Impending 2G Licence Cancellation-Impact on FDI

Ever since the Comptroller and Auditor General (CAG) has unraveled the startling findings over the 2G spectrum allocation, there has been a series of events attached to it. Be it the resignation of the former telecom minster A Raja, or the silence maintained by the PM Manmohan Singh and the allegations thrown on him, the long list of operators in the dock, the showcause notices issued to the them or the possibility of 2G licence cancellation-each revelation in itself has a series of pros and cons attached to it.

Here, we deal with the possibility of 2G licence cancellation and consequences attached to it.

The possibility of 2G licence cancellation of operators who have failed to fulfill the rollout obligations as per the terms and conditions of allocation of the spectrum may cast a negative shadow on the future and present foreign investments in the telecom companies of India.

According to industry experts the cancellation of licences will penalize foreign operators who have bought stakes in these companies, and could send out wrong signals to investments from abroad, and also lead to complicated legal processes. It will also result in losses as some of these companies have invested significant amounts in rolling out operations.

The cancellation of licences may not only affect the high revenue generating telecom space, but also hit foreign direct investments, as leading global players have invested hugely in the Indian telecom sector and the licence cancellation may turn to be a small start towards making the Indian telecom environment an unsafe bed for the both present as well as future foreign investors.

Satyen Gupta, chief regulatory advisor, BT Global Services India & SAARC says, “If the licences get cancelled then it may effect the foreign direct investments of the Indian telecom sector. This may make the foreign investors think twice before investing in India, as they may think that there can be a possibility that the investment may be futile in the near future for any legal issues attached to its background.”

Kunal Bajaj, director, Analysys Mason India says, “If the licences get cancelled then it would definitely give a negative impact to the foreign investors and cast a dark shadow on fresh investments in telecom companies as well. I hope that the government takes caution in the way that that is handled, these specific situations because already the telecom sector in India is facing a lot of negative sentiment from foreign investors.”

Telecom regulator, Trai, on November 18th proposed the canceling of 69 licences of 6 telecom operators. The 6 operators include Etisalat DB, Uninor, Videocon, Sistema-Shyam, Loop Telecom, and Aircel. These companies were issued licences in 2008.

Of the 6, Videocon (formerly Datacom) is keenly seeking foreign investment/strategic on the back of aggressive expansion.

Though these companies were benefited hugely from Raja's spectrum policy, the current market condition does not seem to be too pleasing for them as well as for the foreign investors who could plan to venture with them.

There is already negative sentiment in the telecom sector due to hyper competition, both established and emerging players are striving hard to maintain their space. At this time the allegation of corruption followed by licence cancellation would certainly force investors to keep away from investing in India.

The present market which has a total of 15 telecom operators is reeling under immense pricing pressure due to cut throat competition. The step towards licence cancellation would bring the Indian telecommunication ecosystem towards consolidation. Big and strong players will be buying into the consolidating market.

However experts believe that cancellation of licences may not be the right step and the government and the Supreme Court need to think long term. Evaluating the imposition of fees, fines or penalties of some sort would be a better option, and we can aim at being stricter about ensuring certain rollout obligations in the future.

Moreover, so much capital and operational investment has been made by these operators and it's not just 1 or 2 companies who are getting affected-the cancellation axe now lies on the heads of large number of players who have been increasing their investment, who have entered the country, who have brought tariffs down and who have contributed to the overall growth of the telecom sector.

None of these companies have earned any return on their investments so far. It is only some of the local partners who may have earned some RoI because of increased valuations.

However the foreign companies have been putting huge money into the country in the recent past. They have not taken profits out, they have taken dividends out and they are fueling the economy with growth of the telecom sector.

The composite FDI (Direct + Indirect) in telecom sector of the country is 74%, which is also the sectoral cap. After increase of FDI limit from 49% to 74% in November 2005, the companies as per list given in the Annexure have utilized increased FDI ceiling for telecom services.

So any type of cancellation of licences, will definitely create a small dent in the flow of foreign direct investment in the country. It might thus hit the subscribers as well as the operators who had set up their infrastructure as well.

NK Goyal, president, CMAI Association of India believes that the 2G licence cancellation will not only hamper the inflow of foreign investment in the telecom sector of the country, but also have a negative impact on the growth of the sector in the country, as it will encourage a defensive buy strategy and the bankers will also be skeptical to finance any operators since the bankers always prefer a safer route and don't invest in segments that may be under the scanner.

Government Stand

However, on one hand where the industry is looking at 2G licence cancellation giving a negative shadow to the entire telecom industry, on the other, there are few experts from the industry who agree to the thought of the newly appointed telecom minister Kapil Sibal clearing the 2G scam mess as soon as possible.

Speaking at a press conference recently, a tough talking Sibal said the issue of foreign partners coming in and picking up equity in some of the telecom companies is not the government's problem and that the companies should have got their due diligence done. He added if foreign companies had decided to take a business risk then they had to face the consequences of that as well.

The minister has said that the telecom ministry may cancel licences if rollouts were not met within a year and that the government has nothing to do with foreign companies which are investing in that sector Rajan S Mathews, director general, COAI, says, “If in case these licences get cancelled based on diligent verdict by the government and the apex court, the current impact on the foreign investors would not be much and would be minimal, as most of the operators who are in the target list are not too big ones and they don't have much ties with much bigger investors. Moreover if we look at the other way around, the cancellation can also make these investors to be extra cautious before investing in any country.

In sync with Mathews' thought is Amrita Choudhury, director of CCAOI who says, “During the last few months, there have been issues raised surrounding the “2G Scam”. The matter is currently being investigated and whatever its outcome, we should ensure that the entire industry is not painted with the same brush. After all we must not forget the contribution of the telecom industry to the Indian economy-in all aspects. The telecom industry is chief contributor to the success of the service sector which accounted for 56.9% of India's GDP in 2010. The industry has large and world class investors who deliver services that have enhanced lives, and productivity and provided employment to thousands in urban as well as rural India.”

“I believe that whatever decision would be taken by the government it would be balanced and after due deliberation on all aspects like FDI, interest of the nation etc,” she adds.

As cancellation of 2G licences, obtained by operators at highly undervalued prices of spectrum in 2008, could have a negative impact on the growth of telecom sector, the government too is working on a formula aimed at compensating the exchequer that suffered a “presumptive loss” of over `1.76 lakh crore (based on 3G spectrum prices) from the entire scam.

According to a government official, there is a possibility that the government may ask these operators to pay an additional amount for spectrum to compensate for the massive loss to the public exchequer.

However agreeing to the thoughts of the telecom minister, clearing the telecom mess and disentangling the tangles around the series of mishaps attached to it, is indeed the need of the hour.

V&D Views

Hence having a look at the ongoing mess in the telecom sector, the situation indeed calls for a pragmatic approach such as taking very stern actions against these companies, like their licence cancellation which would reflect on the future growth of the telecom sector in India.

In those cases where there has been a definite violation of the contractual agreement, there are penal clauses which are prescribed and one can take action against them. But the extreme actions of canceling the licence will be very much detrimental to the growth of telecom in India.

However, in those cases where there have been genuine fraudulent transactions, there should be action taken, to not allow any such deeds in future. We hope the national telecom policy 2011 will give answers to our issues.

Ritu Singh
ritus@cybermedia.co.in