Impact Of Fdi On Indian Telecom

Published Date: 02 Nov 2017

This is to certify that the project titled "Impact of FDI on Indian Telecom Sector" submitted in partial fulfillment for the Degree of Masters of Business Administration at the Faculty of Management Studies, University of Delhi is my bona fide work. Any material borrowed or referred to is duly acknowledged.

Signed & Dated:

Name of Student: Nischit Sharma

This is to certify that the project titled "Impact of FDI on Indian Telecom Sector" has been carried out by Nischit Sharma (F-118) under my supervision.

Signed & Dated:

Name of Supervisor: Dr. Partha Chatterjee

ACKNOWLEDGEMENT

I express my sincere thanks to my project guide Dr Partha Chatterjee, for providing me with an opportunity to work under his guidance and providing tireless support during the course of the project. His continued cooperation, never-ending encouragement, meticulous guidance and uninhibited support at various stages helped me in preparation of this research study.

I would also like to thank the staff of the Faculty of Management Studies, library and administrative section for their cooperation and support.

I have learnt from several articles, research studies and papers from national and international entities. I acknowledge the value I have received from these bodies of knowledge.

Nischit Sharma

Faculty of Management Studies

University of Delhi

Delhi-110007

March 2011

Contents

Executive Summary

The objective of this dissertation is primarily to examine the effect which FDI has had on the performances of players operating within the telecom sector.

FDI in Indian Telecommunications Industry is considered to be one of the most important factors in the rapid growth of the telecom sector within India. Over the last fifteen years, India has received over 100000 crores of FDI with approximately 26% of the total invested in development of cellular infrastructure. Till now, all the segments in Indian Telecommunications have witnessed a cap of 49% in terms of investments.

 FDI as a source of funding has dropped considerably with foreign investment inflows decreased to $43 million in the April-September period of 2013. There has been a considerable plunge over the past eighteen months. There was a 96% decrease to $70.46 million in the April to November 2012 period. This is in sharp contrast to inflows of $1,987.18 million in the same period a year ago.

The cumulative Foreign Direct Investment in the sector from April 2000 to November 2012 period stood at $12.62 billion.

This dissertation seeks to analyze the beneficial effect that the introduction of FDI has had on the Telecom sector by comparing the performances of two major players- Airtel and Reliance Communications.

The comparison between the two companies is done because of the fact that Airtel has a huge element of foreign presence associated with it while Reliance Communications Ltd has no foreign company holding shares in private equity portfolio.

A comparison between the two companies would thus, help in analyzing the effect of FDI on telecom sector in a better manner.

The private sector within the telecom industry has grown at a much faster rate than the state and central network companies namely, MTNL (Mahanagar Telecom Nigam Limited) and BSNL (Bharat Sanchar Nigam Limited). Both the companies presently have an extremely low market share within the Telecom market. Thus, both these companies have not been taken into account in the analysis.

There is presently a 74% cap on Foreign Direct Investment within Indian telecom firms. The cap on foreign investment within these firms was initially fixed at 26% when FDI was introduced. However, with rising competitiveness the cap has been gradually increased first to 49% and then to the present value of 74%.

1The hike from 49% cap to 74% was done in 2009 by the Manmohan Singh led Congress government which felt that this would lead to higher investments thus, generating more profitability and greater development.

2In recent times, the Government appointed Parekh panel led by HDFC Chairman Deepak Parekh argued for a hike in FDI limit from 49% to 74%. The Committee felt that raising FDI cap to 100 per cent from the current figure of 74 per cent currently, would make it improbable for Indian stakeholders to raise 26 per cent capital for companies aiming for an Indian presence.

3The cap on FDI on Telecom infrastructure companies has been 100% in recent times as it is generally felt that the infrastructure required development of communications is somewhat lacking. In recent times there was however, a proposal to bring the cap down from 100% to 74%. The proposal was made by TRAI(Telecom Regulatory Authority of India) which felt that lowering the cap to 74% would make the infra segment be at par with the service providers. This move was vociferously opposed by Telecom tower companies.

Implementation of this proposal would adversely impact foreign tower companies such as American Tower Corporation as they would then need to search for an Indian partner.

4In the past there have been quite a lot of aspersions with respect to allowing FDI in telecom as intelligence agencies feel that that communication is an important component of national infrastructure with an important role in national security. It is for this reason that the proposed cap of 74% FDI was rejected back in 2003. Both the Intelligence Bureau and the Directorate of Revenue Intelligence (DRI) had emphasized on management regulation staying in Indian control.

