Lenders to telecom sector turn cautious

Commercial banks lending to the telecom sector are turning cautious.

This is despite foreign telecom companies led by Vodafone, Deutsche Telekom, NTT DoCoMo lining up to pick up substantial stakes in the Indian telecom sector after the hike in foreign direct investment (FDI).

The government had raised the FDI limit in the telecom sector from 49 per cent to 74 per cent in January.

There's no challenging the exponential growth the telecom sector promises but lenders are turning their attention to a particular clause in loan agreements which pertains to change in ownership of the borrower company.

"The clause in loan documents that states that lenders' consent is required for a change in the management of the borrower company is coming into focus since the sector is readying for a shake up. In the case of dilution of promoter's stake, lenders' permission has to be asked. We are trying to enforce this clause now," said the credit head of a large public sector bank.

Official sources at Industrial Development bank of India, lender to telecom majors like Bharti and Tata Tele said that even as the clause has always been there in their lender-borrower agreement , now it is even more important.

Bankers have felt the need for scrutiny after Idea Cellular's Rs 5,000 crore borrowing plans came to a grinding halt when the Department of Telecommunications took objection to Singapore Technologies Telemedia & Telekom Malaysia International picking up over 47 per cent stake in Idea Cellular. The borrowing plan was contingent on the foreign investment.

Tata Teleservices may be the first company to feel the pressure from lenders. "We are planning to call a meeting in the coming month to include a clause in the loan agreement to Tata Teleservices to ensure that the promoter's holding in the company does not fall below 51 per cent. We had lent the money with the comfort of lending to the Tatas," said banking sources.

IDBI is the lead banker to Tata Teleservices. An fax sent to Tata Teleservices did not elicit any response.

Telecom companies' debt-equity ratio is at 1:1 currently. Bankers are not demanding a change in that structure.

Tata group companies' holdings in Tata Teleservices has been falling due to the telecom company's appetite for equity and debt funds.

The shareholding of Tata Power, which was once the largest single investor in Tata Teleservices in 2002, has fallen from 49.85 per cent to 34 per cent and to 18.6 per cent in December 2004.

Tata Steels' stake in Tata Teleservices has gone down from 7.97 per cent in 2002 to 3.72 per cent in July 2004. Even Tata Motors' stake has fallen from 0.33 per cent to 0.07 per cent.

The group holding company, Tata Sons has been investing in the company; its stake in Tata Teleservices has increased to 47.69 per cent as on December 2004 from nil in 2002.

"When foreign investors want to pick up stake in a local telecom company we will inspect the investors on a case-to-case basis. We will not stand in the way of foreign investment so long as we are convinced of their intentions," said an official in Union Bank of India.

The bank has lent about Rs 1,200 crore to the telecom sector to companies such as Tatas, Reliance and Idea.