10 things you need to know before the opening bell
Sensex opens 100 pts up on FDI boost norms, Telcos gain

Money Jul 17, 2013

FDI in telecom: Why RCom, Idea and Bharti are market heroes today

By Firstbiz Staff

Shares in India's mobile operators gained on Wednesday, a day after India approved raising the foreign investment limit in the sector to 100 percent from the current 74 percent.

India approved the relaxation of foreign direct investment (FDI) rules on Tuesday in a broad swathe of industries in a bid to lure capital inflows, prop up a sliding currency and rev up growth.

Reliance Comm gained 2.9 percent, Idea Cellular rose 2.4 percent, while Bharti Airtel rose 1.5 percent.

According to telecom minister Kapil Sibal, the elecom sector needs funds to the tune of Rs 5-6 lakh crore in the next five years and removing the FDI cap would help investment flow into the cash starved sector.

Reuters

Reuters

How will removing the cap on Foreign Direct Investment (FDI) in telecom help the financially weak telcos?

One view is that this move will make impending spectrum auctions more attractive to foreign telcos and another is that it will remove the need for huge investments by an Indian partner in any telecom venture. In the last few days, several voices have joined the chorus on removing all limits on FDI in telecom sector and allowing foreign players 100% play against the present cap of 74 percent.

As of now, foreign telcos or foreign entities are permitted to participate in spectrum auctions conducted by the DoT, but they can begin services in India only when they get a 26% equity partner, which is an Indian entity. Additionally, FIPB needs to approve their foreign investment above 49 percent. Since the FIPB approval is dependent on security clearances, it usually takes a long time too.

The proposal to remove any FDI cap in the telecom sector is obviously supported by the industry as well. In a recent presentation to the DoT, GSM lobby group Cellular Operators Association of India (COAI) has also pitched for 100 percent FDI in the telecom sector. It has pointed out that the sector is mired in Rs 1.86 lakh crore of debt and has accounted for a mere 8 percent of total FDI inflows into India in 12 years between 2000 and 2012.

Who will gain?

Industry experts believe the move will help reduce the debt burden on the companies, which is close to Rs 2.5 lakh crore. Liberalisation of the telecom sector is bound to trigger consolidation among existing foreign players who will now move to take complete control of their India operations.

The move is likely to see other global telecom operators set up shop in the country. Experts say it could attract close to $10 billion worth of investments in the long term. The sector has so far attracted FDI worth $13 billion since early 2000.

Allowing foreign players access means fresh funds will now flow into the sector as foreign investors will no longer need to partner with Indian investors in order to comply with regulatory requirements.

Bharti Group in Airtel, Aditya Birla Group in Idea, Tatas in TataTele, Shyam in MTS, Piramal and Vodafone, Reliance in Reliance Infocomm, and Reddys in Aircel can nowsell in part or full their stake to the foreign investors.

Foreign telcos like Sistema of Russia, leading companies such as DoCoMo of Japan, SingTel of Singapore, Maxis of Malaysia, Vodafone plc of the U.K., Axiata of Malaysia, Telenor of Norway, etc. will benefit from the move as they can now have bigger operations in India without worrying about control as they will now be able to own all of a telcom with the ceiling being raised to 100 percent from the current 74 percent.

According to a report in the Times of India, Ajay Piramal of Vodafone, Sudhit Valia of Telenor, Sangita Reddy of Aircel could get an axit option while the Cyrus Mistry led Tata Group may cut stake in Tata Tele. Such exits, according to the report, are likely to fetch the, double digit returns.

by Firstbiz Staff

Related Stories.