When Vodafone purchased a controlling stake in Hutch-Essar in mid-February, the event raised much excitement. The market response was that competition in the high-growth Indian mobile telephony market would be enhanced. But soon after, ambiguities surrounding the acquisition’s complex ownership structure and regulatory deliberations began hogging the headlines. Vodafone’s 67% stake-purchase comprised Hutchison Telecommunications’ 52%, and options that the Hong Kong-based group held over a further 15% of Hutch-Essar, which is owned by two Indian individuals. The remaining 33% is owned by the Ruias. Though the government expressed concerns of foreign investment caps being exceeded and of a possible threat to national security, it’s worth considering whether ownership in the prevailing competitive environment should really be an issue, and whether the approach on national security here is objective enough to be meaningful.
Consider the regulatory backdrop: Legally, the foreign investment caps regulate the maximum amount of foreign equity that can be held in a communications licensee or service-provider company. In all cases, the licensee or the service-provider company must be incorporated in India, and be registered as an Indian company. Presently, foreign investment of up to 74% is allowed, inter alia, for mobile services. Proposals for foreign investment in these licensees for up to 49% of the licensee’s equity are processed under the automatic route. Proposals that exceed the 49% equity cap are subject to review by the Foreign Investment Promotion Board (FIPB), a high-level government panel.
Monitoring these restrictions is, however, no easy task. Some foreign investors structure their investments through an intermediary investment company, usually an Indian company, but controlled by a foreign investor. The investor uses the intermediary to make equity investments in the company for tax or regulatory reasons. Recognizing this, the government has indicated that the use of an investment-company structure is legitimate as long as the foreign investor’s holding does not exceed 49%, but that it will be treated as part of the maximum ceiling on foreign equity. It seems that two-thirds of Essar’s share of 33% in Hutch-Essar is controlled offshore, implying that a carve-up of Hutch-Essar could breach the 74% cap. So, the ongoing FIPB investigations may meet the same fate.
National security is a more subjective issue and requires scrutiny of foreign investors and their links. While clearing proposals, FIPB considers whether the investment is from ‘unfriendly’ countries. As terror groups do use mobile and Internet networks, national security could be a major concern in telecom proposals.
But why should 49% foreign equity not raise similar concerns? In other words, the restriction of 74% may not be the best defence of national security. A case-by-case approach has only meant subjectivity, with powerful business interests using the unfriendly-country clause to their advantage.
Indeed, a case could well be made out for 100% foreign ownership in telecom, which would obviate the need for the department of telecommunications to monitor innovative structuring of investments from abroad by companies to remain within the existing ceiling. Recall that as Indian telephony, especially mobile, entered a rapid growth phase, the earlier 49% cap proved to be a binding constraint on expansion for some operators. After much lobbying and the N.K. Singh committee report, the limit was raised to 74% in 2005. That growth trend is unabated. And Indian companies are in a strong position to rival global players. So, a brand that’s 100% owned by a Vodafone would make the telecom landscape even more interesting for the consumer.
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