People's Democracy

Left Parties Rejoinder To

The Finance Ministry’s Note On FDI In Telecom

The Left parties had recently submitted a Note on FDI in telecom to the UPA’s coordination committee. The finance ministry in its reply to the Note has disagreed with the Left’s views on this sector. Hence Left parties have sent a rejoinder to the finance ministry’s Note. We reproduce this rejoinder below. However, we have added emphasis at certain places to highlight the viewpoint of the Left parties.

-   Editor

THE finance ministry, in its reply to the Note submitted by the Left parties, has addressed some of the issues raised by the Left even if it has disagreed with Left’s views on the sector.

The main issues that the Left had raised in its note earlier pertain to a) the strategic nature of the telecom sector, b) the reason for similar caps in other countries c) whether there is a need for FDIs of this magnitude in view of the healthy balance sheets of the telecom companies d) the need for indigenous equipment manufacturing capabilities to bring down equipment costs.

While the finance ministry’s Note takes up the general case in favour of lifting FDI limits, it does not address the issue of violations of the existing FDI limits by certain Indian and foreign companies. Without this, the lifting of FDI limits would be construed as rewarding those who violate the law and send a wrong message.

We give below our response to the issues in the finance ministry’s Note.

Telecom: Is It a Strategic Sector?

The key question that we need to address here is whether telecom is to be regarded as a strategic sector. If it is, then we need to put in safeguards regarding foreign control of the sector. India has specific security needs: whether European or American companies should be allowed to own Indian telecom companies is not a decision to be taken without due deliberation.

Historically almost all countries regarded telecom as a strategic sector. The telecom companies were either state owned or under strict regulatory controls regarding foreign ownership. The US and Canada were among the few countries that had private ownership of telecom and both had strict limits on foreign ownership. The Europeans and most other countries had state owned telecom companies. Therefore, they did not need any official caps on foreign ownership.

Subsequent to introduction of mobile telephones and the dominance of neo-liberal economics in the West, there has been a change. Some European countries are now in the process of privatising their public fixed-line telecom networks; mobile companies also are either under public or private ownership, depending on the country. In the US, two changes have taken place. One is the rapid growth of mobile telephony and therefore entry of new players in telecom. The other is the break-up of the Bell system, the only landline telecom company in the US, to a number of smaller “baby” Bells. In spite of these changes, a number of countries still maintain control of foreign ownership of the telecom network

With the technical changes taking place, the question is whether the concept of the telecom sector being a strategic one has become obsolete? If the finance ministry is to be believed, there is no strategic significance to the telecom sector anymore and it is a matter of time before all existing controls in advanced countries also disappear. The problem with this view is that it does not match the reality: physical and other non-physical barriers to foreign entry in the telecom sectors still exist in many of the advanced countries. Interestingly, the Indian security agencies have already put forward their positions that the telecom sector is a strategic one and foreign control of telecom companies need to be carefully circumscribed.

There are a number of ways that foreign ownership can be restricted. One is a simple law limiting foreign equity; others could be security clearances of the concerned companies, mandating local citizens in management positions in these companies, or making the sale of equity and ownership conditional on securing special clearances, etc. While for advanced countries, a more elaborate security procedure may not be difficult to institute, for most developing countries, simple caps on foreign ownership eliminates needless bureaucracy and case-by-case clearances with all its attendant problems.

About a year back, the NDA government and its minister Arun Shourie made an attempt to remove FDI restrictions in telecom (February 2003). The security agencies -- the Intelligence Bureau, and home ministry -- had suggested that increase of FDI from 49 per cent to 74 per cent should not be considered, as it will mean management control getting into foreign hands; instead, the FII route may be allowed. Even then, they had suggested safeguards including security assessment of the foreign investments and mandatory requirements of majority of the Board being appointed by Indian shareholders.

