M&A In Indian FM Radio Sector — Why The Dearth?
Reports suggest that the size of the Indian radio industry is expected to reach $658.2 million by the year 2019
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The Indian FM radio industry has been projected to grow at a CAGR of over 17 per cent between 2016 and 2021 , backed by an increase in advertising spending by Indian corporates across various sectors and the policy initiatives of the Government of India (Government) to expand the FM radio network across the country. An increasing access to mobile handsets has also been stated to be a contributing factor to the growth of the Indian FM radio sector . The recent spurt in investments in sectors such as e-commerce, pharmaceuticals, consumer durables, financial services and automobiles has permitted players in the foregoing sectors to spend significantly on advertising, which in turn has cause an upward swing in revenues of FM radio companies. Reports suggest that the size of the Indian radio industry is expected to reach $658.2 million by the year 2019 .
The recent Phase III auctions has sought to expand the availability of FM radio channels in Indian cities previously not covered under the Phase-I and Phase-II auctions, and has been stated to have fetched the Government over Rs 1,000 crore as a one-time entry fee from private players in the FM radio industry. This certainly shows that FM radio companies are willing to incur significant expenditure to expand their network.
While the macro-economic outlook for the FM radio industry in India appears to be encouraging and certainly provides an attractive investment opportunity, it is interesting to note that mergers and acquisitions (M&A) in the FM radio sector have not been frequent, especially when compared to other media related sectors, such as the Indian television industry. This article seeks to explore certain key issues, which relevant stake holders may be faced with when seeking to undertake M&A in the FM radio sector, and some potential roadblocks which could be said to hamper M&A opportunities in this space.
Foreign direct investment (FDI) in Indian companies engaged in operating FM radio channels is currently limited to 49 per cent of the said company's share capital, subject to the prior approval of the Foreign Investment Promotion Board (FIPB). It is interesting to note that the Government recently increased the FDI limit in the FM radio sector from 26 per cent to 49 per cent, but retained the requirement of prior FIPB approval. At the same time, the Government removed the requirement of FIPB approval in case of FDI in companies engaged in broadcasting non-news and current affairs television channels (i.e., the general entertainment television channels) and also increased the FDI limit in such companies to 100 per cent.
In this regard, it is important to note that a large number of private FM radio stations primarily broadcast music and host entertainment related shows, and can be classified to be in the general entertainment category. In fact, as per the license terms granted by the Ministry of Information and Broadcasting, Government of India (MIB) to private FM radio channels (i.e., the licensees), the licensees are not permitted to broadcast any news and current affairs programme other than news bulletins of the All India Radio (in an unaltered form). In such a case, practically speaking, there is no significant difference between general entertainment television channels and FM radio companies, and therefore, little reason for subjecting FM radio stations to a 49 per cent FDI cap and retaining the FIPB approval requirement; while, FDI in companies broadcasting general entertainment television channels is permitted up to 100 per cent without any FIPB approval requirement.
Increasing the FDI limit in the FM radio sector and liberalising the foreign exchange regulations governing the said sector, could significantly boost investor interest in the Indian FM radio sector, which could consequently provide access to Indian FM radio companies to inter alia advanced technology and global content. Such liberalisation could also provide much needed capital to such companies, to expand their operations to other parts of the country (which appears to be the Government's primary intent as well).
Further, all content broadcast on FM radio continues to be subject to regulatory purview of the MIB and the license conditions set forth under Grant of Permission Agreement (GOPA) (among other Indian laws), and all directors of FM radio companies are mandatorily required to have obtained a security clearance from the Government. The foregoing reasons further alleviate any potential concerns that the Government may have relating to the quality of content broadcast by FM radio companies, or any potential security concerns which may arise, as a result of permitting increased FDI in the said sector.
The relatively low FDI limit coupled with the uncertainty over FIPB approval can be said to be a stumbling block in attracting strategic / financial investors to invest heavily in the Indian FM radio sector. A liberalised FDI regime in the FM radio sector would also provide access to the general public to a wider array of content, and immensely benefit companies operating in the FM radio sector.
