The proposed mergers between Videsh Sanchar Nigam Ltd., India's biggest Internet and international long-distance telephony, and Tata Teleservices, was announced Tuesday at VSNL's annual shareholders meeting.
"The two companies have common interests. Tata Tele could have implemented an international long distance project on its own. It did not," Tata Group Chairman Ratan Tata said. VSNL would love to have basic operations to get its own subscribers."
He said a merger "would complement each other's business and help in expansion."
VSNL, in which the state held a 52.97 percent stake, has been in the forefront of the Indian telecommunication revolution. It is listed on the New York Stock Exchange and India's top exchange.
As a part of its divestment plan, the Indian government sold a 25-percent stake in the company for $2.99 billion and transferred management control to the Tatas in early February.
The deal not only ushered in full-fledged telecom-sector reforms, but also added another layer of competition to the sector, which is still largely controlled by the state and a few privately held telecom companies.
The acquisition made the Tatas one of the major forces in India's $9 billion per year telecom market. For VSNL the change in management meant the opening of more doors.
The Tatas, through Tata Teleservices, provide basic telephony to five of India's states -- Andhra Pradesh, Delhi, Tamil Nadu, Gujarat and Karnataka.
But VSNL did not come to the Tatas without problems. Following the acquisition, the Tatas faced a barrage of criticism when they wanted to invest $247 million of VSNL's cash reserves in Tata Teleservices.
The government, which still holds 26 percent of the company, criticized the move. Critics said it was improper to invest the funds in a company that was still unlisted and had not been valued.
The Tatas eventually succumbed and said they would spread the investment over five years instead of the original one year. It is against this background Tuesday's merger gains significance.
Ratan Tata, now VSNL chairman, also said the company had finalized a $270 million plan to enter broadband and national long distance services. Of this amount, about one-third would be invested in the current fiscal year, while the balance will be invested in 2003-04.
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