AFK Sistema Aims to Become Pan-Indian Operator

Russian companies, which are still very much emerging in the global markets are using some original tactics. Industry analysts did not take too much notice when Russian consumer services giant, AFK Sistema bought a 10% stake in small Indian mobile operator, Shyam Telelink. But now that Sistema's shareholding is likely to increase to 74%, it is obvious that there is a more ambitious strategy behind the acquisition.

Sergei Cheremin, Vice President of Sistema, interviewed below, states that the aim is to develop the minor asset into a major player in the Indian market.

Rossiyskaya Gazeta: India's Foreign Investment Promotion Board has approved Sistema's request to increase its stake in Shyam Telelink from 10% to 74%. What are your plans for the company?

Cheremin: We see it as our key Indian asset and gaining an important presence in Asia. The Indian telecoms market is one of the most promising in the world. At present only a small number of Indians have access to fixed line and wireless telecoms services but there is a rapidly emerging middle class which will require more services in the future. We predict that it will take five to ten years for the market to become saturated so we have enough time to build an infrastructure.

It has been a challenge to gain this foothold in the India and we are not taking this acquisition for granted as there is serious competition in the market, such as Vodafone and Indian state owned companies. We have to prove that Sistema's senior management team is professional and the company is a competitive international business.

RG: But Shyam Telelink works only in Rajasthan. Isn't it too small for your purpose?

Cheremin: India's mobile market has been seriously overpriced. We could have entered it by buying Hutch Essar, a subsidiary of the Hong Kong-based Hutchisson. But we did not think it was reasonable to pay $11 or $12 billion, as much of its technology is about five years old. Our goal is to create a pan-Indian operator through smaller investments and with cutting-edge technologies.

RG: How easy is to acquire a GSM licence for your new asset?

Cheremin: It is possible to file a request for a universal communications licence in India which allows for provision of general telecommunications services including fixed line services. Indian legislation allows operators to provide both GSM and CDMA services. The two standards use different technologies, and need different CAPEX and business logistics also differ. This is why many operators in India prefer to choose a specific format. In Russia we use both technologies and therefore want to have a universal licence to operate in India and an option to choose.

RG: The Cellular Operators Association of India has appealed in court to terminate your GSM licence. What are you doing to protect your stance?

Cheremin: Nobody likes it when a new operator appears on the local market. But there are WTO rules and international agreements regulating investor's access to assets. The Indian Foreign Investment Promotion Board allowed us to invest in Shyam Telelink and buy a 74% stake in it, we view this as definite permission. From the viewpoint of the regulator, there are no obstacles that could stop us from investing more in the development of the company.

There have always been differences between operators, which want to stop the competition from becoming too tough. Governments will always welcome newcomers to the market because it allows decreases in prices, expands networks and increases the quality of services.

As for the lawsuit, it was not filed against Sistema, but against the Telecommunications Ministry which issued the licence to Sistema. The last hearing showed that the Ministry's decision did not violate any legislation.

RG: Have you come across any administrative obstacles in India? Have you had to resort to using un-businesslike practices?

Cheremin: Sistema is a public company and has never resorted to using un-businesslike practices. It always works in compliance with legislation.
The Foreign Investment Promotion Board usually makes decisions within a month. This is a routine procedure but technically complicated because it involves getting the approval from 18 departments, including finance and interior ministries.

We know that this is a difficult task and so we were not surprised that it has taken a bit longer than expected. I have no reason to say that we faced administrative obstacles; on the contrary, the department heads involved in the process positively supported Sistema's intention to work in India.

RG: You failed to take over Aircel in repayment of India's debts to Russia. Why?

Cheremin: We planned to acquire Aircel at a time when it was reasonably priced. But like any organisation we try to minimise spending and hoped to use India's debts to Russia for investment in infrastructure.

Our talks with India's Finance Ministry and other departments indicated that Indian colleagues would prefer to keep the money in India in the form of foreign investment. But at the time there was no agreement between the finance departments of Russia and India on de-freezing these funds. The said documents were approved only several months ago.

In the meantime, we negotiated with Aircel's owner, Mr Shiva Shankaran, who was also talking with other applicants. We eventually decided that the price was too steep and withdrew the offer.

RG: It is said that the mobile market is not very profitable in India because operators fight for every cent. Can your managers play this game?

Cheremin: The rumour is not true. For example, Vodafone has had major success in India. They paid a high price and Vodafone shares fell by 5% after the acquisition of the Indian asset. While investors did not think it was wise to pay so much for a foothold in the Indian market, they were proved wrong and Vodafone turned out to have made the right decision.

It is not possible to generate money and get a huge profit margin in India immediately after entering the market. Everyone who enters an emerging market plays on capitalisation, investing hundreds of millions of dollars in a company that will be worth billions, and possibly tens of billions of dollars several years later.

For example, Mobile TeleSystems (MTS) has 80 million subscribers in Russia and is worth about $37 billion on the New York exchange. But any Indian operator, which has three times fewer subscribers, has a larger capitalisation than MTS. This is because investors are paying for a growing market.

RG: Why have you decided to begin your Asian foray in India rather than China?

Cheremin: The Chinese do not allow foreigners to work in their mobile market. Sistema participated in the talks about this issue between the governments of Russia and China, but no decision has been made so far.

RG: Do you plan to expand beyond Rajasthan?

Cheremin: Rajasthan has half the population of Russia and is a very attractive market, but Sistema wants to become a global company and will have to move on. We have filed requests for licences in 21 states in India, in accordance with local legislation, and expect to get permits soon.

We plan to become a pan-Indian operator. To do this, we do not need to buy more Indian assets. It is enough to have a licence and be prepared to invest heavily in infrastructure, which has to be built from scratch.

We have very good partners in India, who have experience in building networks. We expect problems, but we do not fear them and because we studied the Indian market for four years making a deliberate decision to buy Shyam Telelink despite its small size, we are confident. I am convinced that we have enough managerial resources and enough people in Moscow willing to work in India to implement this ambitious project.

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