SEPT. 15, 2002
 Cover Story
 BT Event
 Personal Finance
 Case Game
 Back of the Book

Q&A: Douglas Nielson
Douglas Nielson, Chief Country Officer, Deutsche Bank, India, speaks to BT Online on what the bank has in mind for India, particularly its plans in the asset management arena. Equity research, as Nielson says, will emerge as a key differentiating factor in this business, and that's exactly what Deutsche is working on.

Long Bond Is Back
The government is bringing back the 30-year bond. Will insurers be the only takers?

More Net Specials
Business Today,  September 1, 2002
The Cost of Success
India has 8 million cellular subscribers, but the telcos have no cause for cheer.

Gloom was the prevailing theme at the press conference called by the Cellular Operators Association of India on August 19, 2002. All the suits on stage-with the exception of MTNL's J.M. Mishra who turned up in shirt-sleeves-reeled off numbers and factoids painting an extremely dismal picture of the sector. It was left to Bharti Enterprises CEO, Sunil Mittal, to remind his brethren that the purpose of the meet was to celebrate the 8-million-subscribers-milestone.

Mittal's Bharti Televentures is a listed company-a rarity among Indian telcos-and that may explain his reluctance to admit that the sector is in the throes of a crisis. A little prodding, and he confesses that "on an accumulated basis, no cellular service(s) company has a positive cash flow".

  Handout Raj  
  Bicycles For The Ear  

The numbers paint a bleak picture: Telcos have invested close to $6 billion (Rs 29,400 crore) in 51 cellular networks of which none has yet-some have been around seven years now-become self-financing; the sector's accumulated losses have increased from Rs 6,929 crore in 2000-01 to Rs 7,719 in 2001-02 and in 2001-02, the losses are expected to increase by an additional Rs 1,000 crore; and Idea Cellular and Bharti Televentures, two of the biggest players in the industry have totted up losses of Rs 212 crore and Rs 140 crore. Says Hutchison Telecom Chief Asim Ghosh, ''The entire industry is profit-negative and cash flow-negative today.''

Subscriber-base apart, the telecom industry has little to boast. COAI Director-General T.V. Ramachandran claims that while airtime rates in India, at an average of Rs 1.99 a minute, are the lowest in the world, ''the licence fee burden remains amongst the highest in the world''. Cellular telephony companies burn between 35 per cent and 42 per cent of their revenues on licence fee, interconnect and spectrum-usage charges, and service tax. For all that, they get a mere 6.2 Mhz of bandwidth. Companies in the two biggest cellular markets in India have recently wrangled a minor increase-they now get 8Mhz. According to a recent survey conducted by COAI, the average spectrum allocation for 114 cellular operators across 31 countries is 17 Mhz. And China's two cellular companies do not pay licence fees or service tax and share 45 Mhz of spectrum between them.

The lack of bandwidth has an effect on the capital expenditure of telcos-they need to spend more on capacity and on quality. And in Delhi and Mumbai, despite the recent respite, no amount of investment can improve the situation. ''My towers are within 300 metres of each other," says Ghosh (Hutch has an operation in each of the cities). ''They can't get any closer.''

The government's argument is that spectrum, a national resource, can't be frittered away. We buy that; only, it will then have to limit the number of mobile telephony companies. Instead, its decision to allow companies with fixed-line licences to provide mobile services will increase the number of players.

The prevailing interconnect regime, too, is stacked against cellular service companies. BSNL charges cellular companies Rs 1.20 a minute for calls routed to its fixed-line network; the companies providing 'limited mobile' services through Wireless-in-Local-Loop (WiLL) on CDMA won't have to pay anything. Worse, cellular companies have to pay the interconnect charges for calls made from their networks to a WiLL-on-CDMA one; calls in the reverse direction don't attract these charges. Says AT&T Managing Director Virat Bhatia, "Management of the competitive landscape between cellular and limited mobility, non discriminatory cost-based interconnection, and allocation of scarce resources (spectrum) are the three biggest sources of threat to the cellular sector.'' The industry is hoping the Supreme Court's September 6 ruling will address some of these issues by preventing the use of will for limited mobility. If it doesn't, some of India's ailing cellular service companies could well go out of business.

Handout Raj
How long will the government continue to sustain UTI, IFCI, and IDBI, and at what cost?

