All caps off telecom sector, but will the dollars roll in?

The telecom industry has given thumbs up to the UPA government’s latest decision to increase the foreign direct investment (FDI) cap from 74 per cent to 100 per cent in telecom saying it would reinvigorate a sector which is in severe debt. The idea behind the decision to increase the FDI is to help the industry get fresh funds to lower its financial burden. The move also brings relief for foreign partners in telecom companies as they can now have complete ownership of the businesses.

Opening up the FDI further might not bring in a flood of dollars immediately, but gradually foreign telecom companies may look at buying out majority stakeholders in the world’s second most populous nation, say analysts. It will also do away with the need for foreign telecom companies to look for new Indian partners if an earlier one decides to quit.

Among those to benefit will be British Telecom giant Vodafone group, Norway -based Telenor and Russia’s Sistema–all of which are operating in the country with their Indian partners. Indeed, the decision will also help to the Indian telecom companies, who have been sitting on huge debt, to ease their burden by bringing in overseas investment. It will  also help some of the foreign telecom operators like Africa’s largest wireless carrier MTN to acquire stake in Indian companies. MTN, which earlier aborted a deal with Bharti Airtel due to regulatory issues, was looking at the country’s reform policy to invest in the fastest growing Indian telecom sector, say analysts.

Telecom lobbies have been pressuring the government to liberalise the FDI as the industry is desperately looking for influx of funds to make the companies economically viable and invest in 3G and broadband wireless access services. As per a recent presentation by GSM industry body COAI ( Cellular Operators Association of India)  to the Department of Telecom, the telecom sector debt stood at Rs 1,85,720 crore at the end of 2011-12. This included a debt of Rs 93,594 crore from domestic and Rs 92,126 crore from external sources.

Certainly the Indian telecom sector did prove as one of the most lucrative for foreign investors. While getting nearly $ 13 billion foreign inflows since early 2000, the telecom sector became a leader in terms of FDI equity inflows in to India. With the removal of cap, now the government expects to attract another $ 10 billion worth of investments in the next five years.

Tremendous pressure

Appreciating the decision, CII Director-General Chandrajit Banerjee says the revision of caps in various segments is a huge step in setting off reforms. However, there are a number of challenges before the government to boost the overseas investors’ confidence in the sector, which was marred by corruptions and scandals. The sector, which is under tremendous pressure, is looking for clarity in some of the key issues like regulatory and policy directions, mainly regarding merger and acquisition, spectrum refarming and its efficient usages, besides clarification on tax matters.

“The removal of cap on FDI is a very positive development for the entire industry”,  a spokesperson of Russian conglomerate Sistema controlled SSTL said. Sistema holds 56.68 per cent stake in SSTL, the Russian government 17.14 per cent and around 24 per cent equity is owned by its Indian partner Shyam Teleservices.

Confident of addressing all issues raised by the investors, Union telecom minister Kapil Sibal said all doubts will be cleared soon. Amidst cheers from the industry regarding the decision, security agencies have always raised their concern saying if these companies go into foreign hands fully, operators may compromise the call data. Sibal, while dismissing the fear expressed by security agencies, said all concerns will be addressed and the operators will be mandated to abide by the Indian laws.
According to him, the telecom operators who want to run a company without Indian partners, will have to procure sensitive products used in telephone operations like chips and routers from domestic manufacturers. The government will encourage telecom operators to invest in manufacturing of telecom equipment.

The government also plans introduce Preferential Market Access (PMA) policy that allows telecom operators to purchase domestically manufactured sensitive telecom and electronic equipment and technology. But the sector, which is dominated by private sector with 80 per cent market share, is currently depending on foreign equipment. According to telecom regulator TRAI, only 12 to 13 per cent of all local products made with the aid of foreign vendors were used in the sector during 2009-10. However, purely India-made products formed just 3 per cent of the market. “In this scenario, the government can’t make companies to purchase domestically produced equipment as production itself was very less. For operators to investment in the manufacturing sector may take time” says an analyst. 

Some players, however, also feel that hiking FDI limit from 74 per cent to 100 per cent in the telecom sector will not make much of a difference as foreign investors would continue to exercise control in more or less the same fashion as they did when the cap was 74 per cent. “A hundred per cent FDI in telecom is just the first page of a novel. The real future lies in mergers and acquisition norms that will clear the future of investments in the sector. Everyone will work out their investment strategy by looking at all the points and not just from FDI perspective,” an official of telecom firm, which is seen as a potential buyer, said.