Responding to a discussion paper of the Department of Industrial Policy and Promotion (DIPP) Erik De Rijk, Managing Director Vodafone International Holdings BV, said the sectoral FDI cap of 74% in the Indian telecom sector “necessarily forces all foreign companies to operate as joint ventures”.
Pointing to not-so-pleasant ties between several JVs, he said “the track-record of joint ventures (JVs) have been well researched, and the problems of longevity and conflicting objectives arising between partners over time are well
He said forcing the foreign companies enter into a JV with a local partners puts the former into a disadvantage.
“This creates competitive dis-advantages for such JVs – for example Indian competitors in the telecom sector can be wholly owned and therefore enjoy the privilege of greater strategic clarity and flexibility as opposed to the JVs between the foreign and Indian enterprises,” he said.
Vodafone, which had a JV with the Essar Group saw a souring phase over valuations. The Ruias’ owned Essar Group has since exited.
FDI upto 74% in the Indian telecom sector and the Indian holdings in the Vodafone joint venture are presently well disbursed.
The DIPP had put out a discussion paper on relevance of FDI caps in different sectors.
Vodafone, headquartered in the UK is India’s second biggest telecom operator. The company has operations in 30 countries.
Rijk said: “We have invested in the Indian telecommunications sector through three different vehicles – via an interest in RPG Cellular in the 1990s (a venture we exited in the 1990s), the acquisition of an indirect interest of 10% in Bharti Televentures (of which we divested more than half of our interest in 2007) and our major acquisition of a controlling interest in Vodafone Essar Limited in 2007”.
Responding on the DIPP’s question that are equity caps effective in delivering control, he said: “We think not”.
“It is not clear to us why ‘control’, even if desired from a policy perspective, could be assured through Indian JV partners holding 26%.”
Even if a single shareholder were to hold 26%, its statutory rights are quite limited and provide mainly protection – related rights and not operational control,” he added.
Responding to the discussion paper, BAE Systems, a global defence and security and company which has a direct interest in the issue of FDI in the defence sector, said the use of sectoral equity caps is a “blunt, inefficient and ineffective mechanism” that suffers from numerous drawbacks.
“The entire FDI cap structure is complex, ever changing and time-consuming to navigate. The structure now contains a number of conceptual and functional anomalies and also potentially provides undeserved windfalls to partners making a limited contribution to overall enterprise success,” it said.
It said the use of sectoral equity caps compels the use of joint venture companies as the vehicle through which FDI is delivered.
“Many commercial sectors are littered with failed joint venture activities. Joint ventures are inherently difficult to establish, operate and make successful, especially where the party with operational and management control lacks the key capabilities and technology of the minority partner,”it added.
Further, it said that in defence the position is more anomalous because companies are required by procurement regulations to have 10 years existence to qualify for the “Make” category.
“Thus Indian defence JVs, even when formed between highly competent partners, are often excluded from bidding for the very business for which they were established,” it added.