Thus, this project seeks to throw greater clarity on the impact of gradual introduction of FDI in the Telecom sector in terms of organizational performance.

Introduction

Since the opening up of the economy after 1991, Foreign Direct Investment (FDI) has been looked upon as a tool for accelerating the progress of under developed countries into advanced nations. There has afterwards been a gradual increase in encouragement provided to FDI’s.

The Indian telecom sector has attracted a large chunk of FDI’s over this period as compared to other sectors. A huge part of the total FDI inflow in Indian telecom sector has gone towards investment in holding companies after which are cellular network, manufacturing and consultancy.

Horizontal FDI are the investments made by a firm for establishment of manufacturing facilities in multiple countries, where all produce quintessentially the same thing which is meant for separate domestic markets. Vertical FDI is when individual firms specialize in different production stages of the output. The half finished products are then transported to other subsidiaries for further processing and future production. This segmentation of the process gives the company an advantage of differing factor costs across various nations. Vertical FDI decreases cost of manufacturing and marketing finished products and thus, leads to higher margins. Foreign investors give high weight age to financial incentives and taxation breakup. They hunt for markets having lower taxes as it has an impact on the investment profitability.

Horizontal FDI is connected to market seeking motivations and is a result of cheap trade costs. Thus, high tariff barriers make firms take on horizontal Foreign Direct Investment. Hence, foreign production is substituted by foreign subsidiaries which result in higher exports.

The experiences of companies who have entered in the Indian telecom sector have been mixed with some making deep inroads such as Vodafone and MTN while others facing vital regulatory and economic problems such as Etisalat and Telenor. [5] Vodafone, which entered in the Indian telecom sector with joint venture with Essar initially, had a bad experience due to high competition and lower margins. The company still has persisted with the Indian growth story and has thus, become a major player in recent times. The move to increase FDI cap from 74 to 100% has the full support of the telecom giant as it feels that this would lead to greater amount of ease in doing business within the economic sector for companies. A 100% cap would also result in greater autonomy in operations. Foreign players also feel that wholly owned Indian competitors would have an advantage over compulsorily made Joint Ventures (JV’s) in terms of strategic planning, coherence and execution.

The confidence of foreign corporate was greatly lost in light of the recently occurred 2G scam. It has played a major factor in the slowdown of foreign inflows into the sector. [6] The 2G spectrum scam involved politicians illegally undercharging mobile telephonic companies for purchases of licenses related to communication frequency allocation. These allotted frequencies were then to be used creating 2G subscriptions for cell phones. As estimated by the Comptroller and Auditor General(CAG) of India, the difference between the money collected and the money that should have been connected in accordance with the law is Rs. 1,766.45 billion (US$ 32.15 billion). This value was calculated on the basis of 3G and BWA spectrum auction prices in 2010. This figure was hotly disputed by the government agencies such as CBI and other Congress politicians. The telecom minister Kapil Sibal stated that zero profit and zero loss was caused by the sale of these frequencies.

 The controversy was however laid to rest by the verdict of the Supreme Court which declared the allotment of spectrum as "unconstitutional and arbitrary" and thus, cancelled all the 122 licenses which were issued in connection with the 2G frequencies.

The ruling shocked [7] foreign investors as it wasted all the billions of dollars which were invested in the Indian telecom market. Companies controlled by foreign governments have planned to take legal recourse to recover their lost investments. Steps which are planned to be taken for protecting Telenor's investments include the invocation of clauses from the India-Norway Bilateral Investment Treaty (BIT) by the Norwegian government which owns a majority stake in the company. The Russian government which owns a major part in Sistema has taken legal action to protect its investment.

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Following the decision, Telenor has written down its USD 721 million investments in the Indian joint venture.

Literature Review

There has been a lot of research done investigating the cause and effect relationship between FDI and economic development. This has included many different sectors varying from IT, Telecom, Automotives, Banking, Insurance etc.

The paper [8] "Foreign Direct Investment in India and Its Economic Significance In Relation To Development of Various Sectors" talks about the different factors affecting the quantity of FDI inflows within an economy. These have broadly been listed down as:

Political stability:

Firms prefer not making investments in countries which have a reputation for political instability, volatility and unpredictability. Threats of civil unrest, riots and upheavals discourage investors. Thus, political stability is an important issue.

