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G. Rambabu

It's time the Government gave the nod for hiking foreign direct investment in telecom.

IN end-February this year, when the high-level Group of Ministers (GoM) cleared the proposal to hike foreign direct investment (FDI) limits in a whole bunch of sectors including telecom, it was greeted with a round of applause from the industry. The telecom industry, in particular the private cellular operators such as Bharti, Hutchison, BPL and Escotel, felt relieved at the fact that they would now be able to infuse more funds and protect their bottomlines in an increasingly competitive scenario. However, close to seven months down the line, they feel justifiably betrayed.

The Union Cabinet which took up the issue subsequently refused to give the green signal, following security apprehension — if the management control passed onto foreign hands. It tossed the issue to a Committee of Secretaries (CoS), which duly submitted its report after seeking the opinion of the Department of Telecommunications (DoT), Defence Ministry and other security agencies. Much to the chagrin of the telecom operators, a decision is yet to be taken in this regard.

The CoS had recommended that in case the Government did not want to hike the FDI limit, an alternative would be to allow FII investments upto 25 per cent outside the sectoral cap subject to an overall investment limit of 74 per cent. It would not only allay the security fears, but would also increase foreign investment while keeping the management control in Indian hands. This is precisely what the Group of Ministers have recommended to the Union Cabinet on September 25. At present, FII investments are considered as part and parcel of the FDI sectoral cap of 49 per cent.

The basic assumption is that FIIs generally do not take part in the management of the company but are interested in the rate of return on such investments. Their participation would be neutral and of the remaining paid-up capital, management would be controlled by the Indians. Further, the licensee companies will issue additional shares exclusively in favour of FIIs without diluting the existing shareholding pattern. Further, under such a scheme, the chances of individual foreign investors controlling the management of the licensee company are remote, as they will not hold more than 1 per cent equity of the company, since, for the formation of an FII, there has to be a minimum of 20 investors and each investor cannot hold more than 10 per cent equity of such FII. Moreover, each FII can invest a maximum of 10 per cent in the Indian company.

For the domestic telecom operators who have been taking a hit on their revenues with the falling tariffs rates, this should be the perfect antidote. Maybe its time the Government woke up to the fact that telecom is one of the few sectors that have delivered the fruits of liberalisation, and any efforts to curtail its growth would only be a disservice to the nation. Foreign investors who are not exactly queuing up to pump in money into the country would gladly do so if it is in telecom.

Apart from this, the few foreign investors who are in the country may make an exit if the FDI limits are not hiked.

In fact, it may be worthwhile to note that over the past couple of years, many of the foreign investors have pulled out of the country. Notable among them are British Telecom, Telecom Italia, Telstra, Swiss Telecom, Vodafone, Telia, Hughes, Alltel Corp, Bell Atlantic, Bell Canada, Shinwatra, Bezeq, Telekom Malaysia, Jasmine International and Guangdong Lintech Ltd.

Among the big investors that continue to be present are SingTel, Hutchison, First Pacific, AT&T, Distacom, TIW Canada, France Telecom, CellNet, Century Telephone and Verizon. The largest cellular operator Bharti has almost touched the existing FDI limit with major investments by Singapore Telecom (28.5 per cent), Warburg Pincus and IFC. Hong Kong-based Hutchison Whampoa technically has a 49 per cent stake in Hutch which offers cellular services in Delhi, Mumbai, Chennai, Kolkata, Gujarat, Karnataka and Andhra Pradesh. First Pacific has a 49 per cent stake in Escotel and AT&T has a dual stake of 49 per cent in BPL Cellular and 33.3 per cent in Idea Cellular.

The other major foreign investors are Distacom which has a 42 per cent stake in Spice Communications, TIW Canada (30 per cent) in Shyam Telecom and France Telecom (26 per cent) in BPL Mobile.

If either the FDI limit is hiked to 74 per cent, or FII investment limit is, all the domestic companies can go ahead and negotiate with other foreign telecom investors, who had exited the country, but may now want to make a return.

With most of their operations across the country yet to break even, and growing pressure on their bottomlines because of the falling tariffs, more FDI in their companies would only be welcomed at this juncture.

The security concerns that the Government fears can be easily tackled with adequate safeguards. It's time the Union Cabinet gave its green signal to the proposal and let the telecom operators continue with their business more effectively.

grambabu@thehindu.co.in

Picture by S. Subramanium

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