Given the Government's intention to permit the expansion of the FM radio sector in the country, it is imperative that the Government consider liberalising the FDI norms governing FM radio broadcasting, which in the opinion of the author, could provide a much needed impetus to the Indian FM radio sector. With the recent announcement of the Hon'ble Finance Minister on the proposed abolishment of the FIPB, it remains to be seen whether the FM Radio sector would receive a much needed liberalisation in FDI norms.
Companies operating FM radio stations in India are mandatorily required to sign a GOPA with the MIB, which sets out the terms and conditions of the license, subject to which the said licensee is entitled to operate a radio station. A FM radio company is required to execute a GOPA in respect of each radio station it operates in India.
A number of private agencies currently operating FM radio channels in India acquired their licenses pursuant to the Phase I, Phase II or Phase III auctions conducted by the MIB. In each instance where a private agency has been licensed to operate a FM radio station in an Indian city, the said company would have executed a separate GOPA in respect of the concerned radio channel. It is also important to note that the MIB has from time to time, renewed and/or revised the GOPA, and required all FM radio companies to migrate their licenses, failing which their respective licenses automatically lapse.
To clarify this further, the MIB initially permitted private agencies to operate FM radio stations in India by undertaking an auction and permitting private agencies to bid for FM radio frequencies in certain Indian cities, by undertaking the 'Phase I' auctions in 1999-2000. For the purpose of this article, the terms of the GOPA executed by companies which were licensed to operate FM radio stations pursuant to the Phase I auctions, shall be referred to as the "Phase I GOPA". Subsequently, the MIB held another round of auctions in 2005-2006 (Phase II auctions), auctioning radio frequencies in cities which were not covered under the Phase I auctions, and provided a revised set of license conditions (Phase II GOPA). Pursuant to the Phase II auctions, all entities operating radio stations under the Phase I regime were mandatorily required to execute the Phase II GOPA with the MIB, and "migrate" their licenses to the Phase II regime. The license provided to those FM radio companies which did not migrate their licenses to the Phase II regime automatically ceased once the license tenure under the Phase I GOPA expired. Similarly, pursuant to the Phase III auctions, all companies operating radio stations under the Phase II regime were required to migrate to the Phase III regime, failing which such companies' licenses shall automatically expire once the license period set forth under the Phase II GOPA expires.
For example, in case a company had participated in the Phase II auctions held in 2005-2006 and had been licensed to operate a radio channel in a particular city, the said license would have been valid for a period of 10 years from the date of operationalisation of the said radio channel. Further, in 2015-2016, the Government held the Phase III auctions, and as part of the auctions, permitted all licensees under the Phase II regime to migrate to the Phase III regime. Upon such migration, all such Phase II radio channel operators were required to execute new GOPAs under the Phase III regime, whereby the license granted to their radio channels allotted under the Phase II regime stood migrated to the Phase III regime (and subject to new license conditions), and renewed for a further period of 15 years. In the event a company does not migrate to the Phase III regime, the said company would be permitted to operate the radio station until the expiry of its Phase II license alone, and not thereafter.
It is noteworthy to state that the license conditions set forth under the Phase I GOPA, Phase II GOPA and the Phase III GOPA are not identical, and have been revised by MIB from time to time.
With this background, some of the key restrictions under the Phase III GOPA (which applies to all FM radio channel operators currently operating in India, and who have migrated from the Phase II regime) regulating changes in shareholding of Indian companies operating FM radio stations have been listed below:
(1) A company operating a FM radio channel is not permitted to change the "ownership pattern" of the company through transfer of shares of the majority shareholder / promoter, without the written permission of the MIB.
(2) A company holding permission to operate a FM radio channel is not permitted to change the composition of the "largest Indian shareholder" without the permission of the MIB, and the shareholding of the largest Indian shareholder cannot fall below 51 per cent of the company's paid-up share capital for a period of 3 years from the date on which all channels allotted to the concerned company stand operationalised under the Phase III regime.