Policy Environment

Macro environment is a factor which increases exchange rate and other risks faced by foreign investors. High inflation rates imply decreasing and unsure exchange rates. These damage foreign confidence and investment.

Institutional and Infrastructure Development

Multinational companies seek to invest in countries having sound telecommunications, transport facilities and reliable utilities such as energy. The implementation of laws and extent of corruption is another important factor.

Exchange Rate Effects

The fluctuations of exchange rates between two countries have been found to have an uncertain effect. However, it is a confirmed fact that short term fluctuations cause higher FDI numbers.

Trade Protection

Greater trade protection makes it more possible for companies to switch exports with subsidiary production.

9An autoregressive study of FDI inflows has been carried out to evaluate and analyze the behavioral pattern that it exhibits in terms of the relationship to growth rates within an economy. All the thirteen sectors categorized by the government have been analyzed and the data for the period 2002-2010 has been taken into account. It has found that the sectors of Telecommunications and Construction activities have shown high growth behavior as compared with other sectors which have exhibited high levels of stationarity.

10A time series analysis of FDI and economic growth has also been done for Nepal for the period 1980-2006. This work has been unique in the sense that the analysis has been carried out for a country with extremely slow economic growth rates over the past three decades. This has corresponded with the same level of stagnation in terms of FDI levels over the years.

11An analysis of FDI as a profiler of economic development has been done which has ardently supported increasing FDI within countries giving the reasons of

Trade Balance

Increasing labor standards

Technology transfer

Improvement of general business climate

Enhancement of skills

Access to global managerial skills

An analysis of the inflows to the different sectors within Indian economy has also been done with the result that services sector has received the maximum amount of foreign inflows.

12An overview of Foreign Direct Investment in India has been done in which the impact that FDI has had on India’s economic progress has been analyzed. FDI in India has helped India in achieving an element of financial stability and growth. The inflows received have given India the space to concentrate on areas that may require economic attention. The factors which have built investment in India are secure economic policies, easy availability of good quality human resources at low cost and opportunities for exploration of new markets. The greatest percentage of FDI is flowing in service sector with very low investments being made in the manufacturing sector. Investing in service sector will enhance the benefit of flow of funds to the home country. At present, India has 17% of world’s total population but its share of GDP to that of world GDP is 2%. India has been ranked at second in global foreign direct investments in 2010 and will be a part of the list of top five attractive destinations for international investors during the period between 2010-12 according to United Nations Conference on Trade and Development (UNCTAD).

13A global analysis of the FDI inflows to different parts of the world has been done in a research piece. The FDI inflows made in India have then been contrasted with the other concerned parties. The total FDI inflows made in the world have been estimated as 1114 billion dollars.

These global FDI inflows have been estimated to rise to 1.7 trillion dollars by the year 2015. The author has then shown the trends which FDI inflows have shown at a global level over the years.

These have been contrasted with FDI values in India which have undertaken a sharp rise after economic reforms implemented by the present Prime Minister Mr Manmohan Singh in 1991.

The country wise inflows into India have then been analyzed to find out the nations which have the highest contribution to the Indian economy. Till 1990, there were only 6 countries US, UK, Germany, Japan, Italy and France which were responsible for more than 65% of foreign inflows within India. However, at present it is Mauritius which has the highest investment followed by Singapore. At present, Mauritius accounts for a whopping 42% of all the inflows made within India.

A region wise analysis of FDI inflows within India has also been done which has revealed that Delhi and Mumbai attract the highest share of inflows with 55% contribution while other regions have had considerably lower numbers.

At [14] present, Mauritius and Singapore account for a 48% of the total inflows while US, UK and Japan account for a combined total of 22% to total inflows within India.

The possible effects of FDI on the banking sector within the Indian economic framework have also been examined. [15] Foreign Direct investment (FDI) limits were increased in February, 2002 to allow fifty-one percent ownership in private sector banks. In the aftermath of this decision, there were significant profits announced by private sector and government owned banks. However, the gains announced by private sector banks were almost double of that announced by government banks. This demonstrates the higher impact levels which FDI has associated with the private sector.

It has also been argued that FDI has a negative impact too on the sector as it leads to possible destabilization of stock prices along with greater volatility. The research work has demonstrated that the gains in valuation posted by private sector banks are significantly higher than government owned banks. Valuation gain has been found to be as a function of the individual bank’s market value, investment opportunity, efficiency, labor productivity, earnings quality and asset quality.

