Wall Street Journal
Thursday, February 03, 2005

India Eases Limits On Telecom Investors; Foreign-Ownership Ceiling

In Sector Is Raised to 74%, Lifting Business Confidence

By JOHN LARKIN

Staff Reporter of THE WALL STREET JOURNAL

BOMBAY -- India raised the ceiling for foreign ownership in telecommunications-services companies to 74% from 49%, paving the way for more foreign investment in the world's fastest-growing cellphone market. The move boosted confidence among businesses in the government's ability to overhaul other key parts of the still highly protected economy.

The decision came despite strong opposition from communist parties whose support India's coalition government needs to stay in power. The policy revision also raised hopes that bold fiscal and economic changes will be announced in the national budget to be unveiled this month.

"It's definitely a positive sign," said Rajeev Malik, senior economist at J.P. Morgan Chase in Singapore. "But the government has to step up by opening a lot more sectors." He said increased foreign investment in sectors such as financial services, real estate and retailing would have a quick impact.

The announcement coincided with a surprise vote of confidence in India's economic program as Standard & Poor's Ratings Services raised its rating on India's long-term foreign currency by one notch to double-B-plus, with a stable outlook. (See related article.)

The ratings company said the upgrade reflected the continuing strength of the economy. It predicted the business environment would improve in coming years, spurring private investment and economic growth.

The central government recently has been under pressure from communist parties -- which lend support to its coalition -- to deliver on election promises to create jobs, especially for the rural poor. New Delhi recently decided to defer until next fiscal year a proposed selloff in two state-controlled companies, auto maker Maruti Udyog Ltd. and engineering and manufacturing enterprise Bharat Heavy Electricals Ltd., following protests by the communists.

The same concerns clearly influenced the telecommunications announcement which was littered with protections designed to placate the communists, who generally oppose opening key sectors to foreign investment. The government cautioned that its approval would be needed by foreign firms wanting to increase their holding to 74%. The majority of a company's board will need to be Indian citizens, as will top executives.

"We have to ensure that there is substantial Indian participation in the telecom companies," said Communications Minister Dayanidhi Maran.

But that qualification didn't detract from the latest step that, though widely expected, is seen as an important development for the booming mobile-phone business, and for India's reform drive. India's mobile sector is the fastest growing in the world, with two million subscribers entering the market each month.

The explosive growth is fueled by some of the world's lowest calling rates. At the end of 2004, cellular subscribers accounted for about half of the nearly 100 million phone connections in India .

The government wants to expand the number of connections by focusing on increasing the number of mobile-phone users. Accomplishing this, said Mr. Maran, will require a capital infusion of $20 billion, "and part of this has to come from foreign direct investment."

Even under the rules that have barred foreign telecom companies from having majority ownership of Indian companies, a number of international concerns have made sizable investments in the country. Among the companies that have made major investments in India are Hong Kong-based Hutchison Telecommunications International Ltd. and Singapore Telecommunications Ltd.

With the foreign ownership ceiling raised to 74%, it's quite likely that existing investors will move to increase their India holdings, while some new players may seek to enter the market.

But with entrenched Indian carriers such as Reliance Infocomm Ltd. playing big roles in the local market, analysts doubt there will be a flood of new foreign investment. The established domestic companies have aggressive plans to expand their coverage of urban and rural India .

"A lot of capital is already available," said Sanjeev Prasad, a telecom analyst at Kotak Securities Ltd. in Bombay. He added that companies like Reliance and Bharti Tele-VenturesLtd. "will continue to invest aggressively."

One of the government's broader challenges, said Mr. Malik of J.P. Morgan, is to open up sectors like financial services, real estate and retail, where the impact of increased foreign investment would be felt almost immediately.

The coming budget is being seen by investors as an opportunity for the government to shore up its reformist credentials, which have been tarnished somewhat by concerns that political considerations were holding back reform.

Most urgently needed, Mr. Malik said in a research report, are bold fiscal moves including lower corporate tax rates, cuts in customs duties and increased spending on infrastructure.

He said India too often "ends up following second-best policies" rather than embracing real change. "The leftists don't realize that at the end of the day it is consumers who will benefit."