In what came as good news for foreign telcos, as well as their debt-laden domestic peers, the Telecom Commission (TC) on Tuesday approved the proposal to raise the cap on foreign direct investment (FDI) in the telecom sector to 100 per cent from the present 74 per cent.
While TC has given its green signal to 100 per cent FDI in the sector, up to 49 per cent can come via the automatic route. For investments beyond that level, permission will have to be sought from the Foreign Investment Promotion Board (FIPB).
At present, the country permits up to 74 per cent FDI in the sector - 49 per cent can come through the automatic route and the rest after FIPB approval. The decision now has to be cleared by the Union Cabinet and is expected to find opposition from the ministries of home affairs and defence over security concerns.
However, if cleared, it will enable foreign telcos to easily buy out their Indian partners with which they had to join hands to meet the FDI norms for running companies in the country. It will also do away with the need for a foreign telco to look for another Indian partner if an earlier one decides to walk out.
Among those to benefit will be British telecom giant Vodafone Group, Norway-based Telenor and Russia's Sistema - all of which are present in the country with their Indian partners.
Vodafone, for instance, had to scout for a new partner after the Ruias decided to sell out. It found a new partner in Ajay Piramal, with whom its agreement included the clause that it would have to buy back shares at a premium if an IPO did not materialise in two years. In the case of Telenor, it had a bitter battle with its partner, the Unitech
group, that later reached a settlement. When the Norwegian firm rebid for licences that it had lost after a Supreme court order, it had to get a new partner, Lakshwadeep Investments & Finance owned by Sudhir Valia.
The decision will also enable Indian telcos, sitting on a total debt of 2,50,000 crore - 50 per cent of that in foreign debt - to reduce exposure by bringing in cash and retiring debt through equity infusion.
Earlier, a ministerial panel headed by Finance Secretary Arvind Mayaram had proposed that FDI cap be raised for several sectors, including defence, telecom, retail and commodity exchanges, to attract long-term investments and help the government contain its widening current account deficit.
Responding to Tuesday's development, a spokesperson for Telenor, which recently received FIPB approval to increase its stake in its Indian unit, Telewings Communication Services, to 74 per cent, said: "The move will make it easier for operators to attract FDI, as it allows more flexibility to shareholders and others looking at long-term investments in India."
The same view was echoed by Sistema Shyam Teleservices, which is 56.68 per cent owned by Russian telco Sistema. It said in a statement: "The much-needed policy decision is certainly a pro-industry and a pro-consumer move. With fresh FDI coming in, this will further catalyse the process of proliferation of telecom services across the country."
Even Aircel, which is 74 per cent owned by Malaysia's Maxis, said in a statement that the move "will undoubtedly have a huge benefit for our customers and (translate into) higher licence fees for the government".
Indian telcos, looking to get in strategic investors, have also welcomed the move. The decision is likely to improve the valuation of their shares and help them get more suitors from among telcos interested in making an entry into India.
A spokesperson for Reliance Communications
(RCom), which is in preliminary talks with South Africa's MTN for sale of a majority equity stake, said the decision to allow 100 per cent FDI in telecom would "enhance value for all stakeholders". Analysts say the move will also help companies like Bharti Airtel
that have large debt on their books, by giving them more flexibility to bring in money from abroad through equity. Bharti Airtel recently sold a five per cent stake to Qatar Foundation Endowment.
Following TC's approval, the Department of Telecommunications (DoT) would send a detailed note to the Department of Industrial Policy and Promotion (DIPP) and the proposal would then be forwarded to the Cabinet for approval, said an official. The decision would only come into force after the Union Cabinet has approves the proposal.
According to a DoT official part of TC, the licensing rules for telecom companies had already taken care of security issues.
Sector analysts believe the move will be a catalyst for the already-burdened telecom industry. "In spite of the home ministry's concerns on raising FDI caps in telecom, defence, civil aviation and space on the grounds of national security, this is indeed a very critical move by the government. There is an expectation for further consolidation and buyouts in the telecom space, as cash-rich foreign telcos might seek to buy out smaller players after the entry barriers have been significantly reduced. In the longer term, this will enable additional capital inflows and accentuate the overall financial viability of the telecom sector," said Prashant Singhal, partner, Ernst & Young India.
But Hemant Joshi, partner, Deloitte Haskins & Sells, believes allowing 100 per cent FDI, without regulatory approvals and tax uncertainties, might not attract foreign investors. "The industry is under tremendous stress due to regulatory and policy uncertainties, mainly because there is no clarity on merger & acquisition policy and the government has yet to finalise spectrum-related policies, such as refarming, efficient usage, and tax uncertainties," he said, adding that the decision would anyway help get additional funds for the sector.
Telecom sector, which has attracted nearly $13 billion foreign inflows since early 2000s, is one of the leading sectors in terms of FDI equity inflows. "The move to increase FDI limit is expected to provide the much-needed boost to the sector and is likely to attract approximately $10 billion worth of investments in the near to long term," Singhal added.
Meanwhile, TC has sought a detailed project report on the feasibility of creating the Telecom Finance Corporation (TFC), which would address the sector's funding challenges. It is proposed that TFC will be set up on the lines of sectoral finance bodies like Power Finance Corporation
and Tourism Finance Corporation of India. It will have a target to finance Rs 38,000 crore over five years.
TC has decided to appoint a consultant to look into valuations and other issues for the proposed divestment of equity in Telecommunications Consultants India Ltd (TCIL).
In March 2012, the Department of Disinvestment had decided to divest 10 per cent in TCIL, which was also given the option of taking a call on fresh equity infusion. In June 2009, the board of directors of TCIL had approved the proposal to issue 4.32 million equity shares of Rs 10 each through an IPO.