CALCUTTA, India, Feb. 4 (UPI) -- With the much-awaited permission to allow more foreign investments finally coming through from the Indian government, the country's booming telecom sector is in for a sea change, which some experts said could catapult India's telecom markets to one of the most attractive markets in the world.
Already, India is the second-largest telecom market after China and, with 48 million wireless customers in just about 10 years since the emergence of wireless telephony in the country, it has emerged as the fastest growing wireless market, which is now adding more than 2 million connections each month.
On Wednesday, the Indian government finally voted to raise the allowed amount of foreign direct investment in Indian companies up to 74 percent, up from the current 49 percent, meeting a two-year long demand of industry and foreign investors.
However, to placate the Left parties, on which the right-wing Congress-led United Progressive Alliance government is heavily dependent in parliament, and which vehemently opposed a higher cap, the government has included several stiff riders. The new guidelines, "carefully address all security concerns of the country and the left parties," said India's Finance Minister P. Chidambaram. Concerns that opening the telecom sector to foreigners could potentially weaken India's security were a force in stalling the clearance of the now-on, now-off hike for two years.
The new FDI policy is expected to trigger a fresh round of consolidation in line with the global trend of just four or five major service providers. "Telecom companies would now be able to access low-cost capital for their expansion plans. A higher FDI ceiling would also spur merger and acquisition activities in the sector, particularly in cellular space," said analysts at Refco Sify Securities.
Globally, telecom consolidation appears to have emerged as a hot phenomenon over the past few years -- like the recent SBC Communications acquisition of AT&T for $16 billion. India, in fact, had already gone through one such phase around the mid-1990s. In that round, the number of operators was reduced from 23 to the current 10, which include just two state-owned basic telephony operators, Bharat Sanchar Nigam Ltd. and Mahanagar Telephone Nigam Ltd. The rest are privately owned companies that are all players in the wireless telephony space.
Consolidation, for that matter, is already underway. Just a day after the policy was announced, the Indian mobile unit of Hong Kong-based Hutchison Telecommunications International Ltd., India's fourth-largest mobile services provider, reportedly bought the equity of its Indian partners in several subsidiaries and issued shares to them in the merged entity.
The merged entity, according to reports, is also planning an initial public offering for its Indian wireless business, which had 7.2 million users at the end of December.
In yet another consolidation deal, Aircel Televentures, a mobile telephony-services provider in India's southern state of Tamil Nadu, said yesterday that it has entered into a non-binding agreement with Russia's AFK Sistema to sell its 49 percent stake in the company for $450 million, for which AFK Sistema would float an Indian arm.
However, according to K. A. Chaukar, managing director of Tata Industries, the most significant consequence of the FDI cap hike would be that "with fewer regulatory concerns, international investors will now be able to accord higher priority to India."
Indeed, foreign investors had long been attracted to the success story of India's telecoms, but were stymied by a stubborn and influential protectionist faction that forced the government for years to cap the foreign direct investment limit. Foreign investors, however, were unwilling to bet on the country without a majority control.
Through a new policy in 1995, India first invited foreign investments into its telecom sector at a time when the country had only 8 million phones for a billion people.
But there were teething troubles in the initial days. First, the over-estimation of India's market size and hyper-bids for telecom licenses in 1995 made lenders wary, whose "no business-case, no-lending," led to a crawling project roll-outs.
Then followed a string of ill-thought-out regulation resulting in a spate of litigations and industry wars between operators. Moreover, ever-recurring disputes with the government made investors from across the globe turn and run away. Some of course fought with their Indian partners while a few others cut losses, but all that chaos nearly choked India's telecom ambitions, and soon a seemingly lucrative sector emerged as a "big letdown."
Things changed, however, in 1999 when yet another "New Telecom Policy" was announced, that drastically reduced the burden of license fees, ironed out regulatory wrinkles, and opened up the telecom sector to greater competition.
Following that policy, the industry also took off. From just a 0.8 percent teledensity (phones per 100 people) about a decade ago, India telecom connections zoomed to around 90 million phones (9 percent teledensity) by the end of 2004, with more than half in the wireless segment.
Simultaneously, as competition spread across services, tariffs dropped to levels that are now considered the lowest globally. For instance, the once $1.06-a-minute call to the United States is down to 17 cents; $1 a minute local long distance calls are down to 8 cents; and 40 cents a minute local mobile calls have fallen to 5 cents.
Still India's telecom has a long way to go. The country needs to reach at least 20 percent teledensity by 2007, which means that it has to add another 250 million telephone connections by then.
And that target translates to a requirement of at least $20 billion of fresh investments, which is clearly beyond the means of the domestic players. Foreign direct investment is perhaps the only option India has to achieve its telecom goals, say experts.
Nonetheless, could the riders that come attached with the latest regulatory relaxation pose a hurdle? Because some of them look nasty indeed.
The riders include a clause that the top management, including the chairman, chief executive, chief technical officer and chief financial officer of telecom companies should be resident Indians. "Besides the licensor -- India's Department of Telecom shall be empowered to notify any other key positions that it feels should be held by a resident Indian citizen," Finance Minister Chidambaram said.
There are other restrictions. For instance, telecom operators cannot share information about their subscribers and network design with foreign agencies. Operators will also have to provide traceable identity of its subscribers. Calls made within India cannot be routed through networks in other countries. Similarly, no foreign company can undertake the maintenance and repair of telecom networks in the country.
Most experts believe that these restrictions do not matter. "These riders are not likely to prove restrictive," said Prashant Singhal, India Telecom Leader, Ernst and Young India. "The guidelines will not hamper the flow of FDI into the country either. Industry expects $5 billion to come in the next 12 to 18 months."
But more importantly, the upsides are far more attractive than the downsides, feels Kobita Desai, principal telecom analyst of Gartner India. "We see this as a continued effort to ease regulatory constraints," she said. "And this will help to create conducive conditions for increased growth, investment and consolidation in the telecommunications sector."
And, according to Asim Ghosh, managing director, Hutch India, the environment of openness that the new relaxations create, would sends positive signals to investment communities as well as to service providers.
