India is not so shining

TECH TALK

India's federal government earlier this month decided not to increase the foreign equity cap in telecom service companies from 49 per cent to 74 per cent.

This came as an unpleasant surprise for some cellular companies, which had been strongly pushing to raise this ceiling.

The cellular and the rest of the telecom industry are going to have to expand their networks this year as the country's telecom user base explodes.

They need heavy doses of capital to do so and find foreign equity an optimal source. The public equity route is available just for one or two.

According to unquoted sources in newspaper reports, "national security" was ostensibly the reason. According to a government spokesman I called, the Cabinet had at its January 15 "only deferred a final decision" and could soon revisit the proposal. He admitted there were issues the "intelligence bureau and home ministry had raised."

When will politicians and bureaucrats learn that artificially-set ownership limits do not achieve desired goals when the business requires huge capital?

I have argued since 1997 that a 49 per cent foreign equity ceiling on telecom makes no sense if the sole aim is to keep control with Indians.

Very few business houses in India have the financial depth to underwrite equity in capital-intensive ventures in telecom, power and insurance.

Predictably, Indian businessmen have had to resort to 'pyramiding' to fund their part of equity and, in the process, lost control mostly to foreign partners.

This trend of 'pyramiding' was started by the B K Modi group way back in 1996 when it had to fund its equity contribution in its two cellular companies: Modi Telstra in Calcutta and Spice Telecom in Punjab and Karnataka. The New Delhi-based group set up a holding company Modi Welvest that in turn held its 51 per cent equity in the two cellular units.

It then sold up to 49 per cent equity in Modi Welvest to Hong Kong-based telecom entrepreneur Rick Siemen's outfit Distacom (an existing partner in Spice Telecom) and some American funds.

In effect, the Modis' equity contribution to their cellular businesses was only 51 per cent (of Modi Welvest) of 51 per cent (of Modi Telstra and Spice Telecom): just 26 per cent.

Further, since Modi Welvest itself was owned by another group's holding company, which had investments from foreign funds, the Indian group's effective ownership in Modi Telstra and Spice Telecom was even more diluted.

Given such a low contribution to the equity of the two cellular companies, it was no surprise who was in control of the Modi businesses.

The Modi model was soon followed by almost all Indian telecom companies. The Mittals of Bharti Telecom (now Bharti Televentures) did it; Rajeev Chandrashekhar did it with BPL Mobile and BPL Cellular; and the Goenkas of RPG tried to do it with their two companies in Madhya Pradesh and Chennai.

This model "� it hinges on the Companies Act definition of a company as Indian if 51 per cent of its equity is owned by an Indian citizen "� is reportedly being replicated in insurance companies, which have a cap on foreign equity.

Hutchison Telecom chose an even more audacious route while buying out Analjit Singh of the Max group from Max Telecom (now Hutch) in Mumbai.

It got an Indian shareholder in financial house Kotak Mahindra and pumped in its equity contribution through preference shares and very clearly is at the helm of affairs at its Indian units.

The lesson here is that ownership laws can easily be circumvented in India perfectly legally. What matters really is shareholder agreements between partners that dictate who controls a company.

With 26 per cent or even less, a shareholder "� in this case, a foreign partner "� can control operations at an Indian company; national security and everything else be damned.

Apart from the 'national security' card, there is another reason being bandied about for not raising the foreign equity cap in telecom.

S Gurumurthy, Hindutva ideologue and Swadeshi Jagran Manch convener, was quoted as telling a financial daily that India would have more bargaining power at world trade negotiations if it retained the ceiling at 49 per cent.

This argument is erroneous: what matters at the World Trade Organisation is what a member country binds on itself. Until December 1996, for instance, India had bound on itself just 26 per cent foreign ownership in telecom services although New Delhi allowed 49 per cent foreign equity in such ventures.

India's WTO team used that as a carrot during negotiations at the Singapore ministerial conference and finally agreed to make a 49 per cent foreign equity cap in telecom binding, which the US was keen on.

Similarly, if the Cabinet allows 74 per cent foreign ownership now in Indian telecom services "� as promised by finance minister Jaswant Singh in his last budget "� it does not automatically become binding on New Delhi to accede this as binding at the WTO.

It can still use the prospect of binding on itself an increased foreign ownership of 74 per cent to bargain for concessions at the WTO.

At the end of the day, the Cabinet decision not to increase the foreign equity cap in telecoms to 74 per cent seems to be ye t another outcome of India's dirty corporate wars. Consumers, as always, will carry the burden of this decision.

Josey Puliyenthuruthel canbe reached at josey@vsnl.net