The Telecom Commission has approved the enhancement of the foreign direct investment (FDI) limit in the telecom sector from 74 per cent to 100 per cent.

The cumulative FDI between 2000 and 2012 was Rs.57,079 crore or nearly $10 billion (see Chart).

The Telecom Commission’s decision will now be submitted to the Union Cabinet for its approval. The move comes on the eve of Finance Minister P. Chidambaram’s visit to the U.S. on July 11, followed by Telecom Minister Kapil Sibal’s week-long visit to the U.S. starting July 15. The announcement also comes on the heels of new balance of payment challenges, with the rupee at an all-time low of nearly 60 per dollar.

The announcement has multiple implications for India. Speaking to The Hindu, Mr. Sibal said he expected the move to reenergize the telecom industry out of its legacy debt issues by bringing in at least $10-15 billion of FDI. “By improving connectivity through the highest quality of connectivity and competition, it will further empower the aam aadmi of the country in a meaningful manner,” Mr. Sibal said. He further asserted that security concerns surrounding telecom networks would also be addressed with a firm hand.

Exit options

Indian investors — 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 — will now be in a position to sell in part or full their stake to the foreign investors, in the event foreign investors have any appetite for further exposure. Maxis and Vodafone are likely to use this opportunity to hike their stake up from 74 per cent.

However, when contacted, a Vodafone spokesperson told The Hindu that the company would only comment after Cabinet approval.

For Bharti, with investments from Singtel and the Qatar Foundation, the announcement may not lead to immediate dilution. As of December, 2012, the Aditya Birla Group had two major foreign investors — TMI Mauritius (14 per cent) and P5 Asia Investments (10 per cent) as a part of the 45.6 per cent of foreign. NTT Docomo holds up to 26 per cent FDI in Tata Teleservices. Considering the massive debt burden on these companies, they could consider bringing fresh equity with sufficient head room for growth for both FDI and FII (Foreign Institutional Investors).

Greenfield unlikely

With roughly 900 million mobile subscriptions and a stagnating market, it is unlikely that 100 per cent FDI will result in any massive new inflow of foreign investment in greenfield projects. However, apart from Vodafone, Maxis, and Singtel, some new equity fund could make a play for the existing equity or to buy out Indian equity in an existing venture. By 2014-16, one or two major M&A deals could be in the offing relating to an outright sale of a large Indian telecom operator.

The Director-General of the Cellular Operators Association of India (COAI), Rajan Mathews, did not offer an official comment but cautioned that the main issue revolved around the debt component in relation to 100 per cent FDI rather than just equity.

Security issues

Considered of strategic importance, 100 per cent FDI in telecom is likely to be accompanied by several caveats and stiff restrictions. The decision will make it virtually impossible for Indian security agencies to cast major discriminatory conditions on the 100 per cent FDI-owned telecom ventures of the future. Even today, with significantly large foreign investments, the difference between Indian-owned and foreign-owned telecom ventures has altogether blurred with hardly any mobile or long distance operator without substantial direct (FDI) or indirect FII foreign holding in the ventures.

India has allowed 100 per cent FDI in telecom equipment manufacturing since the early 1990s. Later, the National Telecom Policy 1994 allowed up to 49 per cent FDI in telecom services. India’s mobile sector not just flourished, but also became one of the largest sources for attracting global FDI between 1994 and 2013.

Former Telecom Minister Dayanidhi Maran increased the FDI limit to 74 per cent in 2005. The FDI peaked during 2007-2010, and then declined sharply from Rs.12,270 crore in 2009-10 to Rs.7,542 crore in 2011.

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