Telecom FDI policy open to abuse -- BPL Mobile chief

Telecom FDI policy open to abuse -- BPL Mobile chief
Sunil Jain

New Delhi, August 11: It's tempting, and easy, to call it a case of sour grapes. That Rajeev Chandrasekhar, Chairman and CEO of BPL Innovision Business Group, is upset with the huge inroads made by Hong Kong-based Hutchison Telecom in the Indian market, as well as the rapid strides made by some of his competitors. Yet, in an interview with The Indian Express, Chandrasekhar raises some very valid questions, and issues that deserve to be investigated further. Issues like, for instance, on the reported Hutchison buyout of 95 percent of the Jhavar's stake in Usha Martin Telekon in Calcutta when the Telecom Policy allows foreign telecom firms to buy only 49 per cent of the equity of Indian telecom firms directly. Excerpts:

Q. What are your views on the the FDI investment policies in the telecom sector?
A. I think there is an urgent need for someone in the government to review this. I am strongly of the view that the present ambiguity is favouring companies both domestic and foreign who are willing to bend the rules and actually is restrictive to companies that are following the spirit of the policy.

Q. Can you explain that.
A. Let me draw your attention to a recent wire-service article. It says `the consolidation phase in the cellular sector has begun through complex financial engineering measures that circumvent legal stipulations.' This feeling is widespread.

It is our interpretation, as is of most other Indian companies and foreign operators that the policy stipulates a 49 percent cap on foreign equity in telecom sector. I don't want to argue the merit of this cap, but this cap exists as in the policy today -- and it is there to ensure that these companies remain in domestic/Indian control.

Q. But I thought the cap is really 74 per cent, since a 49 per cent cap is also allowed in holding companies?
A. I think it's quite obvious that this was meant for Indian companies to raise capital from institutional investors, since sources of capital in India were limited. If it was allowed for foreign operators to invest additionally this way, a lot of other operators would have done this long ago.

For example in our cellular companies, foreign telecom operators like France Telecom and MediaOne have equity holdings of 26 percent and 49 percent respectively. Our Group holding company, BPL Communications Limited (BCL) -- which owns a majority interest of 74 percent and 51 percent in the two cellular companies and 74 percent in our Internet and 100 percent in our Broadband companies -- has only Foreign Institutional Investors. It is quite easy for us to sell equity in BCL to a number of Foreign Telecom Operators who have shown interest, including one who has since invested in another Indian company's investment company. We had to decline, just as you don't see the AT&Ts, or British Telecom or Media One or any of these reputed international telecom names resorting to this. The reason being that they all believe like we do, that this is contrary to the spirit of the policy as it is today.

Q. By that logic, are you saying that several of these investments that have led to acquisitions in India are illegal?
A. I am not saying that these are illegal or legal. I would just like to humbly submit, that a lot of companies that scrupulously follow the spirit and letter of law are being disadvantaged, in this consolidation process. The government ought to review what is happening and make clear to everyone concerned what is correct and what is wrong. Then we will all hopefully marching and competing to the same set of rules.

Q. All this sounds very philosophical and great. How does one actually prove a violation of law or spirit of the policy? After all how do you know if say an Institutional Investor is not holding shares on behalf of a telecom firm? Benami shareholdings are an age old practice.
A. First, sectoral limits on telecom are not unique to India. It is prevalent in most parts of the world -- China, US and until recently most parts of Europe. Enforcing it is not diffcult. At the most simple level, a Legal Undertaking can be sought from Foreign Operators that they do not control or own, either directly or indirectly, more than 49 percent of the company.

Further, Undertakings can be sought by the licensee/operating company itself that its Foreign Telecom Operator partner does not own/control more than the stipulated limit. In addition, the Indian company owning 51 percent can give an undertaking that its shares are not controlled by the foreign partner. These are just simple ways, and lots more can be worked out to ensure compliance with the law.

Q. But wasn't this circuitous holding company investment done primarily to encourage such takeovers by foreign telecom firms, and to increase foreign investment into the sector and country?
A. I don't think so. I don't believe that it is the government's objective to encourage Indian companies to sell out. After all very few countries allow foreign companies to control such large and strategic sectors. But even if that is the objective of the government, let it be said so and done in a more transparent manner. Why not simply increase the FDI limit in telecom from 49 percent to a higher number, say 74 percent, and allow far more institutional investors to invest from overseas.

The present ambiguity is encouraging surreptitious solutions and complex and pyramid structures.

Q. What about the recent deals announced like the 95 percent acquisition by Hutchison of Calcutta etc.
A. I have only read of this and the Hutchison takeover of the Delhi license in the newspapers. I don't know the current and correct situation on these and other such reports. Nor would I like to comment on these specific instances. It's for our government to look into these and ensure that these are in line with the policy of the day.