The Hindu Business Line : India calling

THE WIDELY HELD view that foreign direct investments (FDI) may be slow in flowing into the telecom sector, given the regulatory bottlenecks was turned on its head last week. The UK-based Vodafone plc's dramatic call on India through the acquisition of a 10 per cent equity stake in Bharti Tele-Ventures for a staggering Rs 6,700 crore is poised to be a game changer in the mobile telephony sector.

It is only natural that Vodafone, which commands a market capitalisation of over $ 150 billion, managing 165 million subscribers worldwide and operating out of 27 countries, should want a presence in India. Unfortunately, it had to hang up on its earlier foray. However, the latest attempt should be a good call, considering that it is picking up a stake in the largest service provider in the mobile telephony market in the country. For an overseas player wishing to expand in an emerging market, this is always a preferred strategy in contrast to picking up stake across a number of small players. The acquisition underscores the promise of the Indian telecom sector, which has been growing at a scorching pace in recent years. However, there are daunting challenges ahead for the industry. There is already the issue of additional allocation of spectrum on which little progress has been made. Also, future growth must necessarily come from semi-urban and rural areas with growth showing signs of flagging in the metros. This would depend on the economic growth impulses and policy initiatives percolating to the rural areas. While there is cautious optimism among the policy-makers of this happening, the Vodafone acquisition, in a sense, can be seen as an endorsement of this scenario. As a strategic investor in a dominant player in the industry, it can improve operating margins through economies of scale in global procurement efficiencies besides branding initiatives and future growth in the 3G (third generation) mobile markets. Even the premium that it has paid compared to the terms of the Hutch-BPL deal finalised recently is perhaps explained by this.

Looking ahead, it is safe to say that practically every single player will be scrambling to rework its strategic and operational plans. In particular, the CDMA (the alternative mobile technology platform) players may have to consider bringing in a strategic partner for greater technological and financial support. Also, one can expect the initial public offering plans of Hutch and Reliance to be speeded up in the light of the Vodafone's entry. Players who do not have the comfort of a national footprint or the presence of a strategic partner with a global presence will be ripe candidates for a sell-out. With an estimated Rs 1,50,000 crore of investments required in the next phase of mobile growth, the telephony majors with deep pockets would call the shots. If the regulatory hurdles are resolved, Vodafone's entry will probably mark the turning point in the return of the foreign strategic investor to Indian shores.

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