The Hindu Business Line : Telecom: Beyond the FDI cap hike

With the latest sectoral cap of FDI hike, though laced with riders, only foreign equity firms with deep pockets may want to bet on domestic telecom companies, to rake in moolah by trading in telecom sector scrips. If the intention behind the hike in FDI cap in telecom is to quickly expand the network and keep prices down, one way to do so is by fostering competition.

BY RAISING the sectoral cap of foreign direct investment (FDI) in telecom from 49 per cent to 74 per cent or enhancing the composite foreign holding including but not limited to investments by foreign institutional investors (FIIs), non-resident Indians, overseas corporate bodies, foreign currency convertible bonds, American depository receipts, global depository receipts, convertible preference shares to 74 per cent the Finance Minister, Mr P. Chidmabaram, has redeemed the promise he made at the time of presenting his maiden Budget last year.

It may be relevant to recall that the previous National Democratic Alliance (NDA) Government, led by Mr Atal Bihari Vajpayee, had also promised to do this, but dropped the move as it felt that allowing liberal foreign investments in the telecom sector could land in trouble the existing indigenous telecom players not teamed up with joint venture partners.

The reason trotted out, however, was that the then Home Minister, Mr L. K. Advani, saw security threat in such an opening up to foreign investors in the strategic communication sector.

The stock market did not take kindly to the move and plunged. The NDA had to do a re-think and include sectoral cap hike in its election manifesto to the 2004 General Election.

Even as Mr Chidambaram went eloquent about the latest decision, stating that the move is aimed at attracting investment in the capital-intensive telecom sector, fresh FDI — non-debt creating flows — is unlikely to come in a big way as quite a few foreign telecom majors such as British Telecom, Telestra (Australia) and French Telecom exited out of joint ventures a couple of years ago, frustrated by restrictive the foreign investment regime.

Only Singapore Telecom and Hutchison Whampo (Hong Kong) have tie-ups with domestic telecom companies.

Paradoxically, on the day when the composite foreign holding in the telecom sector was raised to 74 per cent, private equity firm Warburg Pincus diluted three per cent stake in Bharati Tele-Ventures Ltd (BTVL) for over $308 million, about Rs 1,300 crore, to a group of foreign funds.

This is particularly so when the Government's policy bristles with such unresolved issues as access deficit charge (ADC), spectrum allocation and unified licence to make it easier for genuine foreign players to invest in this market. If the intention behind the hike in FDI cap in telecom is to quickly expand the network and keep prices down, one way to do so is by fostering competition.

The UN Conference on Trade and Development in its World Investment Report 2004 rightly said that when FDI happened without competition or when competition is slow to take off, there is little incentive for investors to improve capacity such as line construction.

Those who cite the case of China should know that it is opening up telecom services (both value-added and voice and data services) under its WTO accession agreement. Meanwhile, the Chinese authorities have sold to foreign investors a small stake in the state-owned China Telecom and raised considerable funds to undertake network expansion, besides ensuring competition among state-owned telecom companies.

So, those in India troubled by the higher composite foreign holding in telecom sector at 74 per cent should allow the Government to shed a small stake in BSNL which should fetch considerable money, given the vast network and backbone infrastructure the state-owned telecom company commands.

If e-governance, that is part of the National Common Minimum Programme (NCMP), and other services such as rural telephony or State-wide area networks extending up to the block level are to become a reality, the critics of the Government must realise the limited options before it and allow it to exploit what it best can.

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