False ring

Since this is the third time the government has announced increased FDI limits in the telecommunications sector (the first time this promise was made was over a year ago in the July 2004 budget), what prospective investors would perhaps like to know foremost is whether the move is serious.

Even if it is, the real issue is what the decision to allow 74 per cent FDI is expected to achieve, other than allowing a few existing players to exit more easily and some foreign players to increase their stakes. Critically, will the decision spur investment in new telecom infrastructure? The answer to that is a resounding no. It will not, unless there is a dramatic change in the policy environment. First, it is a fallacy that foreign firms are desperately keen to raise their stakes in firms where they have invested, to 74 per cent.

When the sector was first opened up in 1994, the top global companies came forward to invest even though the ceiling on stake allowed was 49 per cent. Since then, some either lowered their stakes even below what was permitted (AT&T in Idea) or simply didn’t increase it (France Telecom in BPL).

This indicated that the issue was not as relevant as, say, the market’s potential for growth. What matters more for investors today is whether the government and the regulator are seen to be fair and neutral.

While the view on the regulator was that it was batting in favour of one set of players during the WiLL-mobile regularisation days, the government has been seen time and again as refusing to implement policy that could adversely affect the short-term interests of incumbent BSNL. As long as this view persists, significant fresh investments in telecom seem unlikely.

The Indian mobile business should be able to attract more investment as it is among the fastest-growing in the world. But there is no spectrum available even for existing players to run their networks. The domestic and international long-distance licence is an option, but the licence fee remains too high and in any case, until the government allows subscribers to choose their long-distance carrier, only those with a captive customer base can run a successful long-distance business.

While Telecom Minister Dayanidhi Maran believes a cartel is operating in the business, he can do nothing until the regulator gives its recommendations. But the regulator believes there is no cartel, and in fact wants to increase the current level of protection for a few more years!

So, investors don’t know what the licence fee for this may be in the future. The only other area worth investing in is internet telephony. The potential in this can be gauged from what eBay has paid for Skype—$2.6 billion down and another $1.5 billion if the business achieves certain growth targets.

But the government doesn’t allow genuine internet telephony. As for VPN, a related area, it has actually reversed policy by hiking the entry fee from Re 1 to Rs 10 crore! Plus, it has not moved for over a year on the Trai proposal to reduce this to Rs 30 lakh.

So once again, the investor doesn’t know what the future entry fee will be, Rs 10 crore or Rs 30 lakh. And he is supposed to rush in to invest.