India's telecom sector, which is grappling with an enormous corruption scandal, slowing revenue growth, and waning profitability, could still be poised to attract fresh investment from the Middle East, writes Rebecca Bundhun of The National.
A corruption case, which resulted in the cancellation of 122 telecom licenses last year, prompted Etisalat (Abu Dhabi: ETISALAT) and other telecommunications operators to leave the Indian market.
The licenses were said to have been sold below their market value by the telecom minister at the time, A. Raja, who was jailed for what has been described as India's biggest scam, with an estimated loss of some $40 billion.
Etisalat became embroiled in the case because it bought into Swan Telecom, which had already acquired the 2G, or second generation, license.
"While the controversy around 2G spectrum issues would have a bearing, we believe the GCC telecoms may still be open for investments once regulatory policies crystallize," said Yogesh Kirve, a telecom analyst at AnandRathi Financial Services in Mumbai.
"India is a large market with better growth prospects than developed countries and many developing markets. The rehabilitation phase-expected over the next few years-for the industry may also potentially throw up attractive investment opportunities."
Etisalat is not pursuing re-entry into the Indian market in the fresh auction of the licenses, and did not respond to requests for comment on whether it was considering re-entering India in the future.
But Bahrain's Batelco (Bahrain: BATELCO), which also lost its license in India through the corruption scandal, last week said that it was looking at opportunities to re-enter India through an acquisition of an existing company. It ruled out buying a license to set up a new telecom company in the country, however.
"It is unfortunate that some of the telecoms suffered a grave setback owing to the cancellation of licenses by the country's apex court during early 2012," said Rajan Mathews, the director general of the Cellular Operators Association of India. "However, that does not mark an end either for the sector, or for foreign investment coming into it.
"Though the policy and regulatory uncertainty has deterred investor sentiment, remedial measures are being initiated by the government at the same time, and we can hope for a renewed investment and participatory environment for foreign companies in the near future."
High reserve prices resulted in a muted response to the auction of licenses in November. But last week, a 50% cut was approved for the auction price of the 800 megahertz spectrum. This could however result in further confusion, said analysts.
"What this means is you have a more highly efficient spectrum, in 800mhz, being sold at a lower cost than 900mhz. That is not going to really go well with operators," said Sivarama Krishnan at PricewaterhouseCoopers in India. "So potentially that could bring about litigation for the government as well as operators."
He said that lack of clarity on reforms in the sector and competition was negatively affecting the investment climate.
"We do not see a high level of interest, unlike in 2008," said Krishnan. "It's very subdued. There are operators who got a license who want to sell it off. Clearly, there are more sellers than buyers today in the market.
"Due to still unclear policy the investment is stalled," he added. "Still there is not open skies for people to enter India. The India story doesn't exist today."
Kirve also pointed out the significant challenges that remain. "The industry revenues are growing 7% to 8%, though profits continue to decline due to cost inflation, currency depreciation, and limited pricing power. Volume growth is slowing and trend is expected to continue," he said.
While things are beginning to improve, both on competition and regulatory fronts, the investment climate continues to be challenging. "Maturing voice markets, low tariffs, high competition and rising cost of spectrum ownership are key challenges for the industry. These factors have made business case for new or smaller telecoms vulnerable," said Kirve.