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Telecom: Foreign connections!

The Budget 2002-03 brings a lot of cheer to the telecom service provider industry

Budget Provisions
The Budget 2002-03 brings a lot of cheer to the telecom service provider industry. There is some thing for the equipment vendors as well. However, the Budget does not bring anything for the Telecom cable manufacturers.

For the cellular equipment manufacturers and resellers, there is good news with cellular phones and pagers being exempted from the counter veiling duty (CVD) of 16%. However, there is an increase in the basic customs duty to 10% from the earlier 5%. At the net level, there is a reduction in the customs duty.

As Yashwant Sinha said, "The use of cellular phones is increasing by leaps and bounds but import through unauthorized channels is a matter of concern. I therefore, propose to exempt cellular phones and pagers from CVD. The basic customs duty is, however, being increased from 5% to 10%."

For the telecom service providers, there are three main provisions relating to carry forward and set off of past losses, additional depreciation and increase in the foreign institutional investor (FII) limit. However, the provision relating to FII limit is still not clear and a lot of ambiguity still remain on that matter.

While commenting on the carry forward and set off clause, Sinha said, "There has been a persistent demand that the benefit of carry forward and set off of past losses in cases of mergers of companies owning industrial undertakings, should be extended to more sectors. The telecommunication sector, in particular, is undergoing a phase of rapid consolidation and expansion. With a view to encourage its growth, I propose to extend this benefit to companies providing telecom services and eligible for deduction under section 80-IA. I also propose to constitute an expert group to examine the extension of this benefit to other companies in the services sector, including the financial services sector."

Further, Sinha wanted to give impetus to fresh investments in the industrial sector. To do this, there is a provision to allow additional depreciation at the rate of 15% on new plant and machinery acquired on or after 1 April 2002 for setting up a new industrial unit, or for expanding the installed capacity of existing units by at least 25%.

Earlier, FIIs could invest in a company under the portfolio investment route beyond 24% of the paid up capital of the company with the approval of the general body of the shareholders by a special resolution. Budget 2002-03 proposes that FII portfolio investments will not be subject to the sectoral limits for foreign direct investment (FDI) now except in specified sectors.

However, there is still ambiguity on this issue as to whether Telecom sector can avail of this new provision. The Budget speech of the finance minister mentions that Guidelines in this regard will be issued separately and this ambiguity will be clear only after the issue of those guidelines.

Reactions
However, the industry feels that the "feel good" factor is missing. As Prakash Bajpai, President & CEO, Hughes Tele.com said, "While the Finance Minister had a difficult task on hand, there appears to have been only a few major initiatives. We would certainly have liked more initiatives for the Telecom sector. The stock markets have reacted negatively."

He had some telecom specific comments as well.

Issues addressed
We don't yet have available the detailed budget document but it appears that only 2 issues related to Telecom have been addressed:

1. Foreign Investment Limits may have been increased: Possible exemption of FII investments from the calculation of current Foreign Investment ceiling of 49% i.e. FDI at 49% + FII investments beyond that. In his speech, the Finance Minister did not specify which sectors would be allowed this exemption. We will have to wait for the budget document to know its applicability to the Telecom sector.

2. Duties on Mobile Phones & Pagers: While CVD (counter veiling duty) of 16% has been removed, the customs duty has been increased to 10% from 5%. The net effect will be a reduction in handset costs.

Issues not addressed
1. Customs duty anomalies remain unaddressed: There appears to have been no reduction in Customs duty on Network Infrastructure Equipment required for Basic services (duty of 15%) to bring the rates on par with that available to Cellular, Internet & Paging service providers (duty of 5%).

2. Customs Duty on equipment required for Village Public Telephones (VPTs) has not been reduced to zero: Lower costs would have enabled the basic service providers to provide faster and cheaper service in rural areas which would have benefit the socially weak sections of the population.

However, the equipment manufacturers feel that the Budget was a balanced one. As Pramod Saxena, Country Head, Motorola India said, "This year's budget is a balanced one with a clear focus on fiscal discipline that is growth oriented. This is clearly reflected in the Government's commitment to promote investment in infrastructure and continue with second generation reforms, which Motorola believes will have a positive impact on India's GDP growth rates in these tough times.

"On the telecom front, Motorola appreciates the Government's outlook in recognizing the telecom sector as an integral part of the infrastructure sector and a key driver of economic development in India. We welcome the Government's decision to reduce the overall duty impact on the import of mobile handsets. We believe that this will help control the grey market menace in India and benefit all - the government will be able to grow taxes from the sale of more legal handsets, consumers will get warranted handsets at economical rates and it will give an impetus for growth to the market. Although it is still too early to give precise details on the impact of duty reduction on mobile handsets, the expected reduction in prices for the end-user can be estimated to be in the region of around 10%."

A view supported by Siddhartha Ray, Managing Director, Data Access India and President - Internet Service Providers Association of India (ISPAI). He said, "With regards to telecom industry the removal of CVD on handsets will help in expanding the mobile subscriber base. The reduction of customs duty on capital goods is another good measure for expansion of investment in this sector."

Pranav Roach, President, Hughes Network Systems India feels that the Finance Minister has continued with the second generation of reforms. He said, "The FM has announced that, except for specified sectors, the FDI and FII investments will be delinked. Telecom is already a specified sector where maximum foreign investment (both FDI and FII combined) cannot exceed 49%. And though it has not been specified whether today's announcement recommends any change in that policy, but we do hope the FII and FDI investments for Telecom will be delinked to help boost investment in this sector."

Industry Impact
Overall, there is a positive impact on the Telecom equipment segment of the telecom sector. With the reduction of customs duties on cellular phones and pagers, this segment can look forward to increased penetration of the mobile phones in the coming year.

For the cable manufacturers, there is not much in the Budget.

The biggest gainers have been the Service Providers. In fact, this segment has been gaining consistently ever since the New Telecom Policy '99 was introduced. This Budget also signifies the importance Government is giving to the Telecom sector and ready to go ahead with reforms in spite of many odds. With the sort of provision in this Budget, India can witness a lot of consolidation in the Telecom sector in the coming years.

Company Impact
The clear winner is Bharti Tele-Ventures (BTVL). The company gets a chance to set off its past losses in case of mergers, where it has a lot of chance as the company has many subsidiaries for various businesses. If the FII limit is extended to this sector, it will act as a big boost for BTVL. The price of the scrip is also below the issue price and give attractive returns in the coming days.

For other service providers like Hughes Tele.com, MTNL, VSNL etc. the provisions of this Budget do not bring any special benefits. The FII limit can bring some good news to all these companies.

In the equipment segment, mostly unlisted manufacturers (resellers) of cellular equipment will benefit.

Companies to watch
Bharti Tele-Ventures,Tata Telecom, FCI OEN, ITI

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