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A Waiting Game - FDI hike implementation deferred for the fourth time

October 15, 2006
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Though the hike in foreign direct investment (FDI) got the go-ahead in 2005, interministerial differences on security concerns have stalled its implementation so far.

It is now understood that Indian telecom companies will have to wait longer as the IT and communications ministry has asked for more time –­ till February 2 –­ to put into practice the guidelines that permit up to 74 per cent FDI in the telecom sector.

This is the fourth extension that the Department of Telecommunications (DoT) has been given. As per the government notification (Press Note 5) issued in November 2005, operators were given four months to comply with the FDI guidelines. However, having failed to ensure compliance, the government gave three extensions of three months each.

The delay this time (according to the union cabinet) is mostly owing to DoT being unable to incorporate the inputs of the National Security Council Secretariat (NSCS) into its fresh proposals.

As of now, it is proposed that the NSCS will come up with an umbrella law, the National Security Exemption Act (NSEA), which will prevail across all key strategic sectors. Consequently, even if the NSEA conflicts with DoT norms, the former will prevail.

The act is slated to be in place by early next year. It is based on the US Committee Act on Foreign Investment, which allows the government to suspend or prohibit mergers, acquisitions or foreign investments if deemed a threat to national security.

In early September, in a move that brought some cheer to the telecom industry, DoT had proposed relaxations in some of the norms laid out in the Press Note which, while allowing an FDI increase in the telecom sector, had also imposed some serious restrictions based on security concerns.

This was opposed by the operators, who argued that the conditions would prohibit foreign operators like AT&T and British Telecom from providing services in India. To resolve this conflict and ensure the compliance of operators, DoT put up a draft cabinet note with different sets of rules for firms with FDI up to 49 per cent and for those with FDI between 49 and 74 per cent.

According to the draft note, DoT proposed to do away with the clause that required an Indian promoter to hold at least 10 per cent stake in a telecom company. It also allowed remote access of equipment after intimating the Intelligence Bureau.

Further, DoT recommended exempting companies that have less than 49 per cent FDI from the guidelines specified in the Press Note. And in doing so, it would allow such companies to appoint foreigners in key positions such as the CEO or chief technical officer. This would have benefited companies like Tata Teleservices or Bharti.

However, the draft note ran into trouble, both in the external affairs and finance ministries and in the defence ministry which openly opposed the proposed changes. It objected to the fact that DoT's note remained silent on two key issues which were part of the earlier norms. These included the appointment of key management positions "after consultation with serious Indian investors" and safeguarding the interests of Indian stakeholders.

DoT, meanwhile, is pushing hard to get cabinet approval for putting the Press Note on hold until a consensus emerges on the various concerns expressed by the industry and various ministries. It has said that implementation of the Press Note in its current form would severely impact the rollout plans of telecom operators and discourage fresh applications. It adds that as many as 63 applicants for the unified access licence are affected because of the stiff stipulations in the Press Note, which the operators are unable to comply with. In addition, many applications for national and international long distance licences, especially those of international players, are on hold for similar reasons.

Its suggestion is that the guidelines could be modified to take care of the needs of foreign investors as well as the requirements of national security.

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