already allowed.

In his October 12 note to the leaders of the Left parties (a copy of the note is with the author), the Finance Minister stated: "The current equity structure of Hutchison Max Pvt. Ltd., both through the direct and indirect routes, reveals that foreign investment in the said company is approximately 69 per cent.

Similarly, the equity structure of Bharti Televentures Ltd., through the direct and indirect route, is approximately 67.5 per cent. Information is now available regarding IDEA (which is a joint venture of (the) Tata, Birla and AT&T (Wireless) (groups)). The current foreign investment in the company is approximately 35 per cent and the company intends to make a public issue to induct more foreign equity to take the total foreign equity to 49 per cent (that is within the current ceiling).

According to information available, Reliance Infocomm has foreign investment from three entities amount to a total of 10 per cent." These facts seem dated and incomplete. For, it has been reported that Hutchison Telecommunications International Ltd. has disclosed that its direct and indirect holding in its Indian associate, Hutchison Essar South, exceeds 74 per cent. This disclosure has come in the Hong Kong-based company's offer document for its initial public offering (IPO) of shares. The Hutchison group holds more than the stipulated 49 per cent in all its five associate companies in India — its holding in six mobile phone operations in India is around 56 per cent (Financial Express, October 9). Hutchison Max Telecom has submitted a proposal to the Foreign Investment Promotion Board to allow the Hutchison group to consolidate its Indian operations under a single holding company, which could float an IPO by June 2005.

As the Left parties have pointed out, all that is required is a clarification from the Ministry of Finance or the Ministry of Communications to ensure that no foreign company or group of companies can hold more than 49 per cent of the equity shares of an Indian telecom company "directly or indirectly".

That is it. Instead of arguing that an opaque system should be made transparent, as Mr Chidambaram is claiming, the Left says the government should not end up rewarding those who have violated the spirit of the law, if not the letter itself.

An analogy can be drawn here about the manner in which authorities first turn a blind eye to squatters illegally occupying a plot of land and then "regularising" it.

Both the Left parties and the Finance Ministry have furnished long lists of countries that allow FDI in telecom and under what circumstances. But one important point has not been mentioned.

Two years ago, the Federal Communications Commission of the US disallowed the Hutchison group from acquiring control over the liquidated telecom firm Global Crossing on considerations of national security. This is the Hong Kong-based group — with close links with China — that has directly and indirectly acquired a stake higher than 74 per cent in its Indian associate.

On security issues, the Finance Minister's note argues that even if the FDI cap is hiked to 74 per cent, foreign partners would require "security clearance" and that "critical management and technical positions" will be held by resident Indians.

So, are we being unduly alarmist or excessively xenophobic? Many security experts claim a rampant use of surveillance technology by the US and other developed countries for every possible kind of espionage — including the garnering of commercial intelligence through secretive projects such as Echelon.

The argument of Mr Chidambaram seems to be along the following lines: Since the US can in any case already listen to any phone conversation or intercept any e-mail or fax anywhere in the world (including in India) and since India is anyway importing almost all of its telecom hardware, why worry about allowing foreign companies to own 74 per cent in Indian telecom firms?

This logic is indeed curious. Even the former Communications Minister belonging to the Bharatiya Janata Party in the National Democratic Alliance government, Mr Arun Shourie, agreed with his arch ideological opponents in the Left on this issue — that the concerns expressed by the security agencies (the Intelligence Bureau, the Directorate of Revenue Intelligence, and the Research and Analysis Wing) about allowing foreign investors to hold more than 49 per cent in Indian telecom firms was not misplaced.

India is the only country whose Parliament has been attacked by terrorists; they were wielding mobile phones too. The Department of Telecommunications has placed restrictions on the operations of mobile companies near the international border in States such as Gujarat, Rajasthan and Punjab.

In Jammu and Kashmir, mobile phones were not allowed until a year and a half ago. Earlier, public call offices in the State had been shut down on the apprehension that these were being misused by militants.

True, India needs huge investments (including foreign) to ensure that the growth rate of the telecom sector does not slacken. Nobody can quibble with this argument.

However, the government does not have with it a single letter from any foreign investor stating that it was or is unwilling to come into the country because of the 49 per cent FDI cap.

In 1995, as many as 32 global telecom giants from all over the world — including the US, Japan, Germany, Switzerland, Australia, France and Malaysia — had set up joint ventures in India to bid for mobile licences; half also bid for fixed-line licences. Ten MNCs actually obtained licences. Today, Hutchison, Singapore Telecom and France Telecom (that has a 26 per cent stake in BPL's Mumbai operations) are the only foreign companies that remain in the country.

AT&T Wireless nearly doubled its investments in India from Rs 600 crore to over Rs 1,100 crore despite its equity stake coming down from 49 per cent to 33 per cent in the IDEA venture with the Birla and Tata groups — AT&T is, however, currently in the process of pulling out of India.

The short point: No foreign telecom company left India because of the FDI cap. Many quit because of different factors such as their own financial constraints, under-estimation of the potential of the Indian market and, most important, uncertainty in the regulatory environment.

The tussle between users of two types of cellular technology (CDMA versus GSM); the critical remarks made in August 2003 by the head of the Telecom Disputes Settlement Appellate Tribunal, Justice D. P. Wadhwa (a former judge of the Supreme Court), against officials in the government and in the Telecom Regulatory Authority of India; the fact that over the last eight years there has been as many Union Telecom Ministers; and, most recently, the row over non-payment of access deficit charges by Reliance to Bharat Sanchar Nigam have together done much, much more to scare away foreign investors than anything else, including the FDI cap.

(Concluded)

(The author, a senior journalist, is Director, School of Convergence. He can be contacted at paranjoy@yahoo.com.)

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