A New Deal for telecom

By Ramnath Subbu

MUMBAI, MARCH 12. The Union Budget 2000-01 has brought cheer to telecom and telecom equipment industries. Developments following the budget have been frenetic in this sector and point to the fact that the industry has received the shot in the arm that was required to be convinced about the Government's seriousness about the sector.

Among various budget proposals initiated for the sector are rationalisation of customs duty from 15 per cent to 5 per cent on basic raw materials used to manufacture optical fibre cables. A concessional rate of 5 per cent for basic telephone service, pager service, cellular service and satellite communications has been extended up to March 2001.

A cut in excise duty on cellular phone from 25 per cent to 5 per cent and battery packs for cellular phones from 40 per cent to 15 per cent. These are measures that are expected to help the market grow.

The budget has reduced the customs duty on import of components and this should help manufacturers in reducing their cost of production - leading to improved profit margins. In addition to this reduction in customs duty, the concessional duty rate of 5 per cent was extended by another year on equipment used.

Besides, cellular services are on the threshold of becoming the main telecom provider - ahead of fixed line telephony globally. Following analogue and digital services, data over wireless is now emerging wherein cellular phones can receive data over the Internet. Switching to this technology would entail heavy investment which only companies with a minimum critical size can undertake. This is the rationale behind the global consolidation taking place.

The National Telecom policy 1999 has led to consolidation activity in the domestic industry. By paving the way for revenue sharing, the policy made many projects in category A circles more viable.

These were burdened with and reeling under high licence fees. By opening up the long distance market, the policy has opened up new revenue streams for companies.

Three giants unite

The telecom merger of the Birlas, the Tatas and AT&T was the big news. Birla AT&T is the second licensee for the Maharashtra circle and controls the Gujarat circle. Once the merger with Tata Telecom is completed, the Andhra Pradesh circle would also come under it.

AT&T has reportedly sought permission of the U.S. regulator to buy Media One which owns US West, a 49 per cent shareholder in BPL-US West. BPL-US West operates the Maharashtra, Kerala and Tamil Nadu circles. If the BPL-US West AT&T partnership works out, the Birla-Tata-AT&T combine would effectively operate the entire cellular network of south India barring Karnataka.

The development is in response to strides made by the Bharti group and Hutchison's Orange brand in the cellular telephony market in India. Bharti's brand extends from Chennai to Delhi and the Orange service of Hutchison has a presence in both the leading metros - Mumbai and Delhi.

The Indian promoters of the Calcutta-based Usha Martin Telecom have indicated that they are open to new investments. The cellular arm of the group is diversifying into domestic long- distance telephony.

There is talk of the company establishing a four-metro long- distance cellular network in collaboration with strategic partners on a shared basis. Bharti's Mittals are said to have an interest in the company.

Himachal Futuristic Communications Ltd. (HFCL) which has shifted focus from telecom equipment to turnkey solutions for the telecom industry had a fortnight ago, paid Rs. 130 crore as a first instalment towards picking up a 80 per cent stake in Essar Commvision Ltd. (since renamed ECL Telecom) of a total of Rs. 200 crore. The remaining 20 per cent is with the Essar Group and Bell Atlantic of the U. S. The balance Rs. 70 crores is to be paid latest by April 2000.

HFCL is to enter Internet services in Punjab after basic services are launched in June-July. It will apply for an ISP licence and has paid the licence fees of Rs. 38 crores for the basic circle. The total cost is Rs. 1,200 crores for basic services and domestic FIs led by IDBI have in principle agreed to lend Rs. 600 crores to achieve financial closure.

In another development, the Kerry Packer owned Consolidated Press Holdings (CPH) announced that it would pick up 10 per cent stake in HFCL worth Rs. 1,039 crores. CPH is buying 71.66 lakh shares of HFCL at Rs. 1,450 per share in an all-cash deal. Both CPH and HFCL have also reached another deal for two joint ventures - one for software services and products and for B2B e-commerce infrastructure and solutions including payment gateways. Both parties will have Rs. 50 crore promoter's equity.

Qualcomm Inc and Cincom Systems both U.S. technology companies are picking up a 3.5 per cent stake each in the Delhi-based Shyam Telecom in a $ 20million deal. While Qualcomm is a wireless telecom company, Cincom is a software company delivering solutions for vertical segments like manufacturing, telecom, banking and the financial sector. Shyam Telecom manufactures a whole range of integrated end-to-end telecom transmission systems. Two months ago, the company placed five million shares with institutional investors for Rs. 80 crores at Rs. 160 per share.

Escorts Communications has entered into a deal with LG Information and Communication (LGICL) of the South Korean LG. LG is taking a substantial equity in Escorts Communications which is a BIFR case having a loss of over Rs. 10 crores which is the paid up capital of the company. LG is keen on supplying WLL and CDMA technology to India. The deal is expected to be finalised in the next few weeks.

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