DoT plays swadeshi card for 86% foreign stake

The department of telecom has played the swadeshi card to boost foreign investment in the sector.

In a proposal to be discussed with a committee of secretaries and security agencies -- which have expressed concern that management of telecom companies would pass on to foreign hands if the foreign institutional investor stakes are taken out of the 49 per cent sectoral cap -- the department of telecom has stated that even if the foreign holding, direct and indirect, goes up to 86.74 per cent, management will remain in Indian hands.

According to the department, FIIs may be allowed to buy 49 per cent stake in a company that holds a cellular or a basic service licence. Further, FDI in that company may be allowed up to 25 per cent.

The balance 26 per cent may be held by an Indian investment company in which the Indian promoter holds 51 per cent and 49 per cent by way of FDI.

In effect, this means allowing additional FDI of 12.74 per cent (49 per cent of 26 per cent) through the indirect route.

The Indian promoter will thus retain management control with a mere 13.26 per cent holding.

The department has further proposed that Indian promoters not be barred from transferring their shareholdings to FIIs. The company will be required to issue additional shares exclusively in favour of FIIs. Such a move will ensure fresh investments by FIIs without allowing Indian promoters to divest their holdings.

Moreover, if FIIs want to divest, they will have to sell 51 per cent of their stake to the Indian promoters. The department has also suggested barring foreign companies engaged in the telecom sector -- directly or through subsidiaries -- from investing through the FII route.

It has said there should be a minimum of 20 investors in an FII, each not holding over 10 per cent equity, in the FII. This will reduce the chances of individual investors controlling the management of the telecom company because they would not hold more than 1 per cent equity each.

The move to increase the sectoral cap in telecom was objected to by the Intelligence Bureau, while the department of revenue intelligence had suggested that if FIIs' investment was allowed outside the sectoral cap, care should be taken to prevent "camouflaged" holding by a few for de facto management control in a telecom company.