India Appeals to Foreign Carriers
"The move is aimed at attracting more investments in the capital-intensive telecom sector and also to make the system transparent," says Indian finance minister P. Chidambaram.
The cash-strapped industry wants to bring its infrastructure up to global standards, and the new ruling aims to encourage operators to seek additional investments from the foreign capital markets.
There are conditions, though. The majority of any operator's board, including key management positions such as chairman and CEO, must be Indian residents, and at least one Indian investor must hold a 10 percent stake in the company.
Mahendra K. Sanghi, president of The Associated Chambers of Commerce and Industry of India (ASSOCHAM), is optimistic that the ruling can help raise new funding. "The telecom industry's requirement for 1.6 trillion rupees [US$36.6 billion] to provide telecom services at affordable prices to the masses will be met with this decision."
The move comes as the Indian telecom market continues its rapid expansion. Fixed line and mobile subscriber numbers are increasing, but there is plenty of room for growth: in a country of more than 1 billion people, only 93 million had phone lines (49 million of which were mobile) at the end of 2004, giving India a teledensity of 8.6 percent.
The Indian government wants this total to reach 250 million in 2007, with industry watchers estimating that $20 billion in network investments will be needed during the next three years to reach that target. Telecom Regulatory Authority of India chairman Pradip Baijal believes the new FDI ceiling will help attract new overseas investment sources. “The entire telecom sector is expected to benefit from this decision. While the demand for telecom services rose when tariffs were lowered, the hike in FDI is likely to improve the supply [of new services],” says Baijal.
Clearly, India's operators believe that growth will happen, and are investing in new networks and services, and even expanding overseas. (See India's RailTel Picks Juniper, VSNL Buys Tyco's Subsea Network, Reliance FLAGs Up Expansion Plan, ECI Bags Bharti Optical Deal, Sprint Teams With Reliance, ZTE Wins Triple-Play Deal in India, VSNL Picks Cisco for Ethernet, and Reliance, Microsoft Team on IP TV.)
And existing investors are showing there are increasing amounts of money to be made from India's expanding market. In its latest quarterly results, Singapore Telecommunications Ltd. (SingTel) (OTC: SGTJY) noted that pre-tax profits from its 28.5 percent stake in Bharti Tele-Ventures Ltd. rose by 91 percent to S$47 million ($28.8 million). (See SingTel Announces Q3 Results.)
But will investors respond? Foreign operators such as BT Group plc (NYSE: BT; London: BTA), France Telecom SA (NYSE: FTE), and Australia's Telstra Corp. have invested in the past but later withdrawn, frustrated by the investment regime.
That experience, says David Gross, the U.S. Coordinator for International Communications and Information Policy, could deter overseas firms, though increasing the FDI limit is sending the right signals.
"A number of American companies have withdrawn from India in the past, and I'm not sure if those companies would come back and invest. But the country is clearly sending the right signals, and it's important for companies to look at India at present. It's a good place to invest," says Gross.
Others are more optimistic. "Opportunities in India's telecom sector are sure to get a higher priority with investors from the international business and investment community," says K.A. Chaukar, managing director of Tata Industries Ltd., which is active in the telecom hardware and services markets. "The rising inflows of investments… will have a positive impact not only on the telecommunication and related industries, but also on all commercial, agricultural, and industrial sectors for which telecom is fast becoming a major contributor to improving efficiency and productivity."
It could also help some of India's smaller operators -- such as Shyam Telecom Ltd., which offers fixed and mobile services, and GSM operator Spice Telecom -- find strong international partners. International mobile giant Vodafone Group plc (NYSE: VOD), which has operations in most of the world's major markets, is just one of the names being linked to a potential future investment in India.
The new policy is also expected to trigger a new round of operator consolidation, with the biggest merger set to be between state-owned giants, Bharat Sanchar Nigam Ltd. (BSNL) and Mahanagar Telephone Nigam Ltd. (MTNL), which together account for more than 90 percent of the country's fixed line and 18 percent of its mobile customers. But there are dissenting voices who say other regulatory issues need to be addressed before investments from overseas carriers increase. B.K. Synghal, vice chairman at BPL Communication, which provides mobile and broadband services, says: "Though this is a step in the right direction, the government must address regulatory issues such as the Access Deficit Charge [ADC], spectrum allocation, and unified licenses to make it conducive for foreign players to invest in this market."
While the new ruling is aimed at increasing external investment in the country's service providers, no such ceiling exists for India's telecom equipment market. Foreign investors can wholly own Indian systems firms, and major global players are taking advantage of the low labor costs and indigenous technical talent. The Indian government expects overseas equipment companies such as Alcatel (NYSE: ALA; Paris: CGEP:PA), Ericsson AB (Nasdaq: ERICY), and Nokia Corp. (NYSE: NOK) to invest $800 million in 2005.
— Udaylal Pai, special to Light Reading