The Indian government few days back met one of the key demands of the telecom operators and bodies by raising the Foreign Direct Investment (FDI) limit in the telecom sector to 100 percent. The move is believed to provide huge confidence in the telecom industry for foreign players, and most importantly help reduce the hefty debt burden.
According to an estimate, the Indian telecom services industry is suffering a debt burden of over $40 billion. The burden is despite the fact that India has one of the largest telecom subscriber bases – around 897.02 million.
Raising of the FDI cap is expected to turn around things for the industry. But of course, this is easier said than done. Considering the depressing economic atmosphere in the country, will the turnaround happen? What does 100 percent FDI in telecom sector actually mean for users as well as the industry? What impact does it have on the industry?
There are two aspects to it. One is the foreign partners, the likes of Vodafone, Telenor and Sistema, they will be immediately interested in hiking their stake to total 100% compared to 74% earlier. They will be really interested in taking over the control of the company and will try to forego the problems or the worries they have in dealing with the local partner. The other aspect is that when we talk about companies like Bharti, Idea and RComm which already have some existing foreign partners except RComm which is only domestically-owned, some of these foreign partners can also look at injecting some equity because both Bharti and Idea will to a certain extent be interested in attracting some foreign investments to repay their existing debt.
Financial gains and consolidation
The Cellular Operators of India (COAI), the GSM industry body, reportedly in one of its presentations to the Department of Telecommunications (DoT), had pointed out the weak financial health of the sector, which was reeling under a massive debt of Rs. 1,857 billion.
With FDI gates opened, the telecom sector can garner the much-needed additional funds in coming months. The fresh inflow of money and reduced burden on local entrepreneurs will help the industry provide better quality services as well as adoption of the latest technologies. The industry is likely to have further consolidation with foreign players, who may eye the smaller players in the country.
Welcoming the 100 percent FDI in telecom, Sistema Shyam TeleServices Ltd said in a statement: “The much needed policy decision is a very positive development for the entire industry. With fresh foreign direct investments coming in, this would further catalyze growth and also the process of proliferation of telecom services across the country.”
Reliance Communications (RCom) says the move will help enhance value for all stakeholders. “RCOM strongly supports the Government’s decision to allow 100% FDI in the Telecom sector. 100% FDI in Telecom will enhance value for all stakeholders,” says a company spokesperson.
“ The move to increase the investment cap of 74 percent FDI to 100 percent is welcome as it will help the industry to 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. This will undoubtedly have a huge benefit for our customers and higher license fee for the government,” says Aircel in a statement.
But market cannot afford more than six profitable telcos in the industry. From the existing situation where we have 10 telcos, we expect the consolidation to take place to an extent that only six players will remain in this industry.
Likely buyouts and mergers
Apart from Bharti Airtel, most of the telecom operators in India may look for buyouts or mergers. Vodafone, the second largest operator in the country, is likely to buyout the 11 percent stake held by Piramal Group and the remaining shares of Essar Group.
Russian conglomerate Sistema holds a 73.71 percent stake in Shyam Sistema with Shyam Telelinkm and operates under the MTS brand in the country. SSTL was the only bidder in the March 2013 auctions for the CDMA spectrum. The Russian conglomerate may increase its stake in its India venture.
A similar deal is expected between Tata and Docomo. NTT Docomo currently has 26 percent stake in Tata Docomo. The new FDI limit may encourage the Japanese company to raise its share. Aircel was reported to be in talks for a stake sale from Malaysian company Maxis Communications, which has the majority stake in the company.
As far as Bharti Airtel and Idea Cellular go, these two companies have foreign holding less than 74 percent. These companies may not look for such deals in the near future. Bharti has stakes from Singapore Telecom and Qatar Foundation. Idea has about 19.96 percent stake from Axiata.
Why FDI may not have significant impact
Contrary to the general and popular belief, some analysts believe the increased FDI limit in the country is going to have a very limited impact on the sector.
“ The impact will be limited since the problems faced by telecom companies are to do with regulation and licensing not investment per se. Some tower companies which are 100% foreign owned (e.g. American Tower) could benefit. They do not require licences. However, they would have been obliged to dilute ownership if the government required them to obtain Unified Licences, as the TRAI has recommended,” says telecom analyst Mahesh Uppal.
According to a Wall Street Journal report, analysts are sceptical about foreign players investing in the sector that has been marred by allegations of corruption as well as regulatory uncertainty.
“ For consolidation to happen in India as well as to attract new players to the Indian telecom market, we need a comprehensive framework to provide clarity on all regulatory issues,” Saurabh Agrawal, who heads corporate finance for South Asia at Standard Chartered Bank, is quoted as saying.
Forbes India’s author, Mohammad Chowdhry in his report says the move will not change the fundamentals of the industry.
“ …further fundamental change will depend on greater clarity on spectrum policy, as well as demystification of the mergers and acquisitions environment by making it easier for players to acquire and sell spectrum rights separately from the rest of the business,” writes Chowdhry.
Interestingly, the new FDI policy for telecom has seen opposition outside in the industry. According to Tamil Nadu chief minister J Jayalalitha, the move raises a number of concerns.
“These measures raise a number of serious concerns. Far from protecting the interests of workers and the common people of the country, the UPA government appears to be acting at the behest of foreign interests and some external Rating Agencies which are frequently threatening to lower the Sovereign Rating to ‘Junk Status’ and thereby cowing down the weak UPA government at the Centre, making it bend to its whims and fancies,” the chief minister said in a statement.
On risks involved in the FDI, analyst Mahesh Uppal says: “The “colour” of money is not the issue. However security concerns related more to services, networks and equipment. This is a serious concern in the light of recent disclosures including PRISM and reported concerns in US and UK about Chinese equipment.”
More measures required
Raising the FDI limit is certainly a welcome step, but it’s only one of the many much-needed solutions to our cash-strapped telecom industry. There is a lot more to be done to recover the industry.
The government needs to bring more clarity in its policies related to regulation, licencing and taxation. Taking lessons from 2G scam, the allocations have to be made in more transparent manner. Tussle over the inter-circle roaming, licence renewals and other issues are unlikely to send a positive message outside.
The industry has to come out of the shadows of corruption and the state of confusion where there’s an apparent lack of vision for the industry. It’s notable the industry already had a decent 74 percent cap of FDI, but still failed to gain ground.
Without the availability of a conducive atmosphere, it’s highly unlikely the telecom sector moves towards the path of recovery.