FDI Flows Fall: Foreign players wary of investing in the Indian telecom sector

Foreign players wary of investing in the Indian telecom sector

According to the latest data from the Department of Industrial Policy and Promotion, foreign direct investment (FDI) inflows into India rose by around 39 per cent, from Rs 1,891.07 billion during 2014-15 to Rs 2,623.22 billion during 2015-16. This was largely on account of a stable macroeconomic policy framework, a favourable investment climate and various initiatives taken by the government to improve the ease of doing business in the country.

However, the telecom sector including radio paging, cellular mobile and basic telephone services witnessed a decline in foreign investments, from Rs 173.72 billion to Rs 86.37 billion, during the same period. The share of telecom in the overall FDI also decreased from around 9 per cent to 3 per cent.

There could be several reasons behind the reduced FDI flows in the telecom sector. For one, while the overall investment sentiment seems to have improved, foreign players remain wary of investing in the Indian telecom sector as there is still no clarity on certain legal cases. For instance, the Vodafone retrospective tax issue remains unresolved despite several discussions between the government and the operator. Second, the constant tussle between the Telecom Regulatory Authority of India and operators over the call drops and net neutrality issues has created a sense of policy uncertainty.

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Key investments

During 2015-16, FDI in the telecom sector was largely driven by the American Tower Company’s (ATC) acquisition of a 51 per cent stake in Viom Networks. Valued at Rs 76 billion, this was ATC’s largest acquisition in India. Viom was established as a joint venture between Srei Infrastructure Finance and Tata Teleservices Limited, with the companies holding 18.5 per cent and 54 per cent stake respectively. The remaining 27.5 per cent was owned by a group of financial investors including IDFC Private Equity, SBI Macquarie, Funderburk Mauritius Limited (Oman Invest-ment Fund) and GIC Investments Pte (Singapore). After the completion of the transaction, the merged entity will become the third major player in the industry, with around 56,000 telecom towers across the country.

Earlier, in April 2015, ATC signed a deal with KEC International to acquire 381 telecom sites across Chhattisgarh, Meghalaya and Mizoram for $13 million. Another key deal in the telecom infrastructure segment was between E2 Energy Services and GTL Limited, in which the latter sold its operations, maintenance and energy management business for Rs 8.5 billion in a slump sale.

In September 2015, UK-based New Call Telecom acquired public Wi-Fi provider Ozone Networks, which has the largest number of public and private Wi-Fi hotspots in India, for an undisclosed amount. New Call Telecom is also in talks for acquiring 12 Indian companies, including three or four firms in the north-eastern region, over the next few months to expand its presence in the country.

Policy and regulatory support

The government had removed the FDI cap for the telecom sector in 2013, providing foreign investors the opportunity to gain complete ownership and control of their telecom ventures in India, and hence not being restricted by the funding capacity of their local partners. During 2015-16, the government took further steps to ease the policy and regulatory environment. The major policy developments in the sector included successful spectrum auctions, which have garnered the highest amount of revenue so far; the introduction of spectrum sharing and trading norms, which allowed operators to procure a greater quantum of spectrum to improve services; approval of active infrastructure sharing guidelines; grant of licences to virtual network operators; speedy implementation of the BharatNet project; and grant of payments bank licences.

The way forward

The Indian telecom sector is the second largest in the world in terms of subscribers and offers new opportunities in various areas such as 3G, 4G, rural telephony, virtual private networks and value-added services. Investors can look to leverage this opportunity and diversify their operations outside the developed economies. Further, the government’s attempt to bring in a liberalised regulatory framework by introducing positive changes in the past one year bodes well for foreign players planning to invest in the country. Going forward, the Indian telecom sector is expected to return to its high FDI levels, which will play a key role in catalysing industry growth.