We have information that the IB and the ministry of home affairs had insisted that as a security doctrine, communications is a vital national service and is critical to the security of the nation. If the security agencies consider telecommunications as vital for national security, we see no reason for overruling their concerns. If the reasons for not lifting FDI caps were valid a year back, we would suggest that they still continue to be valid.

The reply of the finance ministry on this count to the Left’s Note does not address the concerns raised by the security agencies. The arguments advanced are that as electronic surveillance can be conducted without ownership of the telecom network, therefore foreign ownership is not an issue. The key issue here is whether owning physical telecom resources in another country helps in this electronic surveillance. And the answer is an unequivocal yes. In case the finance ministry has any doubts on that score, it has only to ask any of the security agencies. And if this is not so, why are the security agencies concerned with foreign ownership of telecom companies at all?

In this context, it may also be noted that the security agencies have restrictions on people using cell phones in border areas. It would be surprising if owning cell phones in border areas by interests inimical to India is considered a security threat but not foreign interests owning telecom networks in India.

The second argument advanced is that countries such as Bangladesh, Pakistan and Sri Lanka do not have FDI restrictions. The security concerns of Pakistan and India’s are on a different level. Pakistan has security concerns vis-a-vis India. Irrespective of FDI limits, Indian companies cannot own companies in Pakistan. India’s security concerns are much wider. Therefore equating Pakistan and India on this score is an unfortunate comparison. Neither can Bangladesh and Sri Lanka act as a model for India. It is time we look at India’s security from a larger strategic perspective.

The finance ministry’s Note is also misleading with regard to Pakistan and its restrictions on FDI. While Pakistan allows 100 per cent FDI to start with, this proportion has to be reduced to 60 per cent within a stipulated time period.

Apart from security considerations, the telecom sector is a strategic one as it is also of critical importance to other sectors of the economy. Without a large network coverage and telecom access, large parts of the country and large sections of the people will be denied possibilities of economic growth. The importance of the telecom sector, which we have identified in our Note earlier, means it cannot be left to just the vagaries of the market. The state must play an important role for this sector to develop, which in turn will help other sectors to grow.

If there were reasons why telecom sector’s strategic nature needs to be overridden, then we could consider the same. But we see no such overriding concern. As we will show later, India is generating enough surplus to finance the growth of the telecom sector without impacting other sectors. If this is so, is there any reason why we should compromise our security and hand over two-thirds of the existing GSM mobile subscribers to foreign companies?

Restrictions on Foreign Ownership in Other Countries

The second part of the finance ministry’s arguments is regarding foreign ownership restrictions in many of the advanced and developing countries. The Left had provided a table summarising some of the restrictions on foreign ownership that still exists in many countries. The finance ministry’s contention is that this table is misleading, as it does not give the full picture. They have in turn produced a table containing countries from Cote D’Ivoire to UK that allow 100 per cent FDI’s. The finance ministry however, has also given another set of countries that do not allow FDI above 70 per cent, thereby accepting the Left’s contention that there are a number of countries that still have restrictions on foreign ownership in telecom services. It might be noted that countries such as China, Mexico, Turkey, Korea, Malaysia, etc., who are all in a similar stage of development, all have restrictions on FDIs similar or more stringent than ours.

The issue here is not that some countries allow unrestricted FDIs. The more important issue is why do countries such as US (and even the finance ministry accepts that in mobile telephony, US restricts foreign ownership) restrict foreign ownership at all?

The finance ministry’s Note argues that even if the US has foreign ownership restrictions in cellular area, it has no such restriction in fixed landlines. Here we need to remember an elementary fact. Telecom fixed-line services in the US were a monopoly, and a regulated monopoly of AT&T (Bell), a US company. The issue of restricting foreign ownership therefore did not arise for the Bell system.

