Cheer for cash-strapped sector; can spur consolidation

In a note of cheer for the cash-strapped sector, the Telecom Commission has recommended hiking the foreign direct investment cap from 74 per cent to 100 per cent, paving the way for increased foreign participation.

Foreign companies can now own 100 per cent in a telecom entity. While 49 per cent investment can be made through the automatic route, the approval of the Foreign Investment Promotion Board is needed for higher stakes. The telecom panel’s recommendations will now go to the Cabinet for final approval.

The proposed move will help the debt-laden telecom sector in getting fresh funds. According to Hemant Joshi, Partner, Deloitte Haskins & Sells, “The telecom sector in India needs additional funds in the next few years to stay current with emerging technologies, increase offerings and improve penetration. Debt or local investments alone will not be enough.”

Apart from bringing in fresh investments, the move will also spur consolidation. “There is an expectation for further consolidation and buy-outs in the telecom space as cashed up foreign telecom companies may seek to buy out smaller players as the entry barriers will have significantly reduced,” said Prashant Singhal, Partner in a member firm of Ernst & Young Global.

Exit Option

The move will allow some of the players to structure their holdings more transparently without having Indian joint venture partners.

Malaysia-based Maxis, for example, has parked a 26 per cent stake in Aircel with the promoters of Apollo Hospital to comply with existing FDI norms.

Vodafone and Telenor have also inked similar arrangements with the Piramal Group and the promoters of Sun Pharmaceuticals, respectively. The Indian ventures in all these companies can exit if the Cabinet gives its approval.

“The move to increase the cap will help the industry bring in more FDI to fund the high capex demands of this sector, especially in areas to enhance coverage, and launch new 3G and BWA services,” Aircel said in a statement. Maxis has been looking to exit Aircel and may find it easier to find a foreign player now.

But the Government will also have to clarify the merger and acquisition rules for the full impact. “Hundred per cent FDI in itself, without clearing regulatory and tax uncertainties, may not attract foreign investors,” said Deloitte Haskins & Sells’ Joshi.

(This article was published on July 2, 2013)
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