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INDIAN telcos such as Bharti Airtel, Vodafone Essar and Idea Cellular among others may well end up being the biggest beneficiaries from the government’s latest modification of foreign direct investment (FDI) norms. With telecom among the most attractive sectors for foreign investors in India, the new norms will allow all existing telcos here to bring in additional investments from abroad without breaching the 74% foreign investment cap. In 2008 alone, the telecom sector attracted FDI worth $5.8 billion as global majors such as Etisalat, Telenor and NTT DoCoMo picked up stake in Indian telcos.

Take the case of Bharti Airtel, in which Singapore-based SingTel owns 31% through direct and indirect investments. Of this, 15.8% directly comes from Singtel. The remaining 15.2% derives indirectly from Singtel’s onethird stake in Bharti Telecom Limited (BTL), which in turn owns 45.3% of Bharti Airtel. Since Bharti Telecom Limited is “owned and controlled by resident Indian citizens”, SingTel’s stake in this company will no longer be calculated as FDI in Bharti Airtel. So far, both direct and indirect foreign holdings, even if the latter was through an Indian owned company, was considered when FDI was calculated. The new norms imply that Singtel’s holding in Bharti’s Airtel is only 15.8%. The under 5% stake that Vodafone owns in Bharti Airtel, too, comes through a majority Indianowned company, which has a stake in BTL. Now, this Vodafone stake will also not count as FDI. This allows more headroom for Bharti Airtel to attract another 20% at least of direct or portfolio foreign investment.

The new FDI guidelines will allow Vodafone Group to increase its direct stake in Vodafone Essar by 10%, a source close to the company said. At present, the shareholding structure in Vodafone Essar is as follows — the Vodafone group has 52% direct stake and options over 15% jointly held by the telco’s MD Asim Ghosh and Max India chairman Analjit Singh, while the Essar Group owns 33% stake. But only a third of the Essar Group’s 33% is considered Indian as the rest is routed through foreign companies. “ Of Vodafone Group’s 52% stake in Vodafone Essar, 42% is direct FDI and 10% is indirect. But, since this 10% indirect FDI is through Indian companies that are owned and controlled by resident Indian citizens, it will no longer be considered as FDI. So, the Vodafone group can increase its direct stake in Vodafone Essar by additional 10%,” explained this industry executive.

“In theory, this gives Bharti Airtel more headroom to bring in more foreign investments. But, it will ultimately depend on whether the company wants to sell more stake to foreign investors. On the other hand, it will be beneficial to a foreign company who already owns a controlling stake in an Indian telco and wants to raise it further to enjoy more voting rights. There is a difference between what you can do when you have a 74% stake and when you own 90%,” an industry executive with a leading telco said.

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