Communications minister Dayanidhi Maran flags off a new move that will see Indian CEOs and directors ruling over foreign investors in the telecom sector.

On February 4 the cabinet eased the ceiling on foreign direct investment (FDI) in the telecom sector to 74 per cent from 49 per cent. FDI will be allowed in basic, cellular, unified access services, STD, ISD, VSAT, public mobile radio trunked services, global mobile personal communication services and other value-added services.

"We need at least $20 billion (Rs86,740 crore) of investment and part of this has to come as foreign direct investment," said Maran. The increase in the FDI limit is expected to usher in a 20 per cent jump in foreign investments in the telecom sector within the next two years from the current Rs10,000 crore

'We have very transparent and clear new FDI rules. Operators did not have clear FDI structures and as a result, many offshore firms were holding different stakes in them. Now, such operators can come clean on investments,' IT and Telecom Minister Dayanidhi Maran stated during a press media early this week - exactly a week after the policy change.

But strict conditions have been imposed in order to address the security concerns raised by the Left parties.

As per the new rule,

• telecom companies serving Internet service providers with gateways;
  
• infrastructure providers (category-II);
  
• radio paging service

will now have to disclose the status of foreign holding and certify every six months that the foreign investment was within the ceiling of 74 per cent.

"Potential foreign investors will, however, need government approval before they increase their stake beyond 49 per cent," clarified Maran.

Prior to the new rules being announced, two companies - Bharti and Hutch - had managed to exceed the 49 per cent FDI limit. From now, the licences of the companies that do not comply with the new stipulations will be revoked.

Another condition that service providers will now have to comply with is that a majority of the directors, including chairmen, managing directors, chief executive officers, chief technical and finance officers, will all have to be resident Indians.

Earlier, the Telecom Regulatory Authority of India (TRAI) was established in 1997 to resolve the security concerns raised by various agencies and provide a regulatory framework to the private sector telecom industry, then still in its infancy.

The new guidelines also bar the rerouting of traffic (whether mobile or landline) originating from India to other subscribers within India through any other country.

Also, telcos have been barred from transferring accounting information relating to subscribers (except for roaming or billing) outside India. Further, the details of companies' infrastructure also cannot be passed on to anyone other than the telecom equipment suppliers or manufacturers who undertake the installation and commissioning of the licensee company on signing of non-disclosure agreement.

In the last two years the telecom sector has emerged one of the fastest growing sectors in the country. This has been due to intense competition that has brought down tariffs as well as simplification of regulation that has promoted healthy competition among various service providers. As a result, telecom density in the country has risen to 7.5 per cent in FY04 compared to 3.64 per cent in FY01.

The mobile services segment alone has been growing rapidly and has emerged as the fastest growing market in the world. This sector is expected to reach nearly 75 million by FY06. Currently India has over 40 million mobile users (source: DoT, August 2004). The government hopes to further increase the number of mobile users to 200-250 million by 2007.

Though competition has increased manifold, certain government policies seem to be designed to favour telecom PSUs. Penetration levels in rural areas have more or less remained stagnant. To raise resources for new infrastructure in these areas, cellular operators have to pay an 'access deficit charge' (ADC) to BSNL, the fixed line carrier.

Since over 90 per cent of the fixed line infrastructure is owned by BSNL, cellular firms have to pay a usage fee to BSNL, which in turn is passed on to the consumers. This in keeps the tariffs high.

However, the hike in FDI gives the consumer more options to choose from. Earlier, on the international basic telephony front, the end of VSNL's monopoly in 2002 brought two private players in the international basic telephony business and the immediate effect was the fall in tariffs. In the first six months only, the tariffs fell by 50 per cent and can expect to fall further as new entrants crowd market.

The hike in FDI has increased the attractiveness of the sector for foreign telecom majors like Vodafone of UK and Telenor or Norway of (along with some from the US and Hong Kong) who have long wanted to participate in the growth of the Indian telecom sector, provided investment conditions were made more investor-friendly.

The increases in foreign investments will go a long way in improving the growth of this sector. Specifically, players like Bharti Televentures, Idea Cellular and Hutchison-Essar Telecom, which have foreign partners, are likely to benefit. Other companies that have till now not explored the possibility of raising capital in this manner can have a fresh look at this source of capital. Consolidation is also likely to speed up.

"With increased foreign capital now being allowed, the move will provide the Indian telecom industry the much-needed impetus to deliver on its ambitious target of reaching between 200- and 250-million phone connections over the next three years," says joint managing director, Rajan Mittal, Bharti Tele-Ventures.