Chidambaram’s 74 Per Cent Argument

Prabir Purkayastha

THE finance minister, P Chidambaram has proposed that the FDI caps for Insurance, Civil Aviation and Telecom be raised to 49 per cent for the first two and 74 per cent for the telecom sector. In this article, we will just deal with the telecom sector and look at the justification offered.

The telecom sector in India has a 49 per cent limit of foreign ownership. It is not the only country, which has such a cap on foreign ownership. Almost all advanced countries including the US has such caps. Only recently, European countries have been lowering some of these, permitting EU countries to enter each other’s telecom markets. The US still maintains a 26 per cent direct foreign ownership limit, as do countries, such as Korea and Mexico amongst others. The key reason for restricting foreign ownership in telecom is that the telecom sector is perceived to be related to country’s security needs and therefore the need for domestic control. While Chidambaram may have a different view about security, he still needs to tell us why this argument, endorsed by various security agencies in the country, should be rejected. 

LIFTING OF FDI CAPS

Interestingly enough, the proposal has been welcomed by the cellular operators association of India (COAI), particularly Bharati Telecom, who has been asking for raising of FDI caps for quite some time. It has also been welcomed by a number of investment bankers --- ABN Amro, ICICI, HSBC, etc --- who have indicated that such a measure will allow some of the current operators sell out to foreign companies and presumably they will arrange such sales. Market analysts all agree that the two major international players who would benefit are Hutchison, who have bought Essar’s out and Singtel, who want to have the major stake in Airtel, the company in which Bharati also has a stake. Reliance and Tatas, who are the other two major private players, have said that they are unconcerned either way: they were not interested in selling out nor do they believe that it will alter the current telecom scenario significantly.

The “market friendly” analysts have been campaigning for quite some time that all FDI caps should be lifted and such a measure will help in boosting the FDI flows into infrastructure. To many of them, without such lifting of FDI caps, Indian telecom sector will be languishing in the doldrums. This is the argument that COAI had been repeatedly advancing for the last five years: without FDI flows Indian telecom sector cannot increase its teledensity per hundred from the figure of 3.5 in 1999 to 7, the target for 2005. Unfortunately for COAI’s argument, the teledensity in India has grown much more rapidly in the last five years, when the FDIs in the sector have been relatively low. And India did meet the target of a teledensity of 7.04, one year before the targeted 2005 schedule. As is public knowledge, Bharati Telecom and Airtel, both of whom are interested in lifting of FDI caps, control COAI. Neither has Chidambaram advanced strongly the argument that lifting FDI caps is vital for increased capital flows to the sector, leaving COAI and others to put forward this bogus argument. His argument is that foreign telecom companies have already found a way around the current limit of 49 per cent using holding companies and therefore let us make this legal, or in his words, “transparent.”

Before we get into the details regarding FDI ownership in telecom, let us see why and from whom the pressure is coming for lifting such caps. With the initial opening up of the sector to private capital, there was an interest in a large number of international telecom majors to enter India. There was then the belief that the telecom sector was set to take off world wide, and there was a worldwide scramble for telecom licenses. This lead to gross over bidding by the companies, or perhaps strategic bidding --- high prices to keep out others and subsequently petitioning the government for lowering license fees. This in India led to the revenue sharing arrangement decided by the lame duck Vajpayee government after it had lost its mandate in the Lok Sabha. Similar concessions were also offered in Europe. None of the foreign players made much of the 49 per cent FDI cap then, knowing that a demand for outright foreign ownership would probably run the risk of de-railing their entry: they were quite happy to get a 49 per cent ownership, well beyond what the US offers.

COMPANIES HAVING LARGE STAKES 

After the initial scramble and the change from fixed license fees to revenue sharing, a number of foreign companies exited from the Indian market. They were responding to the crisis that they were undergoing, having over-extended themselves in other markets as well. The two companies who today have large stakes are Hutchison (known as Hutch in India) and Singtel. Both of them acquired large stakes in two of the major cellular players in the country. Hutchison bought Sterling and a part of Essar’s stakes in Delhi and has also Max’s share in Mumbai. Though Bharati Telecom still owns what appears to be controlling interest in Airtel, Singtapore Telecom or Singtel has already acquired major stakes there. What Chidambaram is telling us is that though Hutch and Singtel are technically minority shareholders; they have actually acquired a majority stake by holding another 25 per cent through a holding company that they own.

