Key Sectors for FDI in India: Telecoms, Power and Oil & Gas

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Aug. 14 – Over the past decade, India has seen various sectors grow within the country. Starting from the services sector (which makes up about 23 percent of the country’s total foreign direct investment (FDI)), India also experienced growth in the following sectors: computer software and hardware (8 percent), telecommunications (8 percent), housing and real estate (7 percent) and construction activities (7 percent).

In addition, the power and oil & gas industries also present significant opportunities for foreign investors looking to get their foot in the door of the Indian market. Given the expanding economy, energy demand is predicted to increase five-fold over the next 25 years, creating a huge potential for returns on investment in these fields.

In this update, we will examine three key sectors for FDI in India: telecommunications, power and oil & gas.

Telecommunications

India is the fifth largest telecommunications services market in the world, growing at an annual rate of 25 percent for the past five years and having just overtaken China as the world’s fastest growing market. India now also permits 100 percent foreign investment in telecommunications equipment manufacturing.

According to the Ministry of Information Technology and Communications, India possesses favorable demographics and socioeconomic factors leading to high growth in telecommunications. These include:

  • Growth of disposable income combined with changes in lifestyle;
  • Increasing affordability, low tariffs, easy payment plans and handset financing;
  • Increased coverage and availability of mobile services;
  • Telecoms devices and software for internet, broadband and direct to home services, set top boxes, gateway exchange, modem, mobile handsets and consumer premise equipment, gaming devices, EPABX, telecoms software;
  • Telecoms services for voice and data via a range of technologies; and
  • Applications and content development ranging from gaming to education.

Facts and figures:

  • Telecom sector’s share of FDI inflow: 8.04 percent
  • Nine million phones are being added every month in India, outpacing China’s monthly rate of increase (below 8 million a month).

Investment opportunities:

  • Manufacturing of equipment and components;
  • Exports of telecommunications equipment and services;
  • Setting up a national long distance bandwidth capacity in the country;
  • Tele-banking, tele-medicine, tele-education, and tele-trading;
  • E-commerce; and
  • Telecoms and value added services.

FDI policy:

  • 100 percent FDI permitted through the automatic route in telecommunications equipment manufacturing;
  • FDI ceiling in telecommunications services has been raised to 74 percent;  and
  • Introduction of a unified access licensing regime for telecommunications across India.

Key Indian players:

  • Bharti Airtel Ltd;
  • Idea Cellular Ltd;
  • MTNL;
  • BSNL; and
  • Reliance Communication Ltd.

Recent FDI:

  • Vodafone Essar will invest US$6 billion over the next three years in a bid to increase its mobile subscriber base from 40 million at present to over 100 million; and
  • Sistema Shyam TeleServices Ltd (SSTL), a joint venture between Russia-based telecoms major Sistema and Shyam Group in India, is planning to invest US$5.5 billion by 2015.

Power

India needed an additional 100,000 megawatts of power in 2012. India, however, currently has a peak deficit of 18 percent and an overall deficit of 9 percent. While India possesses the fifth largest electricity generation capacity in the world, it has low per capita consumption at just 606 units – less than half of China’s consumption per head.

While concerns exist over Chinese-managed projects close to India’s border areas, opportunities do exist for politically neutral energy providers to service the Indian market.

According to the Ministry of Power, the total installed capacity in India is calculated to be 145,554.97 megawatts. They also state that Inda has:

  • A generation capacity of 122 GW, with 590 billion units produced (1 unit = 1kwh) CAGR of 4.6 percent over the last four years;
  • The fifth largest electricity generation capacity in the world with low per capita consumption at 606 units;
  • A transmission and distribution network of 5.7 million circuit kilometers; and
  • Coal-fired plants that constitute 57 percent of the installed generation capacity, followed by 25 percent from hydroelectric power, 10 percent from gas, 3 percent from nuclear energy and 5 percent from renewable sources.

The State Electricity Regulatory Commission has said that India possesses a vast opportunity to grow in the field of power generation, transmission and distribution. The country’s target of over 150,000 megawatts of hydroelectric power generation has not yet been achieved however, as huge capital investments are required to meet this target. This has resulted in numerous power generation, transmission and distribution multinationals establishing operations in the country under the public-private partnership (PPP) program.

