The Hindu Business Line : Foreign equity holders in cellular cos may up stake

THE Government's decision to increase FDI in telecom sector to 74 per cent is expected to result in some significant announcements over the next few weeks by existing foreign stakeholders in Indian cellular companies such as Airtel and Hutch.

Market analysts also predict that the move to keep out foreign holding in Indian public sector banks and financial institutions, having investments in telecom companies from being counted as FDI, will see increased activity by financial institutions (FIs).

Ms Kobita Desai, Principal Research Analyst, Gartner India, said: "The decision will send the right signal to the global community as it makes the process more transparent. It brings in more clarity to financial institutions that may now want to invest in the telecom sector. This will also benefit telecom companies that are planning IPOs."

Essar-Hutchison, the fourth largest cellular operator in the country, has been planning an IPO and will find the decisions very beneficial. Listed companies including Bharti, Tata Teleservices (Maharashtra), and VSNL may also see more interest from FIs.

The FDI hike will also allow telecom companies to restructure their equity holdings in a more transparent way. Companies such as Essar-Hutch and Airtel are understood to have foreign equity already as high as 60-74 per cent, invested through pyramiding structure to circumvent the 49 per cent cap that existed so far.

The Government has allowed such companies four months to come clear on the equity structure and bring the levels to 74 per cent.

While Hutchison Whampoa is the foreign partner in Essar-Hutch, SingTel is Bharti's foreign partner in Airtel. Bharti also has Warburg Pincus as its other major partner. Officially, both Hutch and Airtel show foreign equity at 49 per cent.

Other telecom companies such as Idea Cellular, Spice Telecom, and Aircel, will also gain from the hike in FDI cap as they have been looking out for a foreign partner.

Idea had almost concluded a deal with Singapore Telemedia and Malaysia Telecom to pick up 49 per cent stake but the agreement got stuck in Government approvals.

The hike in FDI cap is likely to revive the company's hopes to get a foreign partner quickly.

"A 49 per cent cap would not have attracted larger strategic investors. The decision to hike the cap is a win-win for all. It benefits operators as they can get more funds, consumers get enhanced services with more competition, overall economy benefits, and the Government gets more revenues," said Mr Deepak Kapoor, Executive Director and Leader (Infocomm Practice), PricewaterhouseCoopers.

A number of foreign players including Vodafone, KDDI, STT, and AFK Sistema have been waiting in the wings for some time to make the entry into the fastest growing cellular market in the world.

"We have come across a number of investors who are keen to put money in India. Now they will have more clarity in terms of policy and we are sure of inflow of some funds in the coming months," said Mr T.V. Ramachandran, Director-General of COAI.

Since the opening up of the telecom sector in 1991, FDI has been slow in coming.

Though the net inflow has increased from Rs 2.06 crore in 1993 to Rs 9,950.94 crore as of March 2004, analysts have pegged a requirement of over Rs 1,50,000 crore to meet the national target of 250 million telephone lines by 2007.

Increase in the FDI cap is expected to provide fillip to the inflow even as company valuations rocket upwards. According to industry estimates, $5-billion worth of FDI is expected in the next 12-18 months.

For the consumer, an increase in the flow of money means access to better technology, better quality of services, and wider choice as operators invest more on their networks. And one can also expect tariffs to fall further.

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