Opportunities lurk in India's current financial woes. Although the rupee has been falling and growth has slowed, contributing to a record deficit, the country has embarked on a series of measures designed to reverse the negative trend. Among those efforts to bring in outside capital and boost growth, as well as to shore up the rupee, the government has proposed to relax its rules on foreign direct investment (FDI) in several industries, with perhaps the largest change coming for phone service providers.
Ownership of phone carriers by foreign investors is currently capped at 74%. But among the actions announced by Commerce Minister Anand Sharma, that will rise to 100%, an action that Nitin Soni, associate director, Fitch Ratings, says will not only pique the interest of investors outside the country but will also benefit the telco industry.
"The Indian government's decision to remove the FDI limit in the telecom sector will help reduce leverage and strengthen balance sheets in the medium term," Soni stated in a research report. "The move could encourage foreign investors—who have previously been put off by FDI rules—to look again at the sector, and allow existing foreign investors to increase their stake in subsidiaries to 100%. Taking complete ownership would remove the burden of dealing with a local partner."
Soni also said, "Vodafone, Telenor, Maxis and Sistema may be among the first to take advantage of the change, as they are already at the current 74% holding limit." Other Indian telcos whose foreign ownership is well below the cap would be likely to see benefit in the medium term. He said, "Such telcos could invite equity injection from existing or new foreign investors to improve leverage."
Other industries likely to see some benefit from relaxed FDI regulations include defense production—currently capped at 26%, but rising if India gains access to modern technology; petroleum, natural gas and refining, which will be permitted to rise to 49% without requiring additional approvals, and commodity, power and stock exchanges, which will also be allowed to rise to 49%. Single-brand retailing will be allowed to rise to 48%, and could go beyond that—but FDI from 49%–100% in that sector will require government approval.
The changes in policy began last September, with an initiative by Prime Minister Manmohan Singh launching policy changes to help boost expansion and avert a downgrade in India's credit rating. Those earlier government actions have already shown enough promise that in June, Fitch Ratings changed India's outlook to stable from negative and reaffirmed its BBB- rating. This latest move by the Indian government to relax FDI regulations "supports our view that regulatory risk is fading away," according to Soni.
