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Merger and acquisition rules to kickstart consolidation in telecom
December, 27th 2013

Telecom companies are waiting for Tuesday when an inter-ministerial panel is scheduled to decide on the long-awaited mergers and acquisitions (M&A) norms, likely to spark consolidation in the sector.
There have been other positive developments as well, the most notable being last week's decision of the Empowered Group of Ministers to fix the January auction reserve price for 1,800-MHz spectrum at 25 per cent lower than what the government had set for the March auction, which failed to get any bidder.

Foreign investors are watching these developments keenly. The decision in August to allow complete foreign direct investment (FDI) in telecom has already helped many companies like Aircel, Vodafone India and Telenor to get investment from promoters abroad. While Aircel and Telenor are investing more, so that their local units can survive, for Vodafone, buying stake from its Indian partners is more for consolidation.

All this is a far cry from the mood even a few months ago when Indian telecom, despite exciting prospects, was seen as a tough market for investors, given complex regulations, cancellation of licences by the Supreme Court following the 2G spectrum scam and falling prices.

"There is a definite improvement in the performance of the big telcom companies - increase in subscribers & reach and with the expected reasonable pricing of spectrum, the outlook is positive and this sector should see more FDI, investment and growth," says P Krishnamurthy, director of Quant Capital's advisory board.

Ministry officials say Sistema and SingTel, holding 32 per cent in Bharti Airtel, are also awaiting the rules that allow firms to merge or buy smaller players, provided the market share of the merged entity does not exceed 60 per cent in a circle. SingTel has already made it clear it would fund any M&A to help consolidate Bharti's hold once new norms are unveiled.

One of the biggest investment was made this year when Qatar Foundation took a five per cent stake in Bharti Airtel for Rs 6,796 crore in May. That came as a morale booster for Airtel as its profits had been falling for the past three years mainly due to competition and losses at its African operations that Bharti bought for $9 billion in 2010.

Among recent investment, Malaysia's Maxis Berhad, which owns a 74 per cent stake in ailing wireless telephone operator Aircel, has pumped in a little more than Rs 6,000 crore as "quasi equity" into the Indian firm to finance the latter's interest outgo of Rs 2,500 crore a year.

For Aircel, the funding was more of an emergency drip. The funds were infused by the promoter after banks asked Aircel to bring more money into the company before a four-year moratorium on payment of the loan's principal amount could be given.

Another ailing telco, Tata Teleservices, with a debt of Rs 26,000 crore, is hoping its promoters, the Tatas and Japan's DOCOMO, will inject more funds into the company as it gears up to bid for spectrum in the auction slated for early next year.

British telecom giant Vodafone is making a big bet - it has applied for approval to buy a stake worth Rs 10,000 crore held by minority shareholders, including the Piramals, in Vodafone India. The UK-based telco holds 64.38 per cent stake in its arm. Telenor of Norway also invested Rs 1,000 crore in its Indian venture so that it could survive in the fiercely competitive Indian market.

But there are still concerns. Asim Abbas, partner, Khaitan & Co, a top advisor for multinational companies, says, "It is unlikely that foreign investment will come into the telecom sector in the current situation because the regulatory regime is not favourable for consolidation of telecom operators. Also, the actions of instrumentality of states in the last two years strengthen the impression that the rules of the game can be changed anytime. The unified licence issued recently is copy and paste of the existing service specific licences and at variance with the stated objective of the telecom policy of 2012, that is, convergence of network, service and devices." Most of the investment, he says, are being made as the government has cleared 100 per cent FDI in India.

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