Indian telecom industry on a growth trajectory

By Gautam Khaitan and Nidhi Mathur, OP Khaitan & Co
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India’s telecommunication sector has registered phenomenal growth during the past few years. India now has the world’s second largest telecom network and is one of the most lucrative telecom markets globally. Government policies and the regulatory framework have provided a conducive environment for service providers. Growth is expected to continue, with penetration in rural areas being a major area of opportunity for the next five years.

The main growth drivers in the sector are: (i) subscriber base, which is expected to rise from 51% currently to 72% by 2016; (ii) mobile value-added service, which is forecast to grow to US$10.8 billion by 2015 especially from semi-urban and rural areas; (iii) mobile number portability; (iv) handsets, with shipment of 208.4 million expected by 2016; (v) new network architectures to deliver high-bandwidth services.

Gautam Khaitan
Gautam Khaitan

Investment climate

Earlier foreign direct investment (FDI) policy allowed 74% FDI (automatic up to 49% and with government approval for 49%-74%) in specified telecom services. However, in a bid to attract more investment from telecom giants, India has increased the permitted FDI to 100% (automatic up to 49%, government route above 49%) for all telecom services.

Investments above 49% will still require a go-ahead from the Foreign Investment Promotion Board. The government is also working on a separate preferential market policy, which requires that 65% of the equipment used by a telecom company be manufactured in India.

The change in the FDI policy is a pragmatic one as the increase in FDI is coupled with the removal of some security-related provisions under the previous policy norms. The fresh inflow of money and reduced burden on local entrepreneurs will help the industry provide better quality services and foster the adoption of the latest technologies. The industry is likely to see further consolidation with foreign players, who may eye the smaller players in the country.

The decision to allow 100% FDI will also eliminate the need of a foreign player to partner with a local telecom company and is expected to provide much needed increases in cash flows that will enable telecom companies to meet their expansion plans. Further, foreign investors can now think of multiple ways to bring fresh capital into their companies, which will expand their ability to raise funds.

Several major players operating in the Indian telecom sector have foreign ownership at or near the previous FDI limit of 74%, for example, Aircel (Maxis, Malaysia), MTS (Sistema, Russia), Uninor (Telenor, Norway) and Vodafone (Vodafone Group, UK). These companies are expected to gain the immediate advantage from this decision as it will give them the option to establish wholly owned subsidiaries in India and embark on an aggressive plan to compete with Indian companies such as Airtel and Reliance.

Nidhi Mathur
Nidhi Mathur

More measures required

The Indian telecom industry has faced several challenges in the past two years. Although the government has increased the ceiling of FDI in telecom companies to 100% to help the industry raise funds and reduce its financial burden, this measure alone will not suffice.

Additional requirements include clarity on merger and acquisition guidelines and a clear roadmap on spectrum re-farming. The National Telecom Policy 2012 aims at promoting efficient use of spectrum but the challenge by government on the legality of the 3G roaming agreements between operators contradicts this aim.

Retrospective amendments to tax regulations to enable the government to levy tax on past transactions, as in the Vodafone case, have given wrong signals to foreign investors. The policy towards renewal of old licences also needs clarification. For consolidation to happen, as well as to attract new players to the Indian telecom market, a comprehensive framework is required to provide clarity on all regulatory issues.

Conclusions

India is one of the most attractive telecom markets because it is still one of the markets with the lowest penetration. The government is keen on developing rural telecom infrastructure and is also set to roll out next generation or 4G services in the country. Operators are in expansion mode and are investing heavily in telecom infrastructure.

While foreign telecom companies are acquiring considerable stakes in Indian companies, Indian operators abroad are bringing their knowledge and best practices back home, where they can benefit Indian businesses and consumers. For example, Bharti Airtel is gaining operational experience across Africa while Tata and Reliance Communications are doing the same with their international undersea cable and corporate businesses.

The burgeoning middle class and increasing spending power, together with the government’s thrust on increasing rural telecom coverage, a favourable investment climate and positive reforms, will ensure that India’s high potential is indeed realized.

OP Khaitan & Co is a 40-lawyer law firm, based in New Delhi. Gautam Khaitan is the firm’s managing partner and Nidhi Mathur is a junior partner.

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