Thus, the authors conclude by saying that investors support the removal of protective barriers which would finally result in the acquisition of inefficient firms after liberalization. This leads to significant policy results for under developed countries which have restricted foreign ownership due to prohibitively high cost of takeover and control.

16FDI impact on telecommunication sector for developing and transition countries has been measured by Silvio Contessi. It has been proved that there is significant correlation between privatization processes and increase in telecommunication density. Thus, the conclusion has been derived that foreign presence in the telecom sector generates economic benefits through the developed theoretical model that characterizes a non linear relationship between the two variables.

17A sector analysis of the role that FDI has played in the country’s economic development has also been done. It has been found that there has been a gradual shift in perception of the Indian economy over the years. There has been a steady rise in the number of countries which have shown a willingness to invest within the country. It was also found that the Indian telecom industry has grown at the fastest rate within the world at 45%. This has mainly been due to the gradual relaxation of norms by the Indian government and the entry of major foreign players within the market.

The sector wise inflows of FDI in India have showed a diverse trend but it has been concluded that foreign investments in general have accelerated growth, quality maintenance and development of Indian industries to a high extent. Transfer of technology is also perceived as a major change besides increase in operational and managerial efficiency.

There has been a heavy rise of reliance on FDI due to its contributions to the growth of the economy. For developing countries since 1990’s, FDI is the leading source of external financing. The rise in FDI volume has been marked by a significant change in its structure with addition of new sectors for financing.

Question

The primary question that I seek to address is that how has FDI impacted the working of private sector companies within the telecom sector. As a policy, FDI was first introduced in India by the then Finance Minister Mr Manmohan Singh as part of FEMA (Foreign Exchange Management Act) in 1991. The logic behind introduction of FDI was to open up the Indian economy to greater foreign inflows which would stimulate the economy. As the economy of India was closed earlier, there was a high presence of bureaucracy within the corporate working environment leading to slow growth and stagnation.

However, the introduction of FDI has led to an accelerated growth trajectory for India over the past two decades with an average GDP growth rate of 6-7% per annum. This high rate of growth has been eclipsed only by China in recent times. However, over the past 4-5 years, with the occurrence of recession following the US land mortgage economic crisis, there has been a gradual slowdown in GDP growth for India with there being high stagnation in Industrial Index for Production (IIP). This has led to renewed concern among economists with some demanding tough reformist measures to be implemented. In recent times finance minister P Chidambaram ratified the proposals for 51% FDI in retail along with 100% FDI in the insurance sector. This was met with fierce opposition by the opposition since they claimed that this would result in the formation of monopoly.

This dissertation seeks to analyze the impact of the introduction of FDI on the telecom sector within the Indian economy. Foreign confidence in the Telecom sector was greatly dented since the revocation of licenses obtained in the 2G scam bidding process.

Here, an attempt has been made to study the directness with which FDI has impacted the working of the Telecom sector. The sector that has been chosen is Telecom because of the fact that this sector is a red ocean market with the strong prevalence of Porter’s five forces within this industry.

Thus, the impact of FDI on the private sector would have greater clarity within this frame. The reason behind this being so is that introduction of FDI has helped some companies gain a huge competitive advantage over others in terms of capturing market share.

Methodology

To measure the impact of FDI on the working of the telecommunication sector, I have narrowed down two companies of the Telecom sector, Bharti Airtel and Reliance Communications Limited. The reason behind selection of these two companies is that while Airtel has a significant foreign presence in its stock pattern, Reliance Communications is a wholly owned Indian company with some amount of Foreign Institutional Investments (FII’s) present in its shareholding pattern. However Reliance Communications enjoys the brand leverage that the Reliance industrial group while Bharti does not have the same reach as Reliance.

Thus, the comparison between these two companies makes for a highly interesting study. The parameters on the basis of which these two companies include:

Revenues

Profits

Expenditures

Market Shares

Growth

Number of Subscribers

Making a comparison between the 2 companies on these two counts would enable me in drawing out an inference with respect to the overall impact which FDI has had on the telecommunication sector. It has been conclusively proven that government owned players have started lagging behind the private sector by a considerable margin. The reason behind this chasm could include bureaucracy, lack of vision, inefficient marketing and lack of managerial talent.

It is for this reason that the public sector companies have been excluded from the analysis.

