The government recently lifted the cap on foreign direct investment in telecom. But will 100% FDI really transform the sector?
By KTP Radhika
The government’s decision to allow full FDI in telecom is expected to bring in fresh funds and high confidence to the sector. The union Cabinet decided to increase FDI cap in telecom to 100% from 74%, up to 49% via automatic route and beyond that through the Foreign Investment Promotion Board. Industry experts believe the sector can now garner the much-needed additional funds, and the new norms will help bring in more consolidation and buyouts in the telecom space.
Currently, India has four major service providers where foreign investors hold a majority of shares. For instance, Vodafone is owned by Vodafone Group of UK; Uninor is owned by Telenor Group of Norway; Aircel by Maxis of Malaysia and Russian company Sistema owns major stake in MTS. Each of these investors holds 74% or lower stakes. Even though many foreign investors have tried to bring in more funds to the industry, they were discouraged by the 74% cap. Now with the cap removed, cash-rich foreign telcos are likely to seek to buy out their Indian partners’ holdings and can claim complete ownership of their business. Also, new foreign investors will no longer need to partner with Indian players to comply with regulatory requirements.
During the recent telecom summit held by the industry group CII, telecom minister Kapil Sibal commented that 100% FDI is a very progressive move since there are a lot of companies who want to get into the country through a transparent way and invest here. “There are immense opportunities in the market and the money will flow if there is a return on investment,” the minister said. According to Praveen Bhadada, Director – Market Expansion, Zinnov, the key benefit will be additional avenues of capital infusion for a sector increasingly burdened by debt. As per the recent presentation given by Cellular operators association of India (COAI), the GSM industry body, to the Department of Telecommunication, the debt on telecom sector is Rs 1,85,720 crore by end 2011-12. This includes Rs 93,594 crore of debt from domestic sources and Rs 92,126 crore from external sources. “Allowing 100% FDI makes investment decisions relatively simpler by taking out the additional consideration of regulatory requirements,” Bhadada adds.
Foreign flow
According to Minister of State for Communications and IT Milind Deora, in the past 13 years, (April 2000 to May 2013), India’s telecom sector has received a cumulative FDI of $12.86 billion (Rs 58,782 crore). It comprises 7% of the total FDI inflows. That said, as per Department of Industrial Policy and Promotion (DIPP) records, FDI in the sector — which includes radio paging, cellular mobile, basic telephone services — plunged 81.64% in 2012-13 to Rs. 1,654 crore mainly due to the economic slowdown.
Deora says that the National Telecom Policy 2012 which was released in June last year, endeavors to create an investor friendly environment for attracting investments in the sector and provides clear roadmap to address policy and regulatory issues to improve the health of the telecom sector. “The enhancement of FDI cap will further facilitate capital inflows as well as ability of existing service providers to access lower cost financing,” he adds.
Apart from inviting investment, the removal of the FDI cap is expected to boost innovation in the telecom space. According to Sibal, more FDI will also help in setting fabrication units in the country and will in turn helps in innovation. Mirroring this view is Ankur Lal, Chief Executive, Infozech, a software provider for the telecom sector. He says full FDI will accelerate technology innovation in some new areas of telecom. “With 100% FDI allowed, the velocity of innovation will increase and in near term, FDI will bring in more globalization to the sector,” says Lal.
According to Sanchit Vir Gogia, Chief Analyst & CEO of Greyhound Research, 100% FDI will be a game changer as far as technology in telecommunication sector is considered. “Right now, telcos are facing money crunch especially in tier 2 and tier 3 cities. FDI will bring in enough funds for the sector and will improve the technology of the sector,” he says.
Not a silver bullet
While it is true that 100% FDI will help in wooing investors into telecom sector, experts say it alone cannot solve all the problems the sector faces today. They identify the reasons for this phenomenon as the existing policy and regulatory hurdles in Indian telecom industry. Badada of Zinnov states, “Although the decision might bring additional investments from some foreign investors as they look to buy out stake of local partners, fundamental challenges of the sector like constrained profitability, uncertain regulatory environment, decreasing revenue etc. are unlikely to be directly impacted in the short term.”
The troubles that ensued spectrum auctions and problems relating to mergers and acquisitions have to be solved first before the industry could directly get benefits from full FDI. According to Deepak Arya, Head, Regulatory affairs, Viom Networks, while FDI cap removal will give a boost to technology and manufacturing in the telecom sector, FDI alone will not solve the problems. “Today, there are lot of challenges in the telecom industry like spectrum issues. It will take at least five years to understand the effects of this move. We have to wait and watch,” he says.
As of now, foreign investors with substantial investments in the Indian market might look to invest in the near term to gain increased control and showcase long-term commitment.
New investors, on the other hand, would tread more cautiously as the decision does not fundamentally alter the investment scenario in the industry. Watch this space.
