Fresh rider for foreign investment in telecom

DoT wants firms to bring in funds via fresh equity

The department of telecom (DoT) has added another rider in its proposal to allow 74 per cent foreign investment.

In its recommendation to the Cabinet, the department has made it mandatory for cellular and basic telecom companies to issue fresh equity in case they want to bring in foreign funds beyond the 49 per cent foreign direct investment (FDI) cap.

This implies that resident shareholders will not be allowed to sell their existing shares to foreign institutional investors.

DoT sources told Business Standard this would ensure that the domestic holding in telecom companies would always be higher than the FDI component, even after the foreign investment limit was raised to 74 per cent from 49 per cent at present.

"The basic idea for relaxing the foreign investment cap is to bring in the much-required funding for telecom project. If we allow existing shareholders to just sell their stake then it will not create any additional equity in the market," said a DoT source.

The move would also address the security concerns raised by the home ministry since the holding of domestic promoters will be higher than that of foreign direct investors.

As per the earlier proposal made by DoT, Indian promoters could sell their shares in the company to foreign investors.

The proposal only mandated management control with Indian promoters, even with a minority holding.

This, however, did not find much favour with the government due to security concerns. A decision was deferred by the Cabinet last week.

The move to raise the foreign investment cap could be a matter of worry to pure Indian companies like Reliance Infocomm, Tata Teleservices and BSNL since competing operators like Bharti and Essar-Hutchison would have access to additional foreign funds.

"We have formulated the proposal taking into account all concerns relating to security and those expressed by Indian companies. We expect this issue to be settled once the political situation stabilises," said the source.