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When the Cabinet decided to up the foreign direct investment cap in telecom services from 74 per cent to 100 per cent a few weeks ago, it was ostensibly to woo foreign investors to a key growth sector. But, if the government expects overseas telcos to make a beeline to India, it could be wishful thinking. That's because telcos in India are facing tough times: they are straddled with a huge debt (about Rs 180,000 crore) which they had taken for rolling out networks and paying for expensive 3G spectrum, and cutthroat competition has brought tariffs crashing down and has squeezed profit margins. On top of it, the 2G-spectrum scam forced several overseas telcos like Etisalat to walk out of the country. Maxis of Malaysia, which had invested in Aircel, is also under investigation.
It is clear there will be no new investors daring to enter India at this juncture or buy into an Indian telco, at least for a while. But the new window provided by the government can give a whole host of foreign telcos who are already in India an opportunity to buy out their Indian partners who are, in any case, bringing nothing to the table. Some have had acrimonious partnerships, like the one between Telenor of Norway and Unitech. With 26 per cent stake, an Indian partner could block crucial special resolutions in the boardroom or go to town on violation of the rights of minority shareholders.
Easy funding
Foreign telcos have been forced to depend more on debt than on equity to fund their expansion because their Indian partners were not ready to put in their share of equity money. Now, under the new regime, foreign telcos do not have to worry about it. Also, getting an India partner, especially when many of them want to sell their stake in a short time, is not easy. When Vodafone bought over the Ruias, it had to scout around for another Indian partner so that it did not breach the 74 per cent FDI cap and found Ajay Piramal. On his part, Piramal made it clear to Vodafone that he had a horizon of 12-18 months in which the company should go in for an initial public offering or he would sell off, and that he was looking at a rate of return of 17-20 per cent per annum.
Says Goldie Dhama, executive director (tax & regulatory services), PricewaterhouseCoopers India: "The new FDI regime will finally allow foreign telcos to own and fund the Indian telcos without having to be restricted by the Indian partners' funding capacity. This will allow several Indian telcos to get the much-needed funds from overseas without having to manage their operations on expensive debt." But will foreign partners rustle up the cash now? And will the Indian partners sell at a time when valuations are bound to be low and many of the companies like Telenor and Sistema have shrunk their business to a few circles? Probably not immediately. Sigve Brekke, executive vice-president of Telenor Group which has Sun Pharma's executive director, Sudhir Valia, as a 26 per cent partner, says: "There are no talks with our partner on this regard at all".
Those in the know say that even in the case of Sistema Shyam, there is no urgency to buy out the local partner, Shyam Telecom. For one, Sistema of Russia, along with the Russian government, is firmly on the saddle and runs the operations of Sistema Shyam with a combined 73.71 per cent stake. Buying up to 100 per cent will not make any difference to its control over the management. The company, which has invested over $3.6 billion in India, saw its footprint shrink from all over the country to just nine telecom circles (the country is divided into 22 circles) after it reentered the market following the Supreme court verdict to cancel licences given out in 2008.
So, to burn extra cash to buy out its partner makes no sense to Sistema. And even its partner is aware that the company is rebuilding its operations and, therefore, it will not get the right price if it decides to quit.
Some are bullish that in the long term, the move will bring in more foreign investment. Prashant Singhal, partner in a member firm of Ernst & Young Global, says: "Telecom has seen FDI equity inflows of nearly $13 billion into the country since early 2000. The move to raise the FDI cap is expected to provide the much-needed boost to the sector and is likely to attract approximately $10 billion worth of investments in the near to long term."
That might look ambitious. Also, whether a similar amount of money would have come even if the cap remained is difficult to predict. The other question is whether the change will attract new telcos which have not made an entry into the country so far to come in despite lack of clarity in the regulatory regime on many key issues: what shape will the mergers and acquisition regulation take or at what final price will spectrum be sold? Hemant Joshi, partner, Deloitte Haskins & Sells, says: "Telecom needs additional funds in the next few years. But 100 per cent FDI in itself, without clearing regulatory and tax uncertainties, may not attract foreign investors."
An opportunity for some
Of course, there are many cash-rich companies which have been closely looking at India and have also made some overtures. For instance, Africa's MTN, despite two aborted moves, is again in talks with Reliance Communications for a strategic alliance. Axiata of Malaysia has been weighing its options after taking a stake in Idea Cellular and is believed to have had talks with a 4G operator, though it has maintained a stoic silence on the issue. Telcos say that Mexican tycoon Carlos Slym who runs a clutch of telecom companies, European majors like Deutsche Telecom and US telcos like Sprint and AT&T have always been looking at possibilities across developing countries. And there has been speculation that both Sistema and Telenor might buy out one of the existing telcos.
"The decision to allow 100 per cent FDI in telecom is a very positive decision. It makes funding easier from our parent company. We are looking into possibilities (of increasing its stake in the Indian venture). However, the timing has not been decided," says Dmitry Shukov, CEO, Sistema Shyam TeleServices Ltd. He also says the company is open to acquisitions.
To be fair, India is a key market which any global telco cannot ignore. But, considering that a large part of the subscriber market has been sewn up by existing telcos, it doesn't make sense for a new player to start from scratch. With over 800 million subscribers, analysts say the addressable new market is not more than 300 million in the next three to five years. Even assuming that 50 per cent of this market goes to the incumbents, the total market for others will not be more than 150 million. Moreover, they will be first-time users and hence low-paying customers. So acquisition of an existing operator will be the way out. But the removal of the FDI cap may not be enough to encourage such strategic players. That will depend purely on how the merger and acquisition policy shapes up which will determine what one has to pay. If the government pushes through, as it looks like now, the rule that the spectrum of the two merging companies will be bundled and they have to either return or pay market price for the additional spectrum beyond 4.4 Mhz, it would hardly attract anyone. Also, many of the companies which could be potential takeover or merger targets are facing investigations, so a new investor would hardly take a risk to get in.
At least for the time being, most telcos are concentrating more on cleaning up their operations and reducing their debt to improve valuations rather than go for a quick sale. They are also cashing in on the forced consolidation of the sector due to closures after the Supreme Court verdict which has reduced the number of operators to nearly half, thereby reducing competition. As a result, they have been able to increase tariffs and improve realisation per minute. "All of them know they cannot get the right price with such huge debt and poor realisation. So that is what they are working on. And that is what potential buyers are also looking carefully" says the CEO of a leading telecom company. The final outcome will only, of course, come after the M&A guidelines are announced.
Sounak Mitra contributed to this report
