Ph(i)ne Line on Investment

Having come a long way from the days of monopoly, the Indian telecom industry

has seen liberaliza-tion of sorts. It all began with National Telecom Policy (NTP)

1994 when private operators were allowed to offer cellular services. It was

followed by the ’99 version, which opened up basic telephony services. Every

time a policy announcement was made, there was controversy.

Not surprisingly, the deliberate attempt to maintain the incumbents’

monopoly was evident. This time around, its about the increasing videshi role in

the telecom services companies in India. The government has plans to increase

the Foreign Direct Investment (FDI) cap of 49% to 74%, which means an additional

stake of up to 25%.

Of the various reasons cited for raising the cap in the telecom sector, is

the shortage of funds causing the sector to be a neglected child. The fact that

ever since its liberalization, this sector has not been able to attract much

foreign investment vis-à-vis its counterpart, Information Technology (IT),

remains undisputed. The IT sector, which does not have any such restriction on

FDI, has seen a crowd of multinationals investing in this part of the country.

Therefore, in telecom, Indian promoters are applying different means to route

the investments of foreign participants beyond the 49% mark. Typically, the

partner picks up more than 49% of equity through a subsidiary, a Foreign

Institutional Investor (FII) or through subscribing to preference share capital.

The idea behind the capping for FDI was to maintain the management control with

the Indian partners. But with routing techniques used by the foreign partners

and the Indian promoters, the purpose of capping gets defeated. The foreign

partners gain control over management indirectly.

The government has pointed out that allowing the FDI within the gamut of the

rules would make the whole process transparent. "If the cap is upped by

another 24% and the same is done on a case to case basis, voting rights still

can be kept under the Indian company’s control," explains an official in

the Department of Telecommunications (DoT).

Meanwhile, if this mechanism materializes, the beneficiaries will be top FIIs,

which have lined up for major investments in the telecommunications sector.

"This would also solve the problem of voting rights, as not many FIIs want

to invest in the Indian telecom sector without any management control",

explains a DoT official.

The two Indian companies that would benefit the most are Bharti and

Hutchison. Both the companies have been lobbying strongly with the government to

increase the foreign equity. For Bharti, the private telecom plans laid out for

the year 2002-03 would cost something to the tune of Rs 4500 crore. The recent

Initial Public Offering (IPO) raised by the Mittals’ could fetch only Rs 894

crore. Similarly, with the Tatas’ emerging strongly, post the acquisition of

the Videsh Sanchar Nigam Limited (VSNL) stake, Hutchison will have to pull up

its socks to make an impact as a strong telecom player in the country.

Meanwhile, there may not be a direct impact on the other major telecom player

Reliance as the giant has its own source of funding.

Realizing the lack of investments and the immediate need to infuse funds, the

government has allowed Internet Service Providers (ISPs), e-mail, voice mail and

infrastructure providers involved in setting up fibre-optic networks for telecom

operators, 100 % FDIs via the automatic route. This, though the policy came with

a rider that automatic approval for FDI will be granted only to those ISPs

without satellite or submarine cable landing stations. Many big players are

still disappointed at the ‘partial deregulation’ of the Internet sector.

"This may sound as an impediment to many, but the government’s concerns

over security issues especially today are justified", feels Amitabh Singhal,

secretary, ISP Association of India (ISPAI).

Now that the behemoth VSNL’s monopoly over International Long Distance (ILD)

is coming to an end in April 2002, the upping of foreign equity would bring in a

lot of major international players. Giants like Concert (an AT&T British

Telecom combine), MCI-WorldCom and Sprint are some of the most-likely ones to

enter India’s lucrative ILD services. Concert already commands 35% of VSNL’s

US-bound traffic, which accounts for a major share in the international direct

dialing business.

While there have been periodic demands to hike the FDI, the erstwhile

Department of Telecommunication (DoT) remained firm in not allowing more than

49% FDI in telecom services. If the plan of upping FDI comes true, and there is

infusion of foreign equity in the Indian telecom sector, then the country would

soon have its dead lines ringing again.

S Lakshmi in New Delhi