The Telegraph
Since 1st March, 1999
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Free flow of foreign funds in telecom

New Delhi, Sept. 25: The group of ministers on telecom today decided to raise the limit on foreign investment in the telecom sector to 74 per cent from the current level of 49 per cent but set the rider that management control will have to remain in Indian hands.

Foreign investment comprises two elements: foreign direct investment (FDI), which is the amount that a foreign partner with experience in the same line of business stumps up, and the second comprises foreign institutional investment (FII), which is the amount that overseas fund managers shovel into a company’s equity in order to maximise unitholders’ returns.

The current limit of 49 per cent includes both FDI and FII funding. Now, the government has decided to remove the FII component from the equation.

“The FDI limit will be 49 per cent but FII funding will not be a part of this limit. So the total foreign investment cap will be 74 per cent,” communications and IT minister Arun Shourie told reporters after the first meeting of the group, chaired by finance minister Jaswant Singh. The final decision will be taken by the cabinet.

The decision means that the domestic partner in a telecom company will have to maintain 26 per cent in the venture and hold management control.

Telecom operators, who have been forced to go in for rapid expansion of their services to ward off competition, have been hard pressed to finance the creation of new infrastructure. They have been demanding that the foreign investment limit be raised in order to raise the cash to fund their expansion plans.

”This is a good move and we hope that the government will respond positively to these recommendations. It will help the sector to get the enhanced FDI that will boost the growth of telecom revolution,” said Bharti group chairman and managing director Sunil Bharti Mittal.

”The country has to move from 20 million telephone subscribers to 1000 million soon and this will need a major flow of finance. This will help us prepare for that explosive growth,” added Mittal.

The current foreign investment limit of 49 per cent applies to fixed line, cellular mobile, very small aperture terminals, national long distance, international long distance and global mobile personal communications services.

A top executive of Hutch the second major telecom operator in India said, “It is a good move and will help bring in more investment for the sector. This will also stimulate the growth of services.”

”We hope it will be cleared by the cabinet soon,” said a senior executive in Cellular Operators Association of India.

However, several telecom company chiefs refused to speculate on how the decision might affect their expansion plans and said they would like to study the decision after it is taken up by the cabinet. They also pointed out that while the GoM has approved the hike, it has also shown it unwillingness to take action against violators of the licence conditions.

”While the GoM has recognised that one operator (Reliance) has violated the spirit of limited mobility, it has not made any comment about the action it would like to take nor has it condemned such an action. This could deter foreign institutional investment in the telecom sector.”

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