Firstly, the individual profiles and operations of the companies would be examined. This would give a better idea of the scope of growth that both these companies along with the possible roadmap for the future.

The company comparison would then be carried out after this individual entity analysis.

Once, the comparison has been carried out, the cause and effect relationship between the increasing FDI in Airtel as opposed to purely domestic presence in Reliance Communications Ltd would be analyzed.

Inferences and conclusions would then be derived on the basis of this analysis.

Company Profiles

Bharti Airtel

Bharti Airtel Limited, commonly known as Airtel, is an Indian MNC providing telecommunications services [18] . The company has its headquarters at New Delhi, India. Its operations are in 20 countries across South Asia, Africa and the Channel Islands.

The scope of operations of this company is such that it has the presence of a GSM network in all countries in which it operates. Bharti Airtel provides 2G, 3G and 4G services depending upon the country in which it operates. The company is the world's third largest mobile telecommunications company with over 261 million subscribers across 20 countries as of August 2012. In terms of provision of cellular services the company has the largest presence in India with 183.61 million subscribers as of November 2012 [19] .

The dominance of Airtel in the provision of communication services is such that

It is the biggest provider of mobile telephony 

In terms of fixed telephony, the company is the second biggest provider

Airtel is also a provider of broadband and subscription television services. The telecom services offered by the company fall under the AIRTEL brand, and are headed by Sunil Bharti Mittal. Bharti Airtel is the first Indian telecom service provider to be awarded with the prestigious Cisco Gold Certification [20] . 

The company also doubles up as a carrier for national and international long distance communication services.

It is Airtel which first came up with the strategy outsourcing all of its business operations except for marketing, sales and finance On 31 May 2012, Bharti Airtel signed a contract with Alcatel-Lucent for a period of three years with the purpose of setting up an Internet Protocol access network (mobile backhaul) across the country [21] . The main purpose behind this action was to enable access to internet at faster speeds and better quality on mobile handsets.

The founder of Bharti Group is Sunil Mittal. The company’s foray into the telecom sector started in 1983 when Mittal in agreement with Germany's Siemens manufactured push-button telephone models for the Indian market.

In 1986, Mittal incorporated Bharti Telecom Limited (BTL) and his company became the first in India to offer push-button telephones, establishing the basis of Bharti Enterprises.

It was in 2002 that Bharti Enterprises went public after which the company was listed on Bombay Stock Exchange and National Stock Exchange of India [22] . In 2003, the cellular phone operations were rebranded under the single Airtel brand. At present, Airtel is the fourth largest cellular service provider in the world.

The Group's strategic roadmap identifies six key goals [23] :

1. Delight its customers;

2. Build the best global team;

3. Leverage its scale and scope;

4. Expand its market boundaries;

5. Be a responsible business; and,

6. Provide superior returns to shareholders.

As such, Bharti Airtel has been divided into three individual strategic business units-

Mobile services

Broadband and telephone services

Enterprise Service

The areas of operations of Airtel include [24] :

The Indian Subcontinent:

Airtel Bangla, in Bangladesh

Airtel, in India

Airtel Sri Lanka, in Sri Lanka

Airtel Africa:

This subsidiary of Airtel operates in 17 African countries namely

Burkina Faso

Chad

Democratic Republic of the Congo

Republic of the Congo

Gabon

Ghana

Kenya

Madagascar

Malawi

Niger

Nigeria

Rwanda

Seychelles

Sierra Leone

Tanzania

Uganda

Zambia.

Airtel also operates in The British Crown Dependency islands of Jersey and Guernsey, under the brand name Airtel-Vodafone, through an agreement with Vodafone [25] .

Airtel has also introduced the concept of One Network. This is a global mobile phone network which has a presence in all countries having Airtel operations. This helps the customers in moving with freedom across borders in the countries where Airtel operates, and be treated as virtually local customers of the visited network in terms of domestic and international tariffs. In the process they also keep their original network service functionality.

One network is the world’s first free intercontinental incoming roaming service. Thus, users of the Airtel network in Africa are not required to either register for the service or purchase new SIM cards as this is automatically enabled. It also allows customers visiting One Network countries in making outgoing calls/SMS at the same rates as charged to the local customers. They also have the option of either recharging locally with top-up cards or with home network top up cards while using the same number and SIM. There is no charge levied on receiving incoming calls.

