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FDI Influx: Relaxed norms attract foreign investors into telecom

November 25, 2014
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The year 2014 has been a positive one for the Indian telecom sector in terms of foreign direct investment (FDI). Till July 2014, the industry had already attracted FDI worth $2.33 billion as against $12 million during the same period in 2013-14. Several foreign companies increased their stake in their Indian subsidiaries, while new investors entered the market in search of higher returns. The increase in interest among foreign investors can be attributed to a better regulatory environment, an improvement in the operational performance of Indian telecom operators, and a relaxation in FDI norms.

Among them, allowing full foreign ownership of Indian telecom companies has been the biggest driver for the FDI surge witnessed in 2014. In July 2013, the government relaxed FDI norms for the sector, bringing in much-needed relief for foreign players, particularly those companies that have had trouble raising capital due to the financial inability of their Indian joint venture partners. Foreign telecom companies will now have the flexibility to bring in equity on the basis of their needs and not have to follow the regular debt route to fund their operations. The 100 per cent foreign ownership regulation will also enable telecom companies to attract higher investor interest, raise low-cost capital and reduce the debt burden.

After the new FDI norms were implemented, SingTel was the first foreign company to take advantage of the government’s move and own its Indian subsidiary entirely. Subsequently, Vodafone, which owned a 64.38 per cent stake in Vodafone India, acquired the remaining stake from Indian shareholders to increase its ownership to 100 per cent. With positive sentiment prevailing in the industry, many other telecom companies like Verizon, AT&T and Telenor sought the Foreign Investment Promotion Board’s approval to increase ownership in their Indian subsidiaries. Among the major developments, Telenor was allowed to increase its stake in Uninor from 74 per cent to 100 per cent with a proposed FDI amount of Rs 7.8 billion, while Sistema JSFC’s bid to increase its stake in Sistema Shyam TeleServices Limited was rejected.

The immense growth potential of the Indian telecom market is another reason for the increased interest of foreign investors. Many foreign telecom companies are struggling to achieve a high rate of return in their home markets because of saturation and are focusing on emerging markets, especially India, to drive business growth. In addition, the Indian telecom market has not seen 100 per cent penetration and companies would like to use the gaps to their advantage. Data services have just started witnessing adoption in urban markets, and they still account for only about 15 per cent of the service revenues of major telecom operators. Moreover, several areas in the rural market remain non-penetrated by voice and data services. It is these growth opportunities that foreign telecom companies and investors are looking at while devising their investment strategies.

Another important aspect from the perspective of foreign investors is a positive and investor-friendly regulatory environment. Regulatory uncertainty was at its peak after the cancellation of 2G licences by the Supreme Court in February 2012, which discouraged investors immensely. However, the government’s efforts to bring in clarity on several crucial regulatory issues, including mergers and acquisitions and spectrum sharing and trading, have reignited investor interest in the Indian telecom market.

The improving business performance of telecom companies has also helped attract higher FDI. All telecom operators have started performing well since early 2014 after a series of poor results during 2012 and most of 2013. With data services’ growth picking up, revenues and profit margins have been increasing steadily for the incumbents while new entrants are witnessing a decline in their operating losses and will break even soon. Consequently, it makes commercial sense for parent companies to commit financial resources for long-term sustainable growth of their Indian subsidiaries, given the opportunities offered by the market. For instance, the Vodafone Group has earmarked an investment of Rs 70 million for its Indian subsidiary under Project Spring as it seeks to expand operations and implement next-generation telecom technologies in the country.

Since it is capital intensive, the telecom business requires a significant amount of financial investment from companies, especially for spectrum acquisition and setting up telecom networks. In this regard, the government did a commendable job in allowing 100 per cent FDI, particularly when telecom companies were reeling under huge debt and were struggling to raise capital. The move also opened the doors for global telecom companies that had not forayed into the Indian market because they could not exercise complete control on subsidiaries.

The Indian telecom market is expected to witness a significant inflow of foreign capital over the next few years as operators continue to roll out next-generation data technologies and expand network.

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