Telecom dept plays the swadeshi card

Firms must be run by Indians, says draft cabinet note.

The department of telecommunications (DoT) has recommended that Indian shareholders in a telecom company should retain management and administrative control even after the sectoral cap for foreign investment is increased to 74 per cent.

The DoT proposal has also called for a scrutiny of the credentials of the foreign companies by the home ministry.

According to government sources, the DoT's draft Cabinet note on FDI in telecom, which has been circulated to various ministries for their comments, has proposed a 74 per cent foreign investment ceiling.

In companies where the FDI has already touched the 49 per cent limit, the DoT has proposed that only foreign institutional investors (FIIs) be allowed to pick up 25 per cent more.

The sources said the DoT proposal had specifically made a case for preventing joint venture companies in India from investing in telecom companies where the FDI component was already at 49 per cent. This would restrain companies from adopting the "pyramid" route to take FDI to 74 per cent, the sources explained.

Finance Minister P Chidambaram had proposed to increase the FDI cap in the telecom sector from 49 per cent now to 74 per cent in the Budget for 2004-05.

Besides telecom, he also proposed to hike the FDI caps in aviation and insurance to 49 per cent from 40 per cent and 26 per cent, respectively.

Interestingly, the inter-ministerial committee on liberalising FII rules, which submitted its report to Chidambaram a few days before he presented the Budget, has also made an exception in the case of telecommunications while recommending that the FII holding should be treated separately from FDI in determining the overall foreign investment limit.

The sources said the committee had cited security concerns in restricting the FDI component in the telecom sector at 49 per cent while allowing FIIs to pick up an additional 25 per cent.

Reacting to the proposal, an executive with a leading cellular company said, "This is a good compromise, if security concerns are taken into account. FDI is not the only route to get capital. Telecom companies can get listed and attract FII investment."

Munesh Khanna, MD, NM Rothschild said: "This is an improvement over the previous step to raise the FDI cap to 74 per cent. This will accelerate FII activities in telecom stocks and the stocks could be sold at a premium. Unlisted companies will find it easier to list themselves. With 74 per cent FDI, telecom stocks become less lucrative for trading."

TV Ramachandran, director-general, COAI said, "We agreed to this proposal--to raise the foreign investment cap through the FII route--in a meeting with DoT in November. Be it FDI or FII, there is a need for foreign investment in this capital-starved sector. Security concerns will not be there with FII investments."

Liberalisation with riders

• Companies will not be able to adopt the 'pyramid' route to take FDI to 74%.
• Indian shareholders with 26% to retain management control.
• Credentials of foreign companies to be scrutinised by home ministry.