Reliance Communications:

Reliance Communications Ltd. (RCOM) is an Indian broadband and [26] telecommunications company with its headquarters present in Navi Mumbai, India. The company was established by Dhirubai Ambani [27] .

He took Reliance public in 1977 after which the company rose at an exponential rate and by 2007; the Ambani's were the second richest family in the world. Dhirubhai started his work within the corporate sector by working with a firm in Yemen in the 1950s and moved to Mumbai in 1958. It was here that he started his own business in spices. He attained moderate success in this venture after which he shifted into the production of textiles and opened a mill in NarodaI Industrial area of Ahmedabad.

Following the death of Dhirubhai Ambani, the business was split in two parts between the brothers Anil and Mukesh Ambani. The split was done in the following manner:

Reliance Industries Limited (RIL) [28] was headed by Mukesh Ambani:

This conglomerate includes the following companies

Reliance Life Sciences 

Reliance Institute of Life Sciences 

Reliance Logistics (P) Limited

Reliance Clinical Research Services

Reliance Solar

Relicord

Reliance Anil Dhirubai Ambani Group (Reliance ADAG) [29] headed by Anil Ambani

The conglomerate includes the companies:

Reliance Communications

Reliance Capital

Reliance Power

Reliance Infrastructure

Reliance Cement

Reliance Technology Ventures

Reliance Health

Reliance Communications is thus, a company under the Reliance ADAG group

The company, owned by Anil Ambani is the world's 15th largest mobile phone operator with over 150 million subscribers and is India's 2nd largest telecom operator in India.

RCOM was set up 2004 as a subsidiary of the Reliance Group. Reliance Communications operates in five segments:

Wireless segment:

This segment is responsible for the wireless operations of the company; 

Broadband segment:

This segment is responsible for the broadband operations of the company;

Global segment:

This segment operates the national, international, long distance and wholesale operations of its subsidiaries

Investment segment:

The investment segment of the company is mainly responsible for all the Merger and Acquisition deals which require consideration.

By general consensus and opinion, Reliance Communications has been rated as one of the top 5 telecommunications companies in the world. This perception of the company is due to a lot of factors. In the Business to Business marketing sector, the corporate clientele of Reliance Communications includes 2,100 Indian and multinational corporations with over 800 global, regional and domestic carriers [30] .

To the credit of the company, it has established a digital network which is spread across India with the features of being integrated (combination of wireless and wireline) and convergent (voice, video and data applications).

This telecommunications giant has a coverage extended to over 24,000 towns and 600,000 villages [31] .

The company has an international presence in India, USA, Europe, Middle East and the Asia Pacific region in terms of IP-enabled connectivity infrastructure [32] with the total distance of operations spanning 190,000 kilometers of fiber optic cable systems.

The main subsidiaries of the company operations include:

Reliance Telecommunication Limited (RTL)

The areas of operations of RTL are in Madhya Pradesh, West Bengal, Himachal Pradesh, Odisha, Bihar, Assam, and the north east with mainly GSM services being offered. In July 2011, the company acquired US-based managed ethernet and application delivery services company Yipes Enterprise Services for a cash amount of INR1200 crore (the equivalent of US$300 million). The company was also responsible for the amalgamation of US based Flag Telecom for $210 million.

Reliance Tech Services

This company is the Information Technology subsidiary of the Reliance group. It is responsible for provision of IT consultancy, business process outsourcing and software development services for Reliance Communications and other ADA group companies. The company provides services towards industry sectors spanning telecommunications, infrastructure, financial management, BPO operations and health care.

Reliance Globalcom

Reliance Globalcom is responsible for providing domestic optic fiber services [33] which are then integrated with the head company. It is the owner of approximately 65,000 km of undersea cable system along with 110,000 km of domestic optic fibre.

Reliance Internet Data Center (RIDC)

This Reliance subsidiary is responsible for providing IT infrastructure management services to various private sector enterprises. It has a leading position in provision of data center services such as collocation, managed server hosting, virtual private server and data security. In recent times, RIDC has launched cloud computing services which offer products under its Infrastructure as a Server (IAAS) and Software as a Service (SAAS) portfolio. These have enabled companies to build a cost-effective IT infrastructure and application.

Reliance Digital TV

Reliance digital TV was responsible for the launch of Reliance Big TV August 2008 [34] Â which then acquired 1 million subscribers within 90 days of its launch. This was one of the fastest expansion operations undertaken by the company.

