With the Telecom Commission pressing the button on 100 percent foreign direct investment (FDI), India has literally entered the last leg of a three-staged launch into telecom orbit.
After the investor sentiments in India’s burgeoning telecom sector had hit a low in the wake of cancellation of 122 odd 2G licenses and regulatory uncertainties, things have never really looked up. Could the approval of 100 percent FDI change trigger a change for the better?
The answer would have been fairly simple and straightforward had telecom’s flight not wavered so much during its second stage. A prolonged turbulence, however, has considerably slowed the pace of progress and therefore it is unlikely that this final propelling act would garner the big benefits that would have otherwise been plausible.
In the earlier two legs—of 49 percent and 74 percent FDI caps respectively—India’s telecom had seen growths of unprecedented magnitudes. At one point in time, it even helped resurrect the fortunes of a global giant like Vodafone. Indeed, it almost looked as if India’s telecom story could never go wrong, until when the industry made a judgmental error in estimating the 3G business case.
The hype around mobile broadband swayed telcos to overbid for 3G airwaves and land themselves into a staggering debt trap from which a comeback has been painstakingly hard. The return on 3G investments has obviously been too small to be worthy of being an offsetting factor.
To add to the problem, 3G auctions-led 2G evaluations made it further difficult for the players to even leverage and grow their 2G businesses. It was only after the failed 2G auctions later that the government realized the magnitude of industry’s problems, which led to a more realistic reserve price for the next round of 2G auctions.
That, however, has not helped the industry recover from debts, which has also kept the stock prices as well as overall valuations of major India-based telcos under much pressure. That is unlikely to see a significant lift-up, given that the new FDI norms could increase the near-term competitiveness in the industry without a level playing field being in place.
For example, it would give players like Vodafone, Telenor and Sistema the option to establish their wholly owned subsidiaries in India and chart a more aggressive plan. On the other hand, companies like Airtel or Reliance would find the infusion of fresh investment more difficult in view of their already leveraged balance sheets.
It won’t therefore be unreasonable to say that a full FDI in telecom may not be enough for the overall health of the sector at this juncture. Additional measures would need to be taken to help India-based players offload or offset the debt burden that they are pressured with. The possibilities could be numerous, from allowing inter-operator 3G roaming to accelerating entries of MVNOs and such other things that could help telcos unlock the value of their existing investments in the greatest possible manners.
Well considered measures now taken would have a long-term bearing on how India’s telecom sector as a whole is placed in an orbit that’s smooth for a healthy function of the sector henceforth.
(This article was first published on Light Reading India)
(This article was first published on Light Reading India)
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