Present signals strongly indicate that the coming 2G spectrum auctions in August will not attract any new foreign investor.
This means that in the current fiscal, the telecom sector, which was once one of the leading sources of foreign direct investment in India, will fail to deliver.
This dismal prognosis comes amidst calls for Prime Minister Manmohan Singh to take over the Finance Ministry as Finance Minister Pranab Mukherjee resigns to begin his journey to Rashtrapati Bhavan.
Just last week, the Prime Minister, while emphasising the importance of FDI, said: “We have to work harder than ever before to restore fiscal balance. We need to work systematically to ensure that the balance of payments problem is managed properly and the climate for foreign investment, both direct and portfolio, is favourably motivated.” Any obstacles or policy impediments in the way of foreign investment would be addressed “effectively and credibly,” he added.
Commerce Minister Anand Sharma also assured foreign investors of India’s “welcoming investment climate” while leading a high-level business delegation to Belgium.
However, industry sources confirm that only existing operators will bid and no new foreign investors will compete despite 2G spectrum for up to two national level mobile licences expected to be auctioned within the next 90 days.
According to director-general, Cellular Operators Association of India, Rajan Mathews, “In the last 3G/BWA auctions, there were some enquiries from new global players, which have been entirely absent this time round.”
Sources point to five key reasons for FDI fighting shy of entering India’s telecom sector, mostly centring round regulatory uncertainty and entry norms.
For starters, the lack of clarity on crucial issues such as the reserve price and final slots available till just weeks before the scheduled start of the auctions has been the biggest deterrent, since no serious player can plan multi-billion dollar bids in a hurry.
Ironically, the hike in the FDI limit in telecom to 74% in 2005 is another impediment, since long-term telecom investors with pan-India ambitions need at least $12 billion–$15 billion for operations, build-out and consolidation beyond acquiring start-up spectrum. In 2006, Vodafone invested roughly $12 billion to acquire Hutchison’s stake in Hutch-Essar. Consequently, the Indian partner is minimally required to bring in $3billion–$4 billion into the venture, though as a minority partner in a business whose gestation is long, with recent financial parameters, including return on investment, Average Revenue Per User (ARPUs) and earnings before interest, taxes, depreciation and amortisation margins under squeeze.
Agrees a source close to dual technology operators, “There is no charm left for new entrants considering that over 900 million telecom subscribers are already on the network and ARPU’s are as low as Rs 80-90 per subscriber.”
The third disincentive is the absence of any merger and acquisition (M&A) guidelines. Any foreign investor would need 2G spectrum beyond these auctions, requiring clarity on M&A norms to acquire or merge with other operators to obtain spectrum beyond start-up, along with an existing customer base.
The uncertainty arising out of the governments’ Presidential Reference against the Supreme Court 2G licence cancellation verdict has further complicated matters. Nearly 80 telecom licences remain under legal threat of cancellation, withdrawal of spectrum, or a possible retrospective hike in one-time costs of spectrum, owing to the Presidential Reference. Till the Supreme Court decides on the issue, no foreign company can partner with existing operators to bid for spectrum — since most companies’ existing assets face uncertainty.
Amit Sharma, chairman of the American Chamber of Commerce’s Telecom Committee, told The Hindu , “Under the current climate, prospects of significant FDI from new entrants in the telecom sector are unlikely.”
Finally, foreign companies will be hard put to find a local partner and navigate the lengthy Foreign Investment Promotion Board clearance process in just one month before the auctions begin in August.
The only silver lining is that existing telecom operators will not have to worry about the prospect of competing with global players with deep pockets in the auction ring.
However, the global disinterest in India's spectrum auctions effectively dampens the government’s push to improve investor sentiment through the New Telecom Policy (NTP) 2012 which Telecom Minister Kapil Sibal had said, “... is a great opportunity for GoI to send a signal to the international community that India should be a preferred destination for investment.” He added, “We have already adopted the telecom policy which gives us the roadmap for the next 20 years. Our larger perspective is that there is a great opportunity before us. There is a lot of criticism in the market and the international environment is not very positive. So we want to give a signal to the world that India should be a destination for investors to come in and invest”. This aspiration comes amidst a difficult year for telecom FDI in 2011-12, following a sharp 35% dip in FDI from $2.7 billion in 2009-10 to $1.7 billion in 2010-11.
