Is 74% Too Dangerous?

But while the Left has stated categorically that it doesn’t wish to dilute its demand to retain the lower cap, even private telecom players are deeply divided on the actual desirability of increasing the FDI limit. It is argued that this decision would benefit only two operators, the Bharti group that has tied up with Singapore Telecom and the Hong Kong-based Hutchison group. Still, finance minister P. Chidambaram seems only too eager to go ahead.

When questioned about the rationale for hiking the FDI cap, Chidambaram had said he was merely making transparent a system that was opaque. At present, any investment by a company that has foreign equity up to 49 per cent in an Indian telecom company is considered an investment by an "Indian" company. Thus, consider a telecom company A where a foreign company B has 49 per cent direct investment and the remaining 51 per cent is held by an Indian firm C, in which B has a 49 per cent stake. The overall stake of B in A therefore goes up to 73.99 per cent—49 per cent on its own plus 49 per cent of 51 per cent held by C, or an additional 24.99 per cent.

Still, in early 2003, when the previous nda government considered a similar proposal following the recommendations of an official panel headed by former member, Planning Commission, N.K. Singh, both the Intelligence Bureau in the ministry of home affairs and the Research and Analysis Wing (RAW) under the cabinet secretariat had argued against the move to allow management control of Indian telecom firms to slip into foreign hands. The IB stated that "as a security doctrine, communications is a vital national service having a critical role in the security of the nation and its control must remain in Indian hands". The then telecom minister Arun Shourie concurred with the views of the security agencies—a rare instance when the Left and Shourie agreed on any issue.

That’s probably why the new note has laid down a set of 16 special conditions that are obviously meant to take care of such apprehensions (see box). These include issues like prior security clearances for any FDI hike, ensuring that management control wrests with Indian shareholders, and giving a "golden share" to the government to block any changes in the articles of association.

Before we get into these conditions, consider the arguments in favour of a hike in the FDI cap. At present, there are 43 million fixed phone lines in the country and 40 million mobile subscribers—the number of mobile phones will soon exceed the number of fixed lines—implying a phone for every eight Indians. If teledensity is to be doubled in two years, large FDI inflows are required to supplement scarce domestic capital resources. The N.K. Singh committee claimed $2.5 billion of FDI could be attracted to this sector each year if the FDI cap is hiked. Morgan Stanley has estimated a total investment requirement of $20 billion to double teledensity. T.V. Ramachandran, secretary general, Cellular Operators’ Association of India, estimates the investment requirements to be of the order of Rs 50,000 crore over the next two to three years.

On security, Ramachandran is of the view that strategic/controlling investments can be demarcated from investments by fiis and adds that government companies like BSNL and MTNL still control 90 per cent of the strategic and critical telecom infrastructure, thereby reducing security risks. Moreover, the government has the right to revoke, terminate, suspend or take over the services or the network of a licensee in the interests of national security. "Reasonable safeguards can be built into licence conditions without discouraging FDI," he contends. When contacted, S.C. Khanna, secretary general, Association of Unified Service Providers of India, said he did not wish to comment on the issue of raising the FDI cap.

Those opposed to a hike in the FDI cap for telecom companies marshal equally convincing counter-arguments. A World Bank study in 2003 had pointed out that barring a few of India’s neighbours (Bangladesh, Bhutan, Nepal and Sri Lanka) and countries like Mongolia, almost no other country in the world allows more than 50% foreign investment in telecom. "Even the US government disallowed Hutchison from acquiring a stake in the liquidated Global Crossing on security grounds," says an executive in a wholly-Indian telecom firm. He adds that in view of the rampant misuse of surveillance technology by the US and its allies for every possible kind of espionage—including the garnering of commercial intelligence through secret projects like "Echelon"—the concerns of India’s security agencies are well-founded.

A representative of a large telecom multinational forwards more compelling logic against a hike in the FDI cap. He points out that as many as 32 global telecom giants from all over the world—including the US, Japan, Germany, Switzerland, Australia, France and Malaysia—had set up joint ventures in India during the mid-1990s to bid for mobile licences; half of these has also bid for fixed-line licences. Ten MNCs actually obtained licences before Hutch and SingTel entered the country a few years later and these are the only two MNCs that have stayed on. "How is it that every international telecom company other than these two left India after losing large sums?" he asks, hastening to answer: "They quit not only because they had over-estimated demand but more importantly, because they found the regulatory framework could be easily manipulated and made to turn hostile."

This source is convinced that the cap on FDI has not acted as a constraint at all. Hutchison and SingTel have together invested more than $ 1.5 billion, while at&t has nearly doubled its investments in India from Rs 600 crore to over Rs 1,100 crore despite its equity stake coming down from 49 per cent to 33 per cent in the Idea venture with the Birla and Tata groups. "Mobile licences are available in the market and fixed-line licences are available off-the-shelf with the DoT. Still, international operators are not showing any interest in India, not because of the FDI cap but on account of the uncertain regulatory environment," he claims.

The unseemly tussle between users of two types of cellular technology (CDMA vs GSM), the realisation that a handful of promoters of Indian telecom firms are rolling in wealth while international telecom bigwigs are bleeding, the scathing comments made by the head of the telecom disputes settlement appellate tribunal (TDSAT) Justice D.P. Wadhwa, a former judge of the Supreme Court, against officials of the DoT and the regulator Telecom Regulatory Authority of India, the fact that over the last eight years there has been an equal number of Union telecom ministers...are all important factors that have dissuaded foreign telecom firms. Under the circumstances, a hike in the FDI cap to 74 per cent would make no difference to all players except two. On balance, the government may perhaps be better off placating its allies in the Left on whom the UPA depends for its survival in power.

(The writer is, director, School of Convergence. He can be contacted at aranjoy@yahoo.com)