New FDI norms baffle analysts

The new norms on the foreign direct investment (FDI) announced by the centre yesterday (See: Government details revised FDI regulations) will have some effects on telecom companies such as Bharti Airtel, says a report by Australian research firm Macquarie.

The commerce ministry has issued a more liberal and investor-friendly policy on FDI, which allows up to 100-per cent FDI under the automatic route in most sectors.

The policy on FDI is reviewed on a continuing basis through inter-ministerial consultations.

"We think that the new guidelines are only a minor tweak that will have a limited effect," the Macquarie report said, adding "the norms could affect some telecom companies, especially Bharti.

"This (new FDI guidelines) could increase Bharti's FDI headroom by 15 per cent, provided that Sing Tel's 15 per cent investment in the company via Bharti Telecom Ltd is taken out of the FDI limit calculation," the report said.

Singapore-based SingTel owns 31 per cent in Bharti Airtel through direct and indirect investments, of which 15.8 per cent directly comes from SingTel. The remaining 15.2 per cent derives indirectly from SingTel's one-third stake in Bharti Telecom (BTL), the Suni Mittal investment firm that owns 45.3 per cent of Bharti Airtel. Since Bharti Telecom is 'owned and controlled by resident Indian citizens', SingTel's stake in this company will no longer be calculated as FDI in Bharti Airtel. Until now, both direct and indirect foreign holdings, even if the latter was through an Indian- owned company, were considered when FDI was calculated.

The new norms imply that SingTel's holding in Bharti's Airtel is only 15.8 per cent. The under 5-per cent stake in Bharti Airtel owned by Vodafone, too, comes as a majority Indian-owned company, which has a stake in BTL. Now, the Vodafone stake will also not be included as FDI. This allows more headroom for Bharti Airtel to attract at least another 20 per cent of direct or portfolio foreign investment.

"In theory, this gives Bharti Airtel more headroom to bring in more foreign investments. But, it will ultimately depend on whether the company wants to sell more stake to foreign investors. On the other hand, it will be beneficial to a foreign company that already owns a controlling stake in an Indian telco and wants to raise it further to enjoy more voting rights. There is a difference between what you can do when you have a 74-per cent stake and when you own 90 per cent," said an industry analyst.

The increase in Bharti's FDI headroom "would of course be dependent on a benign interpretation of the term 'owned and controlled by resident Indians', any interpretation of which is ultimately dependent on the regulator," Macquarie added. As per the new guidelines, some analysts suggest that telecom companies such as Bharti Airtel, Vodafone Essar and Idea Cellular may gain from the latest modifications.The department of industrial policy and promotion (DIPP) issued two press releases on Monday to clarify the details, but failed to clear the confusion. (See: All non-resident investments are foreign direct investment  and  Guidelines to transfer of control/ownership in sectors with FDI caps) 

Guidelines baffle analysts
Some of the controversial new guidelines for calculation of FDI continue to baffle analysts. The press notes have not defined the term 'beneficial ownership', which forms the cornerstone of the new guidelines. As per the note, if a company is owned and controlled by Indians, its investments would be counted as Indian. Also, if in a company, foreign holding is less than 50 per cent and foreigners have no other 'beneficial interest' in the company, it will be considered as Indian-controlled.

An Indian company would be deemed controlled by non-resident, if foreign entities have the power to appoint directors on board or it has a majority foreign holding in it. Investments by such an entity downstream would also be deemed foreign. The only exception will be when a joint venture company creates a wholly-owned subsidiary in India. In that situation, the foreign holding in the downstream company will be treated as equal to the level of FDI in the parent company.

Vittorio Colao, CEO of British mobile telecom firm Vodafone noted last month that India's "rules are extremely complex and open to various interpretations". The government has now added to the complexity.

Commentators say if India wants to attract more foreign investment, it must do so in a transparent fashion where rules and regulations are clearly defined.

With telecom among the most attractive sectors for foreign investors in India, the new norms will allow all existing telcos to bring in additional investments from abroad without breaching the 74-per cent foreign investment cap.

In 2008, the Indian telecom sector attracted FDI of around $5.8 billion, as global majors such as Etisalat, Telenor and NTT DoCoMo picked up stake in Indian telcos.

The new FDI guidelines may alos allow the UK-based Vodafone group to increase its direct stake in Vodafone Essar by 10 per cent. Currently, the Vodafone group has a 52-per cent direct stake and options over 15 per cent jointly held by the telco's managing director Asim Ghosh and Max India chairman Analjit Singh, while the Essar group owns 33 per cent stake. But only a third of the Essar Group's 33 per cent is considered Indian, as the rest is routed through foreign companies.

Of Vodafone group's 52-per cent stake in Vodafone Essar, 42 per cent is direct FDI and 10 per cent is indirect. But, since this 10 per cent indirect FDI is through Indian companies that are owned and controlled by resident Indian citizens, it will no longer be considered as FDI. So, the Vodafone Group can increase its direct stake in Vodafone Essar by additional 10 per cent.

Long-term FDI investors would be happy to note that at a GDP growth of 7.1 per cent, India remains the second fastest-growing economy. Moreover, FDI investors have long perceived India as a land of strong skills.

During April-November 2008-09, FDI inflows touched a record high of $23.2 billion - a 45-per cent increase over the corresponding period of 2007-08.

The surge in FDI is consistent with UNCTAD's rating of India as one of the most attractive emerging markets for long-term investors. The surge also explains why capital inflows are almost 9 per cent of the GDP despite difficult times.