Dialing the right number
The Hindu Business Line
Dev Raj Singh
Executive Director - Tax and Regulatory Services
The decision to remove the limit on foreign direct investment in the telecom sector is meant to reassure foreign investors about the country’s political and regulatory stability and, at the same time, help debt-ridden telecom entities attract funds.
Existing foreign investors can increase their stake in subsidiaries and reorganize their debt-ridden balance sheets; new investors can invest without any Indian participation. Complete ownership is now a possibility in this sector.
Currently, foreign investment has reached the threshold limit and any additional infusion of foreign funds should be matched by the Indian partner to maintain the statutory limit. The policy modification has provided the Indian partner an exit route.
Foreign telecom companies can currently participate in the spectrum auctions held by the Department of Telecom, but service can be initiated only when 26 per cent equity stake is owned by an Indian entity.
The reforms also focus on making the spectrum auctions more attractive to foreign investors and eliminating the need for Indian partners to share the huge capital expenditure involved. This will allow telecom companies to invest in better infrastructure.
Indian subsidiaries of foreign companies already satisfying the criteria of 74 per cent FDI shall be the frontrunners to receive the immediate benefits of these reforms. Further, the 100 per cent stake held by a foreign investor will expedite the decision-making process and strengthen confidence in the Indian regulatory environment.
The policy may also benefit domestic telecom companies in managing their debt and strengthening their balance sheet.
The proposed liberalization of the telecom sector would also trigger consolidation involving mergers and acquisition; it is unclear how many of the current operators can survive in the long term, but the major players are expected to remain buoyant.
India is one of the largest telecom markets by users. The sector is marred by unstable policies and an extremely competitive market. These factors have in recent years rendered the sector unattractive for investments.
As the process to achieve 100 per cent ownership is long-drawn, current investors would be the initial entities involved in raising stakes. A new entrant will weigh the prospects cautiously before accepting this invitation from the Indian Government.