New Delhi: Tata Communications Ltd’s plan to set up subsidiaries in Malaysia and New Zealand may be opposed by the department of telecommunications (DoT).
The draft of a DoT letter to Tata Communications, reviewed by Mint, says it is against the expansion plan because of several reasons. The letter, which hasn’t yet been approved by the relevant official, hasn’t yet been sent to Tata Communications. The government holds a 26% stake in the formerly state-owned company.
The draft says Tata Communications’s fund position is not healthy because of high interest costs of Rs 517.64 crore. It adds that the growth of the telecom sectors in Malaysia and New Zealand is slower than those of other developing nations.
“There is need to analyse performance of existing telecom companies in these countries with reference to their existing capital investment, IRR (internal rates of return), and market share, etc,” according to the draft letter.
Tata Communications, the erstwhile state-owned Videsh Sanchar Nigam Ltd (VSNL) that the Tata group bought in 2002, needs government approval to create subsidiaries as per its shareholder agreement.
“We have not received any communication from DoT on our proposal to create two new subsidiaries, so we cannot comment on DoT’s views on the matter,” a Tata Communications spokesperson said, adding the company has nearly 40 subsidiaries in 30 countries.
The draft letter says that some of Tata Communications’ foreign subsidiaries are hurting its profitability. While on a stand-alone basis Tata Communications made a profit of Rs 162.56 crore in 2010-11, its subsidiaries in South Africa and Sri Lanka dragged it into a consolidated loss of Rs 776.9 crore, according to the draft letter.
“Considering this, the company may be advised to carry out a thorough review of the performance of the subsidiaries and reconsider its proposal with available alternatives,” it says.
The draft asks for more details from Tata Communications on its source of funding, the market scenario in the two countries and the financial position of potential competitors.
“The inability to create a subsidiary does pose a problem as it means some delays. It does not however affect the debt position as it means the investment of a small amount just to create a point of presence,” said a Tata Communications executive who didn’t want to be named.
“The company works in a number of countries. Where it is justified to have a subsidiary, there is one. Otherwise, they work with partners across the globe. A subsidiary is usually needed for licensing purposes or as a holding company if the regulatory regime in that country demands it.”
The Tata group holds a 51% stake in Tata Communications. Bank of New York Mellon holds just under 7% as a custodian to the company’s American depositary receipts issue. The government has two nominees on the TCL board.
In July, DoT objected to a proposal by Tata Communications to increase the public holding in the company from 16.85% to at least 25% in line with listing norms.
DoT said a stake dilution can happen only after a dispute over hiving off surplus land is resolved. The dispute relates to some 773 acres that belonged to VSNL and was not a part of the sale deal with Tata group.
This is near resolution after the Telecom Commission at its meeting on 10 August agreed to hive off the land into a special purpose vehicle in order to auction it later.
The department of telecommunications also objected to the proposal to increase the public holding in Tata Communications because that would mean the government stake shrinking.
The government has also refused to allow Tata Communications to increase authorized capital from Rs 300 crore to Rs 2,000 crore as that would dilute its shareholding.
Tata Communications shares fell 2.5% to Rs 179.60 each on Tuesday on the Bombay Stock Exchange. The Sensex fell 1.77% to 15,864.86 points.