M. Damodaran, Chairman, UTI: In 1998, the GoI effected a Rs 3,300 crore bailout of UTI's US-64 scheme; in 2001, the government paid Rs 300 crore to UTI, again to resuscitate the US-64 scheme; and in 2002, it has engineered a Rs 500 crore recapitalisation package to help the Trust meet the shortfall in its assured return (Monthly Income) schemes.

The otherwise genial V.P. Singh, the Chairman and managing Director of the beleaguered Industrial Finance Corporation of India (IFCI), is angry. This correspondent has just used the word bail-out in the context of the Rs 1,000 crore recapitalisation exercise sanctioned by the government in August 2001-money that has just flown into the institutions coffers. ''Bail-out is a negative word,'' gripes Singh. ''I don't think the government is bailing us out; it is only playing its role as a stakeholder in IFCI.'' Then, to bolster his argument he refers to banks and financial institutions in Thailand, Korea, and Indonesia that were resuscitated by their respective governments in the wake of the South-East Asian crisis. ''Today,'' he exults, ''they are back in business''.

Only, there are people like Ashwani Puri, the head of consulting firm PricewaterhouseCooper's corporate finance practice, who believe nothing can help IFCI. Puri's argument: IFCI lacks ''a sustainable business model'', the requisite finances to tide over its current solvency crisis, and boasts a ''huge asset-liability mismatch''. Then, there's the minor fact of the institution still paying a whopping 17.6 per cent interest on some bonds.

P.P. Vohra, Chairman, IDBI: The institution has asked RBI to extend a Rs 1,400 crore, 50-year loan to help it raise its capital adequacy ratio to the prescribed levels.

IFCI isn't the only one. On July 31, 2002, the government cleared a Rs 500 crore recapitalisation package for the Unit Trust of India (UTI). The details: on July 2, 2001, the UTI froze transactions in its flagship US-64 scheme. Courtesy its poor investments, the fund's net asset value (NAV) had dipped to Rs 8-levels. The huge public outcry that ensued forced the government to step in, and the institution announced that it would repurchase the units at an assured price. But with the NAV of the scheme still far below the assured repurchase price, the government had to step in to meet the shortfall. There could be worse to follow: between October 2002 and March 2006, 21 schemes will mature and UTI will need Rs 13,739 crore to meet its repurchase commitments for US-64 units. If the government doesn't step in, the fund may have to liquidate its equity holdings (valued at Rs 46,396 crore in June, 2002). That would be disastrous for a market already at the nadir of sentiment.

V.P. Singh, Chairman, IFCI: In 2001, when IFCI defaulted on foreign debt of $450 million the government engineered a Rs 1,000 crore recapitalisation package

UTI's problems stem from the US-64 and its choice of equities. And, IFCI's and IDBI's (it too has asked for a hand-out) from their choice of debt: to prevent suspect debts from turning into Non Performing Assets, these institutions have no option but to throw good money after bad to keep the debt, ''alive''. Report after report, commissioned by the government, recommends that the way out for these institutions is to become a bank (like ICICI did with a reverse merger with ICICI Bank) so as to access funds cheap. Only, the cost of doing so will be much too high: to meet the statutory capital adequacy norms for banks, IDBI will have to spend anywhere between Rs 22,000 crore and Rs 25,000 crore.

The government has a ready defence: most bail-outs have been routed through healthier (again, government-owned) financial institutions and banks. Quite apart from compromising the interests of shareholders and investors (who are the key sources of funds for public financial institutions) this pooled approach to bailouts may pull healthier financial institutions into the morass along with the sick ones. Why does the government continue to do so? No one quite knows, but our guess is, it is another hang-over from India's socialist past.

Bicycles For The Ear
A West Bengal NGO boasts a unique model to bring telephony to the masses.

Phase 1 targets: Locals armed with will mobiles, and on bicycles will function as public call offices in 5,000 remote villages across seven districts

Phase 2 targets: Every 10 villages in a district will have an internet kiosk and a Light Commercial Vehicle (LCV). The kiosk will function as the information highway; the LCV will serve as the actual transactional highway. Revenues will come from a charge on calls, commissions on transactions, and rural distribution services rendered to companies .

This isn't a flight of fancy, but the business model of Kolkata-based Gramin Sanchar Seva Organisation (GRASSO). The NGO believes it can do in WB what Grameen Phone did in Bangladesh-use connectivity to improve lives and livelihoods. Watch this space.