The finance ministry’s Note states “the restrictions on mobile services are more due to spectrum availability rather than any ideological or security considerations.” The facts are otherwise. In the US, the restriction on foreign ownership on radio licenses came in 20’s when telegraph and wireless were recognised to be of strategic importance. In the US, Marconi, who was a British citizen owned radio licenses. The US thought that this was not in its strategic interest. It forced Marconi to disinvest its share and this led to the formation of RCA under the US government’s stewardship. RCA was also given Marconi’s US patents. The question of similar restrictions on fixed landline telephony did not arise, as this was already a homegrown Bell monopoly. In Canada, where US companies were seen to be foreigners, such restrictions applied to both fixed and radio licenses.

Even today, there is no advanced country, which has effective landline competition. In the US, the baby Bells have metamorphosed into powerful players combining cable, cellular and fixed line services. Local fixed services are still baby Bell monopolies (all are US corporations) and there is hardly any competition in landline services. As long as this scenario continues, there is no need for the US to look at foreign ownership restrictions for landlines. In any case, they have other laws. There are anti-monopoly provisions; sizeable foreign investments in sensitive sectors need Treasury clearances. In telecom, a Committee on Foreign Investments in the US (CFIUS), an intergovernmental agency consisting of the Federal Communications Commission (FCC), Homeland Security, Central Intelligence Agency (CIA), the Federal Bureau of Investigation (FBI) and the Department of Justice, etc., examines all such investments. Foreign equity caps are only one mechanism for restricting foreign control. Countries with higher FDI limits in telecom companies had put in place security mechanisms long before raising the limits.  India has not. The issue for us is that this is the only one we have currently in place and relaxing that as well means no restrictions on foreign control of Indian telecom companies.

The finance ministry’s Note makes it appear that China has “thrown open the doors to foreign capital.” Without going into details of the same, it must be noted that the China has yet to allow FDI limits of 49 per cent, which it would allow only by 2007. It might be noted that in China, Internet services are also covered by the above restrictions unlike India where 100 per cent FDI is allowed in Internet and other data services.

China Unicom and China Mobile – the mobile telephony operators are  “State-Owned Enterprises” with more than 70 per cent of their shares owned by unlisted parent companies and ultimately the Ministry of Finance. China Mobile is the country’s most valuable enterprise and is ranked in the Fortune 500 list. China has more than 300 million subscribers against approximately 45 million in India at present and accounts for 30 per cent of the world’s net addition in subscribers. And this growth has taken place without any FDI in areas such as mobile, fixed telephony or long distance services.

The foreign owned companies that carry overseas communication, according to the finance ministry Note are AT&T and Alcatel Shanghai Bell. A perusal of the website of Alcatel Shanghai Bell will show that it is an equipment manufacturing firm and not a service provider. In India, FDI of 100 per cent is already allowed in telecom equipment manufacturing. With regards to AT&T (China), according to Paranjoy Guha Thakurta (Business Line 25 and 26 October) “Contrary to what the finance ministry's note would imply, AT&T (China) is not an investor in telecom services but a representative office that deals with bilateral long-distance phone traffic between China and the United States. A similar representative office is run by AT&T in New Delhi.” Therefore, it is inappropriate to use the AT&T China or Alcatel Shanghai Bell examples to argue for lifting of FDI limits in India.

Attracting foreign capital depends on a range of factors including market demand, the regulatory framework, and a stable policy environment. These are the areas that we need to address. We are not aware of any foreign investor in telecom that has said the “low” FDI cap is the reason for not investing (or not choosing to remain) in India. As we have already explained in our earlier note, a number of foreign companies invested in telecom services in a period when these caps existed (32 joint ventures for mobile telephony and 16 joint ventures for fixed telephony when some of the world’s largest and best-known telecom companies had bid for mobile and fixed line licenses with a 49 per cent cap in place in 1994 and 1995). Their departure had little to do with FDI caps but the regulatory uncertainty under the previous NDA government in which the Department of Telecom, government and private operators, TRAI, were all fighting cases against each other in the courts.  As the Table below will show, there is little correlation between FDI limits and actual investments.

License Versus FDI Status

(To Be Continued)