Analysis

Over the years, the attractiveness of India as a destination for foreign direct investments has increased considerably. With the implementation of liberalization measures in 1991, the economy has opened up and the number of countries from investments are routed have also increased.

The figure below shows the change in FDI inflows over the years.

FDI Inflows from 1991

In recent years, India has emerged as an extremely attractive destination for attracting FDI inflows. On a global scale, in terms of perception, India is ranked third only behind China and United States of America. [35] This can be seen in the figure giving attractiveness of countries for Foreign Direct Investments.

36Global Perception of Countries for FDI Attractiveness

With time, the number of countries investing in the Indian economy has increased at a steady rate with gradual relaxation in FDI norms and opening up of the economy.

Mauritius however has quickly risen as the top contributor to FDI inflows within India. The main reason behind this is the tax benefit and relaxed investment norms enjoyed by investors within the country. A country wise split up of FDI inflows for the top 9 nations is as shown below:

Country Wise Split Up of FDI inflows [37] 

From 1991, the sector wise split up of FDI inflows is as shown below

Sector Wise Contribution Of FDI Inflows

As can be seen, the major chunk of FDI inflows has come in the services sector (21%).The main reason behind this is the availability of white collar employees at lower rates as compared to other countries.

Of the total FDI inflows, telecom sector contributes a figure of 9% inflows.

The country has seen a rapid rise in the number of telephone subscribers over the years with the improvement in infrastructure and telecommunications equipment.

The telecom sector has witnessed an astounding rate of 65% growth for the years 2000-2011.

Growth in Mobile Subscriber Base

C:\Users\nischit\Desktop\Mobile_Subscriber_Base.jpg

At present, the telecom market is dominated by Airtel with a 30% market share while Vodafone comes next with a market share of 22.6%.

The Telecom sector is predominantly a red ocean market with there being extremely high competition among the major players. The margins have as a result got steadily lower for all the companies with high rivalry and companies undertaking high expenditures on marketing and advertising their respective network connections.

The market share split up for the top 10 players is as given below.

Market Share of Companies in Telecom sector [38] 39

As a result of high rivalry existing within the Telecom market, the profitability of the sector as a whole has also decreased significantly with a steady lowering of margins.

Return on Capital for Major Telecom Companies [40] 

The profitability for all the telecom companies has decreased drastically with Vodafone approaching negative returns. In spite of this climate, Bharti Airtel still enjoys a 15% percent return on capital mainly due to its brand leverage and established market presence.

Vodafone, which at present faces extremely low profitability, hopes to enhance its margins by staying in the market and gradually enhance its presence.

A comparison between Airtel and Reliance Communications is now carried out.

Comparison

As can be seen, there is a 24% foreign presence in Airtel’s equity portfolio with the domestic private ownership of equity equal to 46%. The foreign presence in Airtel is mainly due to two companies namely, Sing-Tel and MTN. Combining both private and public ownership, the stake of MTN is worth 25% while that of Sing-Tel is worth 32%.

Shareholding Pattern

Airtel Shareholding Pattern [41] 

On the other hand, Reliance Communications has a fairly simple stockholding pattern with no foreign presence whatsoever. The highest ownership is that of corporate bodies which a part of the Reliance business venture are. This has a figure of 66.50%. Small shareholders too, have a significant presence in the ownership pattern with a stake of 12%.

Reliance Communications Shareholding Pattern

Revenues

In terms of revenues, Airtel has enjoyed a moderate rate of growth over the last five years. It has grown from a total revenue base of 20,000 crores in 2008 to 43,000 crores in 2012. This implies an average growth of 12% Year on Year. This is a pretty decent rate of growth considering the fact that the company is operating in red ocean market.

On the other hand, Reliance Communications has suffered from a dip in revenues over the last three years due to the high competition and lowering profitability margins. The main period of rise of Reliance revenues was in the period from 2008-2010. This was mainly due to the high customer demand for the network because of the introduction of 1 paisa per second call rates.

Revenues of Reliance Communications

Manufacturing Expenses

The manufacturing expenses of Airtel have increased steadily with time due to increasing scale of operations and expansion into newer areas. The expenses have increased at an average rate of 16% Year-on-Year.

Manufacturing Expenses of Airtel

On the other hand, a look at Reliance Communications’ graph for Manufacturing Expenses shows the company has started to tone down its scale of operations over recent years. This could be mainly due to the fact that the company is facing a loss in revenues in the face of extreme competition and declining margins.