The power sector is still experiencing a large demand-supply gap, and this has called for an effective consideration of strategic initiatives. As a result, there are strong opportunities in transmission network ventures in India – an additional 60,000 circuit kilometers of transmission network is expected to be completed within the next few years with a total investment opportunity of about US$200 billion.

According to the Ministry of Power, the implementation of key reforms is likely to foster growth in all segments as follows:

  • Coal based plants at pithead or coastal locations (imported coal);
  • Natural gas/CNG based turbines at load centers or near gas terminals;
  • Hydroelectric power, with 150,000 MW of untapped potential as assessed by the government of India; and
  • Renovation, modernization, upgrading and life extension of old thermal and hydroelectric power plants.

Opportunities exist in:

  • Allowing foreign equity participation of up to 100 percent in the power sector under the automatic route;
  • Encouraging the private sector to set up coal, gas or liquid-based thermal projects, hydroelectric projects and wind or solar projects of any size;
  • Constitution of independent state electricity regulatory commissions;
  • Deregulation of the ancillary sectors such as coal;
  • Introduction of the Electricity Act and national electricity and tariff policies;
  • Provision of income tax holiday for a block of 10 years in the first 15 years of operation and waiver of capital goods’ import duties on mega power projects (above 1,000 MW generation capacity); and
  • Unbundling of the state electricity boards into generation, transmission and distribution companies for better transparency

Initiatives the government has introduced to facilitate foreign investment in the sector under the automatic route:

  • Unbundling of vertically integrated state electricity boards;
  • ‘Open access’ to transmission and distribution network;
  • Distribution circles to be privatized; and
  • Tariff reforms by regulatory authorities.

Facts and figures:

  • Power sector’s share of FDI inflow: 3.78 percent

Investment incentives:

  • Generation and distribution power projects of any type and size are allowed;
  • The Electricity Act of 2003 allows trading in power and provides for further deregulation;
  • A renewable license period of 30 years;
  • Return on equity up to 16 percent is assured at 68.5 percent PLF for thermal power plants. Similar incentives are provided for hydroelectric power projects;
  • Import duty at the concessional rate of 20 percent has been set for import of equipment; and
  • The government allows a five-year tax holiday for power generating projects with an additional five years in which a deduction of 30 percent taxable profits is allowed.

Investment opportunities:

  • Power generation and transmission;
  • Power distribution;
  • Power exchange;
  • Rural electrification;
  • Hydropower;
  • National grid program; and
  • Renewable power.

FDI policy

  • 100 percent FDI permitted in power sector excluding nuclear power

Key Indian players

  • Tata Power;
  • Reliance Power;
  • Torrent Power; and
  • Power Grid Corporation of India

Oil and Gas

Facts and figures:

  • Oil & gas sector’s share of FDI inflow: 2.83 percent (petroleum and natural gas)
  • Constitutes over 15 percent of India’s GDP
  • The government is considering a series of tax holidays, including a seven-year tax break, to assist with the development of exploration in its oil & gas sector to lessen its dependence on imports
  •  The Investment Commission of India states that total opportunity in the oil & gas sector reached US$35-40 billion in 2012

Investment opportunities:

  • Petroleum products;
  • Improved oil recovery and enhanced oil recovery techniques;
  • Crude oil production from the deepwater block;
  • Use of improved technology;
  • Extended oil field acquisition activities;
  • Capacity utilization of refineries;
  • Foreign company collaboration;
  • End-user market and infrastructure development;
  • Setting up oil and gas courses at universities and training institutes; and
  • Opportunities for world-class service providers.

FDI Policy:

  • Allowing 100 percent FDI in private refineries through the automatic route and 26 percent in government-owned refineries; and
  • 100 percent FDI is also allowed in petroleum products, exploration, gas pipelines and marketing/retail through the automatic route.

Key Indian players:

  • Indian Oil;
  • Bharat Petroleum;
  • Oil and Natural Gas Commission (ONGC);
  • Reliance Industries; and
  • Essar

Recent FDI projects

  • BG Energy Holdings will set up three wholly owned subsidiaries in Andhra Pradesh, Karnataka and Tamil Nadu with around US$28 million investment in each for setting up gas distribution and transmission infrastructure over the next several years.

Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.

For further details or to contact the firm, please email india@dezshira.com, visit www.dezshira.com, or download the company brochure.

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