All dressed up

Sitaram Yechury, I’ve been told by a common friend, has a throat problem and that’s perhaps why you don’t see this suave representative of the Left parties hopping from one TV studio to another, criticising P Chidambaram’s Budget promises to hike foreign direct investment (FDI) limits in areas like telecom, aviation and insurance.

In the absence of any credible Left representative, and given how even luminaries like Dr Manmohan Singh and Chidambaram are seeing so much virtue in the Left’s arguments nowadays, this column is going to argue the Left perspective!

I must admit, by the way, there is merit in the argument, though it’s not necessarily the one Left parties would make, given how they’re so focused on the national security angle — that, once foreigners own 74 per cent of a telecom firm, they can tap into any conversation in the country.

Given how the management of some top cellular firms is already in foreign hands despite the FDI cap, that can happen even today (I’m not sure though as to how the UPA’s tackling this since the NDA clearly felt there was a security angle).

While I’ve nothing against raising FDI limits, this is not going to bring in any large FDI in new projects, but is being done primarily to help some existing players to cash out, to sell part of their stakes to their foreign partners for a premium.

Indeed, readers of this column will remember that when the cellular industry withdrew its (very strong) case against the government which was trying to allow firms like Reliance a backdoor entry into the mobile telephony market, higher foreign investment limits was one of the things a few top cellular players wanted in return. Well, it’s payback time now!

To see why foreign investment will not flow into new projects, it’s useful to go back a bit into history. In 1994, when the sector was first opened up, over 35 foreign firms, including big names like British Telecom and AT&T all entered the Indian market — at that time, the foreign equity holdings were capped at 49 per cent.

A few years later, almost all these players exited the market for a variety of reasons, but low FDI caps was not one of them — most of the reasons for their exit were things like high licence fees, a hostile regulatory environment and an incumbent that played dirty with the newcomers by virtue of being the licensor/regulator as well.

A few years later, however, when the government’s policy became more realistic with the introduction of NTP 1999, India became attractive once again. Singtel made a comeback into the country, this time with Bharti Enterprises, and Hutch bought out the Mumbai cellular circle.

In fact, as on date, Hutch has around $1.2 bn invested and Singtel has brought in around half this amount — all this when the policy allows only 49 per cent foreign equity. So, equity limits are clearly not the issue.

Indeed, BPL’s partner France Telecom has just a 26 per cent stake in the joint venture, but has chosen not to go up to even the permissible 49 per cent.

And AT&T chose to dilute its equity from 49 per cent in the Birla-AT&T joint venture to 33 per cent in IDEA as it saw a bigger market once the Tatas were brought into the venture and the group went on to get the Andhra, Madhya Pradesh and then Delhi circles — once again, evidence that 49 per cent is not a binding constraint.

In which case, what is the binding constraint, and why am I so sure there’s going to be no big new foreign telecom investment once the 74 per cent limit becomes official?

First and foremost is the regulatory environment. When the government can change the rules overnight against the cellular players, and there is a fear of a repeat being orchestrated right now (see “The great spectrum chase”, June 28), why would any investor want to put in more money?

Indeed, apart from one ruling by Justice Sodhi which hastened his exit, there has been no (I repeat, no) instance of the regulator even once hauling up the government-owned incumbent (BSNL) for routinely abusing its market power including making it difficult for non-BSNL users to connect to the BSNL network. Nor is this argument about regulatory apathy (or collusion) confined to the cellular industry alone.

Despite a lot of talk, users like you and I still cannot decide if we want to call long distance (domestic or international) using the operator of our choice — while using an MTNL phone, we can’t, for instance, choose to call up Mumbai from Delhi using the Bharti long-distance network.

Not surprisingly, despite both international and domestic long distance licences being readily available, no domestic firm wants to pick them up. So, why would a foreigner want to do that?

The biggest barrier to new projects, of course, is that the government has not issued even one new licence for wireless telephony after it unified the access licences, indeed it doesn’t have enough spectrum to issue to even the existing players to carry their signals. Singtel buying out the Mittals from Bharti or Hutch doing the same with the Ruias is not new foreign investment.

Similarly, in the aviation sector, since the policy does not allow foreign airlines to set up shop here, the hike in FDI limits is just meant to help the existing players raise money, and not to increase competition.

The best example of FDI limits not mattering, of course, is the power sector where, despite allowing 100 percent equity, there are no foreigners beating a path to India’s door — apart from the fact that the principal buyers, the SEBs, are bankrupt, the fear that the UPA is going to review the Electricity Act which would have brought in competition in the market is a major factor keeping FDI away.

Let’s not kid ourselves into believing that one announcement in a Budget means anything.