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Capital Move: FDI hike elicits positive industry response

August 01, 2013
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In a bid to attract capital into the country, the government has allowed 100 per cent foreign direct investment (FDI) in the telecom sector. Although the hike has elicited an overall positive response from operators and institutional investors, there is a need to address issues such as regulatory uncertainty over mergers and acquisitions (M&As) and spectrum sharing. Industry analysts comment on the impact of the FDI hike on the sector…

Swati-agarwalBEnoy-csHarit-ShahRomal-v-shetty

What is your view on the decision to allow 100 per cent FDI in the telecom sector?

 Swati Agarwal

The decision to allow 100 per cent FDI in the sector is a progressive move. The industry is already reeling under huge debt and has additional capex requirements for 3G and 4G network deployment. The increase in the FDI limit will help the industry deal with the financial stress it is currently facing. Several domestic telecom players were not able to expand their operations due to a paucity of funds. With the relaxation in the FDI norms, foreign investors will be able to bring in more capital. However, the hike is not expected to suddenly turn the fortunes of the industry given existing impediments such as regulatory uncertainty, high debt and intense competition.

 Benoy C.S.

It is a bold step on the part of the government. Although the sector may not witness any major investments in the short term, the decision can change the course of the Indian telecom industry in the long term. If the government can work out a comprehensive framework to provide clarity on pending regulatory issues, the sector could witness a huge inflow of foreign funds.

 Harit Shah

It is a positive move from the government that will make it easier for foreign telecom operators to set up shop in India without requiring them to look for a local partner. It could also result in additional funds entering the sector, which is crucial in light of the high debt burden and low profitability of most operators. The entry of foreign telecom operators in the Indian market could also lead to increased competition.

 Romal V. Shetty

This initiative has been much awaited given  the debt burden of about Rs 2.5 trillion that operators in India currently face. The FDI hike will open the doors for more foreign operators to enter the Indian market. The sector has attracted foreign inflows of about $13 billion since the early 2000s. The move to increase the FDI limit is expected to provide the much-needed boost to the sector and is likely to attract about $10 billion worth of investments in the near to long term. Hundred per cent control will allow the new service providers to take operational and strategic decisions in an autonomous manner. This, in turn, will enable them to bring in advanced products and better practices. It will also have a cascading effect across the entire telecom value chain including passive infrastructure providers, value-added service providers and original equipment manufacturers, among others.

However, a hike in FDI is not in itself the remedy for the various issues faced by the industry today. India is a hypercompetitive and price-sensitive market with seven to eight players, which is much above the global average. Hence, any new player entering the Indian market would add to the existing crowd. Moreover, there is a lack of clarity on the regulatory front with regard to the existing licensing and spectrum norms. These are critical factors that would influence the opinion of foreign operators when they decide to set up shop in India.

 Will the hike encourage foreign telecom operators to participate in the upcoming spectrum auctions?

 Swati Agarwal

The increase in the FDI limit will definitely help improve the sentiment in the sector, but it would be unrealistic to expect it to be the sole factor behind foreign participation in the upcoming spectrum auctions. Better clarity on the regulatory front in terms of M&A guidelines and future spectrum policy will also have an impact on the decision of foreign telecom operators.

 Benoy C.S.

With this change in policy the foreign telecom operators will evaluate the upcoming spectrum auctions more closely. The foreign operators that have already invested in Indian telecom companies could explore the option of increasing their stake further and may consider participating in the upcoming auctions. At the same time, foreign operators that do not have a presence in India could use this opportunity to gain a foothold in the country’s telecom market.

 Harit Shah

Currently, it is debatable as to whether the FDI hike will actually lead to foreign participation in the upcoming spectrum auctions. The Telecom Regulatory Authority of India (TRAI) is likely to recommend a new reserve price for the spectrum to be put up for sale. If the new reserve price is significantly lower than the earlier reserve price, it could result in higher foreign participation. Otherwise, it is unlikely that the auctions will see any foreign presence.

 Romal V. Shetty

While this measure seems to be aimed at removing hurdles to entry and reducing capital investment risks, the benefits from the FDI hike should be evaluated in the context of the existing market conditions and the telecom regulatory regime that underpins it. Even within the new FDI rules, only 49 per cent of FDI in the sector will be allowed through the “automatic” approval route; the remaining 51 per cent would be subject to the approval of the Foreign Investment Promotion Board. The process, thus, is not straightforward.

The industry is under huge pressure due to regulatory and policy uncertainties on M&As. The government is yet to address spectrum-related issues such as refarming and efficient usage, and tax uncertainties. Also, there is ambiguity with regard to India’s preferential market access policy for operators that want to use the relatively cheaper telecom equipment manufactured abroad. These are some critical issues that need to be addressed before foreign operators decide to throw their hat into the ring. However, it is a move that will certainly get investors and telecom operators to revisit their strategy for the Indian market.

 Do you foresee consolidation in the sector following this decision?

 Swati Agarwal

The FDI hike has provided an impetus for consolidation by removing constraints on equity inflow. Foreign telecom operators, who were till now bringing additional funds in the form of redeemable preference shares (which have end-use restrictions) and standby letter of credit-backed loans, will now be able to infuse funds in the form of additional equity. However, consolidation can take place only when there is clarity on the M&A policy.

 Benoy C.S.

Stagnating revenues, intense competition, low tariffs and high opex are putting pressure on operator margins. In the current scenario, there is room for just five to six operators. Therefore, consolidation in the sector is inevitable and the change in the FDI policy will accelerate the process.

 Harit Shah

Over and above the 100 per cent FDI policy, it is important for the government to implement enabling M&A norms to encourage consolidation.

 Romal V. Shetty

The sector will certainly witness consolidation in the coming years as it is not financially viable for several operators to coexist in a market like India in the long term. Shrinking operator margins and their doubtful sustainability have provided domestic service providers an incentive to either be merged or be acquired. However, there is uncertainty with regard to M&A norms and matters pertaining to tax jurisdiction. Efforts have to be made to clear all ambiguity in these areas so that a platform can be provided for M&As.

 How will the debt-laden telecom operators benefit from the removal of the FDI cap?

 Swati Agarwal

The removal of the FDI cap provides an opportunity for additional foreign equity infusion, which will enable repayment of debt and consequent improvement in operators’ leverage profile. It may also lower the requirement for raising additional debt for meeting future capex needs for geographical expansion and rolling out new services.

 Benoy C.S.

The debt-ridden telecom operators will have to acquire spectrum in the upcoming auctions to remain competitive. They also need to fund their high capex requirements to enhance coverage and launch new services. This would require operators to make substantial investments in the short term. With the removal of the FDI cap, they can look forward to increased interest from potential foreign investors.

 Harit Shah

If financially strained operators are able to get foreign partners that are willing to invest capital, it could enable debt reduction. Further, companies such as Vodafone India, Sistema Shyam TeleServices Limited and Aircel, which have significant foreign holding, could see increased investments. Besides, removal of the FDI cap will give their foreign partners greater flexibility to raise their stake depending on business requirements. The sector could thus witness incremental investments through equity rather than the debt route.

 Romal V. Shetty

The fresh flow of funds will allow savings in the form of removal of high annual interest costs, resulting in higher profitability. It will also help operators fund their capex needs, especially for coverage enhancement and 3G/4G service launch. They will be able to adopt the latest technologies, customer-centric measures and innovative operational practices, which may not have been possible earlier.

 
 
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