Decision To Boost Foreign Funds Inflow Into Telecom Services
The decision taken by the Cabinet Committee on Foreign Investment (CCFI) at a meeting on October 17 will lower the funds requirement from the Indian partner in capital-intensive projects like telecom. However, this will apply to other service sectors like aviation only after sector-specific guidelines are in place.
Announcing the decision, industry secretary N Mohanty, told newsmen that the Foreign Investment Promotion Board (FIPB) would come out with guidelines on holding companies operating in the services sector soon. With these guidelines, the board will be able to clear some pending proposals including those of Hutchison-Max and BPL in cellular telecom services, he added.
The government decision clears the decks for huge investment proposals committed in service sectors like telecom. It will allow domestic promoters to tap foreign sources to fund its own equity contribution, while at the same time ensuring Indian control over the licensee or operating company.
The cellular telecom sector is projected to soak $3-billion (some Rs 10,500 crore) investments over the next five years. On a 1:1 debt-equity ratio, the equity requirement amounts to some Rs 5,250 crore, of which 51 per cent (Rs 2,675 crore) was to have been raised by the Indian promoter. With holding companies being allowed, this requirement gets effectively halved to some Rs 1,350 crore.
Earlier, the FIPB had put in abeyance the proposals of some telecom projects on advice from the department of telecommunications. DoT had raised questions about the validity of the holding company route since it felt that the 49 per cent ceiling on foreign equity would be violated through this arrangement. Some telecom promoters had sought to use the holding company route to put up their contribution of 51 per cent of the project funds.
Most cellular operators have decided in favour of holding companies to bring down their equity requirements in the licensee
company. Typically, the Indian promoters of the cellular company which had to bring in 51 per cent equity adopted the holding firm route. A holding firm was floated which would have a 51-49 sharing arrangement between the Indian and foreign partners.
The entire equity of the holding firm would then be used to finance the Indian promoters 51 per cent equity in the licensee firm. However, DoT officials had pointed out that Indian equity in the operating firm would effectively get diluted in the process.
Although the Indian promoter would retain control, Indian equity would only be 26.01 per cent (51 per cent of 51 per cent of the licensee company). This would give rise to problems of management control over the licensee company, especially if the foreign partner in the holding and licensee companies was the same.
The FIPB had rejected a joint venture holding company proposal between Shyam Telecom and Telesystems Mauritius Ltd.