FDI hike to trigger M&As in telecom

Mergers and acquisitions (M&As) in telecommunications are expected to gather momentum after the government's decision to hike foreign direct investment cap in the sector to 74 per cent from the existing 49 per cent.

"The move will fuel consolidation in the industry and lead to long-term players providing better quality services and absolute value to the consumer. It also makes India an attractive destination for investment to foreign investors," Sudhir Mathur, CFO, Idea Cellular Ltd, said.

At present, all private cellular service providers are partially owned by foreign investors. While SingTel owns 28.5 per cent of Inda's largest GSM operator Bharti Tele-Ventures, the second largest player Hutch is 42 per cent owned by Hong Kong's Hutchison Telecom International.

A consortium of Singapore Technologies Telemedia and Telekom Malaysia recently acquired a 33 per cent stake in Idea Cellular, that was previously owned by US wireless major AT& T.

After the proposal to hike FDI comes into force, it will be possible for these foreign investors to increase their stake in these companies. With the existing foreign investors, many other investors from abroad are also expected to buy stakes in the Indian cellular companies.

"The sector will witness dramatic situations in terms of a number of mergers, acquisitions, consolidations and external capital market transactions," said Munesh Khanna, MD, NM Rothschild.

With more and more foreign funds, the cellular industry, that is reeling under an accumulated loss of about Rs 7,000 crore, will get adequate funds to undertake expansion plans to meet the growing demand of increasing lines.

Telecom companies were left only with the option of entering into the market or raising debt as the means of raising funds and it was not possible for Indian promoters to arrange huge funds. This move by the government will enable the players to raise funds from foreign markets.

"The increase in the foreign investment allowed in the current budget will give a major boost to the telecom sector.We can now access foreign capital markets to serve the hinterland in a more efficient and cost effective manner thereby bringing affordable telecom services to one and all," said Sunil Mittal, chairman, Bharti Tele-Ventures Ltd.

This will also enable telecom companies to expand their service to small towns and also to rural areas with more funds in hand, industry analysts expected.

Urge to merge

• The government has decided to hike the ceiling on FDI in the telecom sector to 74 per cent from the existing 49 per cent
• Currently, all private cellular service providers are partially owned by foreign investors
• Apart from the existing foreign investors raising stakes, many other overseas investors are expected to buy holdings in domestic cellular companies