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Telecommunications service was among the three industries in which the sectoral cap on foreign direct investment (FDI) was raised in the 2004–05 union budget. Capped at 49 percent earlier the new limit, up to which a foreign investor could hold equity in an Indian telecom service company, is 74 percent now. A long-standing demand of a section of the Indian telecom service providers, particularly cellular operators like Bharti and Hutch who have major foreign investors. The government's decision has been forced by an official recognition of the fact that the telecom infrastructure sector needs 'huge amounts of capital'. In the past, the Union Government has dithered on such a hike in the FDI ceiling largely because of the perceived fear that allowing management control of Indian telecom companies to fall into foreign hands could be detrimental to national security.

While there is no guarantee that the latest move would result in an immediate inflow of foreign capital in the industry, or for that matter bring in new players in the Indian market, it will surely have an impact on the sector as a whole. As the industry has already gone through a series of consolidations in the past, there are not many companies (either in fixed access or mobile services) left to be acquired. With the exception of BPL Cellular and BPL Mobile, Spice, Shyam Telelink, and HFCL Infotel almost all services companies outside the domain of the biggies, like Hutch, Bharti and Idea, have been acquired by one of these three. However, what could really happen in the near term is that raising of the ceiling is likely to help existing investors like Hutch or even Bharti, Tata, and Idea, in case, they decide to sell stakes in their operations to foreign investors or want to get them in as strategic investors. Also, the remaining small players like Spice, BPL, HFCL Infotel, and Shyam Telelink can now have more suitors in case they decide to sell themselves off. These companies, which were left only with the option of entering into the market or raising debt as the means of raising funds, can now look for investments from abroad. Moreover, it will be easier for Indian companies to tap global capital markets by going for overseas listings.

Perhaps the most relieved company from announcements in the recent union budget, hiking the limit of foreign direct investment (FDI) in telecom services, is going to be the Hong Kong-based ports-to-telecom conglomerate Hutchison Whampoa. By all accounts, Hutchison is the most significant and also the most serious foreign investor in the telecom services business in India. However, the ceiling of 49 percent put paid the company's goal to consolidate its operations in India under one company. The Hutch group, which is the second largest mobile service provider in terms of revenue and third in terms of number of subscribers, operates in India through six companies. Just a few weeks before the budget, Hutchison Max applied to FIPB to allow shareholders of Hutchison Essar Telecom (Delhi), Fascel (Gujarat), Hutchison Telecom East (Kolkata), Hutchison Essar South (Andhra Pradesh, Karnataka, Chennai, Punjab, Uttar Pradesh, Bengal) and Aircel Digilink India (UP East, Rajasthan, Haryana) to transfer all their shares in these companies to Hutchison Max and become shareholders of Hutchison Max Telecom Limited. Hutch can now have better control over their operations and can bring in more funds as well.

SingTel, which owns 28.5 percent in the country's number one GSM operator Bharti Tele-Ventures, might also up its stakes now. In fact, the company, which has one of the largest foreign investments among India companies, has been one of the biggest advocates of raising the ceiling. Also, foreign institutional investors (FIIs) are likely to buy Bharti shares from the secondary market, something that was not possible under the 49 percent regime. Similarly, Idea Cellular, in which a consortium, of Singapore Technologies Telemedia and Telekom Malaysia, recently acquired a 33 percent stake (previously owned by US wireless major AT& T), can see more action now. The Tatas, who have been focusing more on their CDMA services, are likely to get out of Idea and the new ceiling could just make things easier for them.

Ravi Shekhar Pandey