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Telecom wrangles & India's skewed policies
Surajeet Das Gupta | March 11, 2006
Over the past few weeks, instead of battling it out against the competition in the market place, shareholders of two leading telecom firms are bitterly opposing one another.
While the Tatas and Birlas are accusing each other of all manner of irregularities in the case of Idea Cellular, the Ruias of Hutch-Essar have gone and stirred up a hornet's nest by raising the issue of Egyptian telco Orascom's purchase into Hutch International, which gives it a beneficial stake in Hutch-Essar - the country's national security advisor has now jumped into the fray and said there is a security angle here since Orascom operates in countries like Pakistan and Bangladesh.
Apart from the obvious conclusion that all partners are slugging it out so that they can better their financial prospects given how valuable these firms have now become, the other common factor is that both the Birlas and the Ruias are asking for intervention from the government.
The other common factor is that all disputes stem from licensing policies that are outdated, contradictory, and vague. All of which allows the warring partners to cite the law that suits them.
Take the Tata-Birla feud in Idea first. The crux of the Aditya Birla group's argument is that the Tatas as a group hold more than 10 per cent equity in Tata Teleservices that offers CDMA-based mobile services across the country and, at the same time, own a 31.69 per cent stake in Idea Cellular.
This, the Birlas then cite the Unified Access Service License, is not allowed under the law since "no single company or legal person, either directly or through its associates shall have substantial equity in more than one licencee company in the same service area" and substantial equity has been defined, in another part of the UASL document, to mean 10 per cent or more.
If you leave aside the Tata allegations about the improprieties of the Birlas in Idea, their defence is that there is no legal entity called the "Tata Group".
Tata Industries, they say, owns 31.69 per cent in Idea Cellular and this company that owned more than 10 per cent of Tata Teleservices has brought it down to 4.07 per cent, so the UASL conditions have been complied with.
Sure, the Tata Teleservices shares were sold to other group companies, but the law doesn't say this can't be done.
This is a clear case of a law that is unimplementable, since companies will always find a group company, a holding company, or someone else who will warehouse shares for them.
Indeed, in the Hutch-Essar case, when the company needed to lower its foreign equity to 74 per cent, Hutch International gave a loan to Analjit Singh and Asim Ghosh, which enabled them to buy Hutch-Essar shares, which will now be classified as domestic investment.
So, if the Department of Telecommunications does decide at some point that the Tata shareholdings have to seen as a group, and so the group has violated the UASL cross-holding norm of 10 per cent, there's nothing to prevent the Tatas, if they wish, to get Ratan Tata's lawyer/banker to buy the shares in his/her personal name and the acquisition can be financed through a loan from a Tata group firm.
More important, the 10 per cent rule is not only outdated, it is contradictory. The raison d'etre of the clause was to ensure telcos competed with one another and did not collude in the market place, and was put in place when there were essentially two players in each circle.
Today, however, that no longer applies and most circles have five to six competing firms. In which case, even if two firms in the same circle merge, there is still enough competition.
It's interesting that in the 2004 guidelines for merging of licenses in a telecom circle, the rules are quite different. Here, the rules says "merger of licenses will be permitted subject to the condition that there are at least three operators in that service area for that service, consequent upon such merger."
Indeed, the number of operators will include both fixed and mobile phone operators - so, if the only two mobile players in a circle merge, it's okay as long as there are two fixed-line operators there as well.
The guidelines then go on to say the merger will not be permitted if it leads to a monopoly market situation, and that is defined as a market share of 67 per cent. (In this case, the Idea-TataTele market share in Delhi is 6.5 per cent, 29 per cent in Madhya Pradesh and 35 per cent in Maharashtra of the total mobile telecom subscriber base).
In the Hutchison-Essar fight, apart from the issue of getting friendly investors to enable the company to adhere to the 74 per cent limit on foreign investment in all forms, the date on which the new laws become applicable becomes critical.
Until November, the 49 per cent foreign direct investment rule applied and then firms were allowed to go up to 74 per cent and given a period of three months (till March 2) this year to adhere to the new conditions.
While source close to the Ruias are arguing that Hutch International's sale of 19.3 per cent to Orascom - which gave Orascom a 12.9 per cent beneficial stake in Hutch-Essar - had to be cleared by the Foreign Investment Promotion Board, sources close to Hutch argue that the Orascom deal does not need FIPB clearance since the sale took place in December, which is well within the three-month limit given to them to comply - the new law has now been extended to July.
That the law talks of the FIPB taking "note that investment is not coming from unfriendly countries" is another grey area since there is no list of unfriendly countries - in the present case, while Orascom is Egyptian, it appears the problem is with the fact that it operates in Pakistan and Bangladesh, but even that is not clear.In which case, the "unfriendly countries" clause is always open to abuse and subjectivity.
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