The Indian government is considering to remove the FDI (Foreign Direct investment) cap on the telecom sector in order to seek more foreign investment and boost the rupee value, reports Bloomberg citing two finance ministry officials with direct knowledge of the matter.
The report states that the changes are expected to be announced in late June or early July and following this development, foreign investors will be able to own 100% stake in telecom companies, up from the existing 74% limit. Finance Ministry Spokesman D.S. Malik however declined to comment on this development to the publication.
This follows an ET report in April 2013, which had suggested that the government is considering to amend foreign investment norms by allowing 100% FDI in telecom sector.
Why is this significant?
This development will be quite significant, since the FDI in telecom sector had dipped massively in the last year to Rs 386.55 crore as of December 2012, down from Rs 9,011.53 crore in FY12, Rs. 7,542.04 crore in FY11 and Rs 12,269 crore in FY10. Although, do note that the FDI in the telecom sector for the fiscal FY13 is not yet known.
The general sense has been that foreign investors have been spooked to invest further in the Indian telecom sector due to regulatory uncertainties like the landmark Supreme court judgement last year, the one-time spectrum charges and the retrospective tax demands. In addition, instances like the ongoing Vodafone Tax case or the rejection of Vodafone’s license extension application doesn’t help the cause. Telcos like Telenor and Sistema have repeatedly raised this issue over the past year and had scaled down their respective operations in India citing regulatory uncertainties. This was also reflected in the poor response for the November 2G auction and the March 2G auction since the telcos felt the auction pricing set by the government were too high.
On the flip side, Indian telcos have been under severe pressure to increase revenues and profitability, while facing huge infrastructure costs and hyper competition among telcos in India. This has led to telcos having a significant debt burden, since it has not been able to raise matching investments from domestic or International investors. This development will possibly pave the way for increased interests among foreign investors to invest in the sector and for foreign telcos like AT&T and other to enter the market.