Amendments to FDI in the telecom services sector

The Ministry of Finance has released the gazetted copy of the Foreign Exchange Management (Non-debt Instruments) (Fourth Amendment) Rules, 2021 (amendment rules). The amendment rules revise the Foreign Exchange Management (Non-debt Instruments) Rules, 2019, with effect from 12 October 2021, the date of publication in the Official Gazette.

Under the amendment rules, up to 100% of foreign direct investment will be permitted via the automatic route. This revision can apply to telecom infrastructure providers in category 1, which are basic, cellular and united access services, unified licence (access services), unified licence, national/international long distance, commercial v-sat, public mobile radio trunked services, global mobile personal communications services, all types of ISP licences, voicemail/audiotext/urban maintenance systems, resale of IPLC, mobile number portability services, infrastructure provider category 1 (for dark fibre, rights of way, duct spaces and towers), other providers and services as may be permitted by the Department of Telecommunications (DoT). However, licensing, security and other conditions, as prescribed by the DoT from time to time, will still apply, and the licensee and investors will still be obliged to comply with such conditions.

Foreign investment in telecom services will also be subject to the conditions of Press Note 3 of 2020 issued by the Department for Promotion of Industry and Internal Trade. According to Press Note 3, an entity being a country, which shares a land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country, can invest only under the government route.

What does this mean for the telecom services sector? On 15 September 2021, the government cabinet introduced a total of nine structural reforms to ease the hardships that telecom service providers have been facing for over a decade and more so in the recent past. These reforms comprise the relaxation of the foreign direct investment limit in the telecom services sector as noted above, the declaration of a four-year moratorium on the payment of statutory dues, the rationalisation of the contentious calculation of the adjusted gross revenue and other financial and operational reforms.

The reforms are expected to help the financially dire state of the telecom services sector by creating an appealing market for the inflow of foreign investment into the sector. The reforms, especially in the new foreign direct investment regime, are likely to protect employment opportunities, ensure much-needed competition in the sector, result in consumers being offered the highest quality technology from all over the world, encourage investment, increase liquidity and reduce the financial burden on telecom service providers.

The relaxed foreign direct investment limit makes Indian telecom service provider companies attractive for foreign investors looking to own 100% of telecom services companies in India. Vodafone Idea and Bharti Airtel appear to be immediate possible beneficiaries of the reforms. The expectation from the new foreign direct investment regime is not just the revival of the debt ridden telecoms sector, but also the protection of consumer interests by providing affordable, quality technology like 5G networks that up to now have not been accessible to customers in India. This is because of the nascent stage of the ecosystem, high spectrum prices and the perilous state of the balance sheets of telecom service providers.

However, the jury is out on whether the telecom reforms, in particular the relaxation of foreign direct investment limits, will make the sector sustainable and competitive as well as attractive to foreign investment. The licensing and security conditions along with the Press Note 3 restrictions also impose high thresholds to cross for a new entrant in the sector. Therefore, the reforms could well pave the way for further consolidation in the sector, but without the involvement of new foreign entrants.

Jay Parikh is a partner and Ayushi Toshniwal is a senior associate at L&L Partners