• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

Krishnan Thiagarajan

The hike in the sectoral cap for Foreign Direct Investment in telecommunications is seen as positive but how exactly will it make a difference?

IN the first round of spontaneous reactions, post Budget, the hike in the sectoral cap for FDI (Foreign Direct Investment) in telecommunications (apart from insurance and civil aviation) has been widely hailed as a positive move. As the dust settles down, it is an opportune time for a sober appraisal of this blockbuster move, which proposes to raise the sectoral cap in telecom from 49 per cent to 74 per cent in a single stroke. For the time being, it may be appropriate to leave aside the opposition of the Left parties to this move. The implications of this FDI hike proposal can be broadly analysed under two heads: First of all, how will this help the existing basic-cum-cellular (unified access) licence operators and secondly, will it usher in FDI flows into the country through a whole new set of international operators.

Beneficial to existing operators

Without an iota of doubt, the prime beneficiaries of this move will be the existing unified access licence operators — Hutchison group, Idea Cellular and Bharti group (in that order) apart from BPL Mobile and Spice Telecom, to some extent. In our view, if this proposal is passed in Parliament, the existing operators will get the first opportunity to progress from a tangled to a single-layered corporate structure, simplifying all the "complex financial engineering" which had crept in to circumvent the FDI sectoral cap.

Take, for instance, Hutchison India, part of the Hong Kong-based Hutchison Whampoa holds a 49 per cent equity in the consolidated Hutch group. With a hike in the FDI ceiling, the company will be in a position to enhance its equity stake by buying out any of its existing domestic partners such as Essar Teleholdings (of the Ruias), Max India, Kotak Mahindra and Hindujas. It had recently applied to the Foreign Investment Promotion Board (FIPB) to consolidate all its telecom interest in India under a single entity, possibly in the homestretch to its initial public offering later this year. This process may get simplified if the sectoral hike proposal goes through and may even be completed before the IPO process.

Or take the restructuring potential embedded in Idea Cellular. Recently, Singapore Technologies Telemedia (STT) and Telekom Malaysia together acquired AT & T Wireless' 33 per cent equity stake in Idea Cellular, a three-way joint venture between Tata, AV Birla and AT & T. With a hike in the sectoral cap, STT/Telekom Malaysia will be in a position to buy out the AV Birla group in a single deal at the right price, rather than on a piece-meal basis. For that matter, competitive pressures may force Tatas to do likewise, as the Birlas have indicated that they may sell their telecom interests at the right price.

Over a longer time horizon, these three major groups will also be in a position to attract substantial FDI/foreign investment flows for funding their expansion plans as well as for creation of new infrastructure. Consider Bharti Tele-Ventures (which counts among its foreign partners — Singtel, Warburg Pincus, IFC and New York Life Insurance), which is comfortably placed on the financing front at the moment. But if the mobile subscriber base expands sharply over the next six months, it will have the flexibility to raise funds through the FDI/FII route. Much the same logic will apply to Hutchison, Idea Cellular and smaller mobile operators.

Fresh FDI inflows doubtful

If we move away from the existing operators, it may be a different story altogether. The actual FDI flows over the past three years between 2001 and 2003 tell the true story. After peaking with an FDI inflow of Rs 3,970 crore in 2001, the telecom sector attracted only Rs 1,081 crore in 2002. Relatively, these two years were good, as the FDI flows slumped to Rs 301 crore in 2003. Over the past year, several policy / regulatory hurdles in telecom have been removed. But even then the policy environment remains hostile to international telecom operators interested in investing in the country on several fronts such as lopsided policymaking (say, allowing Reliance Infocomm's to convert its wireless-in-local loop licence into a full-blown cellular licence), access deficit charge regime aimed at subsidising the incumbent, BSNL, prolonged wait for spectrum and high licence/regulatory fees. To be fair, the regulator has been working with the government to reduce these irritants over the past few months.

This, to some extent, has been accentuated by sweeping changes in the cellular industry over the past year. The spate of mergers/acquisition (say, Hutch's acquisition of Aircel, Bharti's of Hexacom or Idea's of Escotel) has brought down the mobile playing field to about half a dozen serious operators. Outside the top five operators in the GSM/CDMA space (namely, BSNL/MTNL, Hutch, Bharti, Idea/Tata Teleservices, Reliance Infocomm), only BPL and Spice Telecom are left in a few circles. Given the vast consolidation, which has already taken place, it is unlikely that any US or European operators will make a big time foray into India in the near term. It is significant to note that international operators such as AT & T Wireless or TIW, Canada have decided to sell and pull out of the Indian markets over the past year. Apart from these operators, over the past few years, several leading operators such as British Telecom, Telecom Italia, Telia, Telstra, Swiss Telecom, Telia, Hughes, Alltel Corp, Bell Atlantic, Bell Canada, Shinwatra, Bezeq had exited the Indian shores in droves. The recent pullout has been despite a substantial improvement in the policy, regulatory and economic variables in the telecom marketplace and scorching pace of cellular subscriber additions in India. Besides, the regulator has also been working at removing most of the existing glitches in the policy regime. Till a level playing field emerges between foreign and domestic players on the policy front, none of these players or any new players will rush to invest in India in a hurry.

Picture by Akhilesh Kumar

maverick@thehindu.co.in

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
The other way

Copyright © 2004, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line