Editorial: Foreigners keep out

It is ironic that while one branch of the government, led by the Prime Minister, seeks to promote infrastructure expenditure as a growth stimulus, another branch seeks to restrict entry into this very sector. While the auctions for 3G mobile spectrum are expected to take place in a few weeks, foreign firms which are not already in India — and the list is a long one — have for all practical purposes been denied the opportunity to bid. For one, if they decide to participate and win the bid, they have to first get a universal or 2G licence; if the firm buys it from the government, this will cost Rs 1,651 crore but the licence will be given without any spectrum since there is no 2G spectrum to give; if a successful bidder buys out an existing player player who has 2G spectrum, the price could be upwards of Rs 6,000 crore.

 

So, from the word go, the new player will be at a disadvantage. But even if a foreign player is willing to pay this extra price (because India is one of the few mobile markets that are still growing), there are other googlies that have been bowled at them. Under the law, a foreign firm is allowed automatic entry only if its equity share in a joint venture is 49 per cent or less. So a bidder has to find at short notice an Indian partner who has the financial muscle to put in several billion dollars. Foreign investment limits of up to 74 per cent are allowed, of course, but require time-consuming clearance from the Foreign Investment Promotion Board.

The only way to open up the bidding would be to allow any foreign firm to bid, on the condition that a successful bidder has to find a domestic partner, get FIPB approval and dilute to 74 per cent in a stipulated time frame. Without such an enabling set of conditions, all the comforting noises made by the telecom minister and the secretary on how the government is keen to allow foreigners into the 3G auction, will not mean very much and bidding is effectively closed to them. Apart from keeping foreigners out, another consequence of the policy is that, with the number of domestic players with deep pockets quite limited in number, the bid prices are likely to remain on the lower side.

None of this should come as a great surprise since the telecom ministry is known to play favourites. Apart from giving licences to a handful of firms at bargain-basement prices, it allowed some firms a double chance of getting these licences. While the law is clear that an investor in a telecom firm cannot hold more than 10 per cent of the equity in another firm/applicant in the same telecom circle, at least two of the firms given spectrum at bargain-basement prices were believed to be owned by business houses which already had telecom operations in the same telecom circles — yet, the telecom ministry chose not to investigate the matter even though double licences are not allowed, and refused to give details to those who asked who the owners of these firms were. That such favouritism should be routine in a sector where big investments are being sought, should be a matter of concern, because you can be sure that it raises the risk assessment and therefore the return calculus that would warrant making the effort to get in.