Manufacturing Expenses of Reliance Communications

Operating Profit:

In the face of company revenues and expenditure rising at approximately the same rate, the operating profit for Airtel has risen at very slow rate over time. In the future, the main scope for increasing profits from the saturated telecom market of the Indian economy is enjoying economies of scale and exploring newer markets with time.

Operating Profit of Airtel

The operating profit of Reliance Communications, on the other hand has fallen steadily and has started rising only over the past two years. The main reason behind the recent increase in operating profits however, lies in the fact that the company has strived for better control of their cost structure. The expansion in the market share for consumers has not been too significant.

Operating Profits of Reliance Communications

Operating Profitability

Given the capital intensive structure of the telecom sector along with its characteristic of intense competition, the operating profitability of both the companies has steadily declined over years.

Operating Profit Margin of Reliance Communications

Both Reliance Communications and Bharti Airtel

Debt

In terms of debt, the total liabilities of Reliance Communications stands at Rs 7000 Crores while that of Bharti Airtel stands at Rs 9000 Crores. Thus, Bharti Airtel has a higher chance of defaulting on its debt payments in comparison to Reliance Communications.

A very important factor which needs to be taken into account while considering the relative debt values is the fact that Bharti Airtel has its operations spread across different international territories while Reliance on the other hand, is limited mainly to India. Thus, Airtel has in a way hedged its exposure to risks which may possibly be incurred in terms of operating recovery.

On the other hand a major factor tilting the scales in favor of Reliance Communications is the fact that it is backed by the major presence of Reliance Anil Dhirubai Ambani Group (Reliance ADAG) which has its operations into other domains as well while Bharti Airtel is limited to the telecom sector. Thus, the dependence of Bharti Airtel per se on the telecom sector is of a much greater magnitude.

Debt Equity Ratio:

The debt equity ratio which Reliance Communications has is double of that which Bharti Airtel has. Over the past three years, the debt equity ratio of Reliance Communications has increased at an extremely high rate to 0.62. This is still a major improvement for the company when compared with its value of 0.82 five years back.

Debt Equity Ratio of Reliance Communications

The debt equity ratio for Bharti Airtel, on the other hand has retained stability over the years. Its value had declined to a low of 0.14 but has risen in recent years to the present value of 0.29.

Debt Equity Ratio of Bharti Airtel

The relatively low value of debt equity ratio also indicates that the shareholders and the board of directors have greater power to make decisions and higher control in the case of Bharti Airtel. This has, however not hampered the company from pursuing expansion strategies.

Results

In terms of the parameters on the basis of which both the companies have been compared, Airtel scores above Reliance Communications in all except for one(Debt). Thus, it can be concluded that the impact of bringing FDI into the shareholding pattern of Airtel has played a huge role in making it a top player in the Indian Telecom market. However, it can also be seen that with the increased foreign presence in its operations, Bharti Airtel has exposed itself to a greater level of long run fiscal exposure. This could have adverse consequences for the company as the core sector of its operations is one which requires high capital and has extremely low return on investment in comparison to other sectors.

But, it is also necessary to take some risks if it is to expand into newer areas and grow as a company. This opinion is shared by many supporters of capitalism who feel that the barriers present for doing business within a country must be minimal.

However, as the high debt burden on Bharti Airtel demonstrates, FDI within the telecom sector needs to be ramped up in a gradual manner as doing otherwise could lead to the possibility of recession occurring within the sector.

Thus so far, the Indian government has done the right thing by increasing the FDI presence within the country in a gradual manner to its present value of 74%.

Conclusion

This project has successfully analyzed the impact of FDI on Telecom sector by comparing the performance of two companies operating within the Telecom sector, Bharti Airtel and Reliance Communications. Both the companies have been compared on the basis of different parameters ranging from revenues to the total debt.

This comparison based on diverse parameters has helped us in analyzing the different facets associated with the presence of FDI in the Indian private sector.

This has helped in understanding the scope of effect that the introduction of FDI has on the Indian telecom sector.

The better performance of Bharti Airtel along with its increasing global presence has helped us in understanding the importance which FDI in an economic sector has attached to it.

However, this project falls short in terms of delivering a tangible link between the introduction of FDI and the comparative evaluation of the two companies. In terms of argumentative logic, it could be inferred that the better performance of Airtel as compared to Reliance Communications has no background in terms of the introduction of FDI.