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India Allows 100% FDI In Telecom; What Next?

India has allowed 100% Foreign Direct Investment (FDI) in telecom: At a meeting held by the Ministry of Commerce and Industry, Chaired by the Prime Minister, there was agreement on allowing 100% FDI in “Basic and Cellular Services”, of which 49% FDI is allowed through the automatic route, and for increasing stake up to 100%, companies with have to go through the bureaucratic process of the Foreign Investment Promotion Board. Prior to this, India only allowed 74% FDI in telecom.

Details: Announcement, Annexure (the link they’ve given doesn’t work)

Acquisitions That May Follow

Foreign telcos will buy out Indian shareholders: Given that the foreign telecom operators held 74% in their Indian telecom operations, it is likely that they will buy out their Indian stakeholders. This means that:
– Vodafone will buy out the 11% stake held by the Piramal Group, and whatever else is still held by the Essar Group. Vodafone India is the second largest telco in the country, with around 146 million active connections at the end of April 2013.
– Telenor holds 74% in Telewings Communications Pvt Ltd, the joint venture it formed with Lakshdeep Investments & Finance (from the Sun Pharma founders), after a bitter battle with previous Indian partner, Unitech. A Telenor vs Unitech timeline here. Uninor had 31.68 million active connections in India at the end of April 2013.
– Russian conglomerate Sistema holds a 73.71% stake in Shyam Sistema in partnership with Shyam Telelink, and operates under the MTS brand. It was the only applicant for CDMA spectrum in India in the auctions held recently (some history here), and won spectrum in 8 circles. MTS had around 10 million active connections in India at the end of April 2013.

What Happens To…

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– Tata Docomo: Docomo currently holds 26% stake in Tata Docomo, and these regulations will encourage it to increase its shareholding in the company, but frankly, a lot would depend on the performance of the company. Tata Docomo had around 65.63 million active connections at the end of April 2013, which is substantive.
– Aircel: Was reportedly in talks for a stake sale from Malaysian co Maxis Communications, which owns a majority stake in Aircel. Sindya Securities and Investments Pvt Ltd, promoted by Suneeta Reddy and P. Dwarakanath Reddy, of the Chennai based Apollo Group hold 26% stake in the telecom operator. Details here. Aircel had 36.16 million active connections at the end of April 2013.
– Videocon: The telco had an active connections base of 1.4 million at the end of April 2013, and, as far as we know, no foreign investors.

Why Foreign Telco’s May Still Not Enter

The Indian government has been busy roasting the golden goose:

– Regressive policies: the Vodafone tax case, wherein laws were changed to apply tax retrospectively on Vodafone for its purchase of what is what is now Vodafone India, from Hutch, is possibly the worst example of policy making. The signal that went out to foreign investors: even if there is rule of law in India, the laws can be changed by the government to suit its needs.

– Corruption and policy not holding up in court: the 2G Scam, wherein the telecom ministry, at that time led by A. Raja, allocated licenses alongwith spectrum under the first-come-first-serve basis, but more pertinently, shifted the dates of application, allowed the entry of many foreign players. That brought in fresh investment in the telecom sector in India, but also led to hyper-competition, with prices falling drastically, and some telcos offering free minutes just to get consumers on board. When India’s Supreme Court cancelled 121 licenses that were allocated as a part of the 2G Scam, the message that went out to foreign investors was: whatever the Government of India decides, it might not hold up in court.

Many foreign investors burnt their hands in this process, and decided to withdraw from India – Etisalat shut Swan Telecom, Batelco exited S Tel.

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– Aggressive Regulatory Action: Government bodies and regulators have been hyperactive in recent times: the 3G roaming pacts have been under scrutiny,the government recently sent a demand notice to Airtel with a Rs 650 crore fine for providing Subscriber Local Dialing between 2002 and 2005, there’s been an issue with Vodafone, regarding the extension of its 2G license in India.

There’s no telling what the government will do next, and some of the actions it is taking almost appear to be vindictive – as if it is trying to weaken the sector instead of strengthen it. This appears to be largely because there is a revenue focus versus market focus: this government has build up a massive fiscal deficit, and it is trying to extract what it can from one of the few sectors that was actually doing well. The results of its actions: spooked investors. Remember that last two 2G auctions have failed, even though foreign telecom operators could have entered by acquiring spectrum then.

So, even if 100% FDI in telecom has been allowed (via the FIPB red-tape), don’t expect any miracles yet.

Written By

Founder @ MediaNama. TED Fellow. Asia21 Fellow @ Asia Society. Co-founder SaveTheInternet.in and Internet Freedom Foundation. Advisory board @ CyberBRICS

MediaNama’s mission is to help build a digital ecosystem which is open, fair, global and competitive.

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