The question that the country then needs to ask the finance minister is not whether these two companies have secured a majority through the backdoor, but whether the original cap of 49 per cent of foreign ownership makes any sense? Whether the 49 per cent restriction should apply or not is not the finance minister’s beat, but to be jointly worked out between the minister in charge of the Telecom department and others concerned with security. If these departments want to review this decision, then let us debate that. Surely, the finance minister’s job is to see that his department plugs the loopholes that other departments and the finance ministry may have unwittingly left in their policies. Instead of which, he is arguing that since this policy has been bypassed by the foreign companies, let us now reward them and lift all such restrictions.

How did Hutch manage to beat the 49 per cent foreign ownership limit? For example in Mumbai, where they bought a major share of the original Max shares, they also have 49 per cent holding in a joint venture in which Kotak Mahindra hold 51 per cent shares. This company, which is classified as an Indian company as Kotak holds 51 per cent shares, holds another 41 per cent shares in the Hutch Mumbai. If we now total up 49 per cent of shares that Hutch directly owns with 49 per cent of the 41 per cent that Hutch-Kotak joint venture owns, then we can see that Hutch owns in reality about 70 per cent shares in Hutch Mumbai.

THE QUESTION OF CONTROL

There are two issues here. One is to look at the question of control. Though Hutch may contribute to mare that 70 per cent of the current share holding of Hutch Mumbai, the fact remains that the control remains in Indian hands as the Kotak-Hutch joint venture has 51 per cent owned by Kotak, an Indian entity. This joint venture along with Max who still holds 10 per cent shares in Hutch Mumbai, owns 51 per cent of the shares. As the issue here is one of control, the 51 per cent shares of this company are in Indian hands. However, let us agree with Chidambaram that this is really not true, and as Hutch has paid for 70 per cent of the shares of Hutch Mumbai, they effectively have 70 per cent ownership. Then the right answer would be to put in place mechanisms by which this cannot be done. This should be a simple measure: argue that directly or indirectly, the maximum that any foreign company or individual can own is 49 per cent of a telecom company. This will address the vital issue that Chidambaram is raising, the one of transparency. Yes, there should be complete transparency in ensuring that foreign ownership is restricted to 49 per cent. But let us not reward those who have broken the spirit of the bar if not its letter.

NEED TO RESTRICT FOREIGN OWNERSHIP

The key issue in this is there a need to restrict foreign ownership in telecom? If we look at the US, it is clear why they insist still on restriction on foreign ownership. They know exactly how eavesdropping electronically on telephone and other conversation leads to “hard intelligence”. The national security agency (NSA) has been listening to such conversations for decades. The information is filtered through a bank of computers using sophisticated search patterns by which some of such conversation of email is selected for human analysis. In today’s world, if one country can own a telecom company in another, it can mine this information remotely, without the knowledge of even the operating company.

All networks and exchanges are really computer banks; planting a backdoor for either remote intelligence gathering or taking the telecom network down from a remote location during a crisis is child’s play with today’s technology. It is because the US knows this and is in this business for its intelligence agencies, that they will not allow foreign ownership of their telecom companies. For those who believe that most countries do not have such restrictions, we give below a table of advanced countries, which still have restrictions on foreign ownership.

This also explains why the security agencies had strong reservations on passing on the management control of the telecom service companies in favour of foreign promoters, when NDA tried to enhance this limit in 2003. DoT had then invited security agencies' views on increasing FDI ceiling to 74 per cent from 49 per cent in respect of basic and cellular services. DoT received replies from the Intelligence Bureau and the Directorate of Revenue Intelligence, both emphasising that management control should remaining in Indian hands on the ground that communication is a vital national infrastructure with a critical role in the security of the nation.

 Countries With Foreign Ownership Restrictions

The finance minister’s argument regarding telecom makes his proposals for raising limits from 26 per cent and 40 per cent in insurance and civil aviation to 49 per cent even more suspect. If the 49 per cent limit has been violated by a number of companies, then can we take it that his strategy in these sectors is first raise the limit to 49 per cent and then later argue that for the sake of transparency we would then have to increase it further to 74 per cent? Is then racheting up the foreign investments his game? Openly if he can manage it, through such devious means if he cannot? Or is it his long association with the cellular lobby, whose lawyer he was for a long period, telling on his judgement?