Indian telecom receives a booster dose of hope from the GoI
The clearance of 100% FDI for the interest of international investors has now been put on the table for engagement in a sector which could become one of the key drivers of the Indian economy.
The Modi Government has issued yet another statement of intent by announcing that it would invite 100% foreign direct investment (FDI) while adding that all safeguards would apply, via the automatic route in a bid to stir up interest among international investors keen to do business in India’s telecom sector.
The pathbreaking decision announced by the Union Cabinet erased the previous caveat which allowed 100% FDI, but only 49% of which was in the automatic route beyond which anything had to go through the government route.
“In the telecom sector, there was a 100% FDI but only 49% of it was in the automatic route,” said Union telecom minister Ashwini Vaishnaw. “The cabinet has decided that 100% FDI in telecom via the automatic route has been allowed. All safeguards including press note 3 and others will be applicable.”
A four-year moratorium on airwaves payments due to the government and raising the tenure of airwaves held by firms were a part of the package, along with a change in the contentious definition of adjusted gross revenue (AGR) to exclude non-telecom income.
Centre protects certain sectors from foreign investors
The reforms come a year after the Union finance ministry notified changes in the FDI rules in April 2020, which made prior approval of the government mandates for foreign investments from countries that share a border with India, including Pakistan, China, Bangladesh and Nepal among others. The Centre has allowed FDI through automatic routes in a majority of the sectors. However, in sectors such as defence, media, pharmaceuticals and insurance, government approval is needed for foreign investors.
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The Covid-19 pandemic, the world’s most stringent lockdown and an 8 per cent contraction in GDP last year have not dampened the appetite of foreign investors for a slice of the Indian market in 2020-21.
India Global Business had observed in an analysis published in May that, the resulting inflow of investor dollars, has boosted the country’s foreign exchange reserves during the year under review by more than $100 billion to $576.8 billion as on April 2, 2021. The money flowed in both in the form of foreign of foreign direct investment (FDI) as well as in the form of foreign portfolio investment (FPI).
FDI flows into the country during 2020-21 stood at $54.67 billion, according to figures released by the Reserve Bank of India. Outbound FDI flows, i.e., investments made by Indian companies in foreign countries during the year under review were $11.30 billion. Net FDI inflows, therefore, were $43.37 billion, a new high, comfortably overhauling the previous record of $43.01 billion set in the previous financial year.
The GoI’s latest initiative primed to sweeten the appetite of investors ensures that under the automatic route, foreign investors have to only notify the Reserve Bank of India (RBI) after the investment is made. Adding more meat to the latest initiative has been the approval of eight structural reforms and five process reforms for the telecom sector approved by the Union Cabinet.
Endorsing those decisions Vaishnaw said “In the backdrop of the outstanding performance of the telecom sector in meeting Covid-19 challenges, with a huge surge in data consumption, online education, work from home, interpersonal connect through social media, virtual meetings etc., the reform measures will further boost the proliferation and penetration of broadband and telecom connectivity.” In addition to enabling the FDI ruling the Cabinet also addressed the adjusted gross revenue (AGR), digitisation of Know Your Customers (KYC) forms, scrapping of penalty on payment of licence fees, spectrum user charges and all kinds of charges.
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The burden of the AGR
As things stand on the ground in India, Indian telcos owe the government $13 billion in outstanding payments (AGR - adjusted gross revenues). The AGR coupled with the increasing cost of the 5G spectrum were deemed to be legacy issues and solving them would then guide the telco sector out from its zone of hopelessness to one of optimism. It was necessary in order to ensure that the sector could once again become one of the engines of India's growth.
The Union Cabinet’s clearance of the much-needed reforms and a relief package for the ailing telecom sector will provide succour to cash-strapped companies like Vodafone Idea and Bharti Airtel given the 4-year moratorium on payment of their AGR (Adjusted Gross Revenue) dues. The Supreme Court had earlier refused to waive these dues, adding to the travails of these companies.
The government’s latest benefit to the telecom industry was immediately heralded by the stock markets when shares of Vodafone Idea Ltd surged nearly 20% and banks with exposure to the telecom firm also jumped.
What remains to be seen is whether the telecom market has the potential into a duopoly. AGR adjustments are not necessarily a long-term solution for the sector. The telecom sector, with all its problems, had faced disruption when Mukesh Ambani’s Reliance Jio had forced some competitors out of the market, thanks partly to the huge dues that owed to the government.
Vodafone Idea, a combination of the India unit of Britain's Vodafone Group (VOD.L) and domestic telecoms firm Idea Cellular, alone still owes the government about $6.81 billion.