India’s mobile-phone industry, once a symbol of rapid growth, is turning into something else: a demonstration of the difficulty of doing business there. Some telecom companies have left and others said they may follow.
India has rewritten tax rules, scrapped 122 licenses tainted by graft allegations and recommended charging 11 times more for airwaves in a bid to wrest more money from operators to help plug the widest budget deficit among the biggest emerging markets.
Bahrain Telecommunications Co., known as Batelco, left India after its permit was canceled. Emirates Telecommunications Corp., or Etisalat, has shut its operations in the country. Shares of billionaire Sunil Mittal’s Bharti Airtel Ltd., India’s biggest operator, have dropped 8.2 percent this year. Idea Cellular Ltd., controlled by billionaire Kumar Mangalam Birla, has fallen 4.1 percent. India’s Benchmark Sensitive Index, or Sensex, has gained 7 percent.
“It has become a bit of a nightmare,” said Andrea Williams, who helps manage about $1 billion as head of European equities at Royal London Asset Management. “Expectations were higher for telecom than other Indian industries, but as of late we haven’t seen many decisions that have inspired a lot of confidence.”
The telecommunications industry isn’t the only one facing regulatory and legal hurdles in India. Delays in approvals to acquire land for coal mining have hampered power generation. In July, the Supreme Court banned iron ore mining, following allegations of illegal extraction, in the state of Karnataka, cutting off supplies to steelmakers. ArcelorMittal, the world’s largest steelmaker, and South Korea’s Posco have been waiting seven years to acquire enough land for steel mills worth a combined $36 billion.
ArcelorMittal’s billionaire Chairman Lakshmi N. Mittal, who started an oil refinery in India this month, said the country is growing more slowly than it can, partly because project permissions take too long. In December, Prime Minister Manmohan Singh, under fire from opposition parties and allies, scrapped a plan to allow foreign retailers, including Wal-Mart Stores Inc. and Carrefour SA, to open outlets.
Vodafone Group Plc, Telenor ASA, Idea and Bharti are among companies that helped to build the world’s second-biggest mobile-phone market after India opened up the industry in the 1990s. Subscribers have grown 158 times to 919 million since 2001, and competition means users enjoy some of the world’s cheapest calls.
The industry’s troubles started in 2010, when the nation’s auditor said the 2008 sale of permits to operate mobile-phone services was “arbitrary and lacked transparency,” and the government may have lost as much as $31 billion in revenue. The report sparked the country’s biggest corruption investigation and led to the arrest of the then-telecommunications minister, bureaucrats and company executives. All of the accused deny wrongdoing.
In February, India’s top court scrapped the 122 phone licenses, including those of Batelco, Etisalat, Telenor and Russia’s AFK Sistema, and ordered a fresh auction of airwaves.
Last month, the Telecom Regulatory Authority of India set a reserve price of 181 billion rupees ($3.4 billion) for a fresh permit spanning the country, compared with 16.6 billion rupees for similar licenses sold in 2008. Vodafone said the nonbinding recommendations will do “irreparable harm,” while the Cellular Operators Association of India called it a “disaster.”
Raising Call Charges
“Indian operators have grown accustomed to certain prices, so this may seem harsh, but I’m confident that the industry will prevail,” TRAI Chairman J.S. Sarma told reporters on April 23 in New Delhi. “Over a 20-year projection, these prices are more than manageable and we will give companies enough time to pay these prices.”
The proposals, if accepted by the government, will raise call charges by as much as 30 percent, companies including Vodafone said in a letter to Telecommunications Minister Kapil Sibal on April 27.
“These shortsighted recommendations could singlehandedly cut the industry’s growth in half,” said D.H. Pai Panandiker, president of the RPG Foundation, a New Delhi-based research group. “A sudden tariff hike will drive subscribers away.”
Telenor, the Nordic region’s biggest operator, jumped as much as 3 percent on April 30 after announcing a “precautionary measure” of writing down $682 million of remaining value in its Indian operations. The company has said it will quit India if the airwave recommendations are accepted.
‘Investors Are Hesitant’
“India is the main reason that investors are hesitant” about investing in Telenor, Saeed Baradar, an analyst at Societe Generale in London, said in an e-mailed note to clients the same day. “Removal of that fear will result in at least a 15 percent to 20 percent re-rating in the stock.”
Meanwhile, India’s Finance Minister Pranab Mukherjee, under pressure to avoid a junk credit rating from Standard & Poor’s, is chasing at least 520 billion rupees from operators to help plug the budget deficit. He accounted for 400 billion rupees from the sale of spectrum in his budget proposals on March 16 and introduced an amendment to the law after the Supreme Court in January ruled Vodafone’s acquisition of Hutchison Whampoa Ltd.’s Indian operation in 2007 wasn’t liable for $2.3 billion in capital gains tax.
He told lawmakers on April 27 that the proposed change is to remove “ambiguities” in the law, and it won’t hurt investment flows into the country.
Foreign funds turned net sellers of Indian stocks in April, the first month of withdrawals in 2012, according to data compiled by Bloomberg. The rupee has slipped 5.2 percent against the dollar since the budget, the worst performance among Asian currencies.
The government, which said the change to tax law will apply to deals going back 50 years, has yet to confirm if it will make a fresh attempt to tax Newbury, U.K.-based Vodafone. The world’s biggest mobile-phone company said on April 17 that it will seek international arbitration should India persist with the demand. Sistema and Telenor, with a combined $5.8 billion investment in India, have also threatened similar action over their scrapped permits.
“Once the poster child for foreign investment, India’s telecom sector has become challenging and difficult due to poor regulator intent,” said Suresh Mahadevan, a Mumbai-based analyst at UBS AG. “Prospective investors may now see India as unfair, with a huge amount of regulatory risk.”