(3) The company may, with prior approval of the MIB dilute the total shareholding of the constituents of the "largest Indian shareholder" of the company as it existed at the time of submission of bids to a level below 51 per cent only after a period of 3 years from the date on which all the channels allotted to the company holding permission stand operationalised, subject to there being a "largest Indian shareholder" meeting the prescribed eligibility conditions set out under GOPA. (Para 9.4 of the Policy Guidelines on "Expansion of FM Radio Broadcasting Services through Private Agencies (Phase III)" (Phase III Policy)).
As is apparent from the foregoing, the Phase III GOPA imposes a lock-in on the shareholding of the largest Indian shareholder, requiring such largest Indian shareholder to hold at least 51 per cent of the company's shareholding for a period of 3 years from the date on which all FM radio channels allocated to the concerned company stand operationalised under the Phase III regime. Interestingly, under the Phase II policy, all companies which operated FM radio channels were subject to a similar lock-in of 5 years from the date on which the said channels stood operationalised under the Phase II regime. Therefore, a company which operated a FM radio channel under the Phase II regime would have originally been subjected to the 5 year lock-in, and upon migration to the Phase III regime, would be subject to a new lock-in of 3 years from the date of operationalisation under the Phase III regime.
The intent behind subjecting licensees to a lock-in restrictions is to ensure that FM radio channels are not owned by "fly-by-night" operators, and shareholders in control of FM radio channels retain their economic interest in such companies. However, FM radio companies which have operated FM radio channels in the Phase I and / or Phase II regime have already been subject to a lock-in on their shareholding under the earlier regimes, and subjecting the same companies to a further lock-in of 3 years under the Phase III regime appears unnecessary and significantly impairs promoters of such companies to unlock the value of their shareholding in such companies, and consequently impacts M&A activity in the FM radio sector.
Also, it is important to note that the Phase III Policy for the first time, has permitted FM radio companies to operate more than 1 radio channel in a city, subject to certain conditions. Therefore, FM radio companies which migrated to the Phase III regime (and which operated only 1 radio station in a city under the Phase II regime), may consider acquiring strategic stakes in other FM radio companies operating a radio channel within the same city for reasons beneficial to both the acquirer and the target. However, retaining the lock-in requirements for companies which have migrated to the Phase III regime (and not new licensees which have acquired licenses for the first time under the Phase III regime), creates a roadblock for M&A activity in the said sector.
The embargo on the largest Indian shareholder from diluting their stake to less than 51 per cent for a period of 3 years can also severely impair the ability of FM radio companies from raising capital from third-party investors, which may be imperative for such FM radio companies for their operating expenses.
Therefore, relaxation of lock-in norms for existing FM radio operators who have migrated from the Phase I / Phase II regime, and who have adhered to the lock-in requirements under the Phase I / Phase II regime may be exempted from the lock-in requirements under the Phase III regime. Further, given that FM radio companies are primarily engaged in operating general entertainment FM radio channels, it would be helpful if the requirement of FM radio companies being Indian owned and controlled be removed, permitting greater flexibility to such companies to raise foreign investment.
Cap on the total number of FM radio channels
Another significant roadblock under the GOPA which impairs the expansion of radio channels in the country can be said to be the cap on the total number of radio channels an Indian company can operate within a city and in the country as a whole.
As per the Phase III Policy, an Indian company is not permitted to operate more than 40 per cent of the total number of radio channels in a city, subject to a minimum of 3 different FM radio operators existing in such city. Further, a single FM radio company cannot operate more than 15 per cent of the total number of FM radio channels licensed in the country (excluding Jammu & Kashmir, the North Eastern States and island territories). As stated earlier, under the Phase II regime, a company could only operate a single radio channel in a particular Indian city.
It is surprising that on one hand, the Government intends to incentivize private agencies to operationalise more radio stations and improve the quality of fidelity in reception and generate, encourage local talent and generate employment; while on the other hand, it imposes caps on the number of radio stations that can be operated by a single FM radio company. Removing caps on operating FM radio channels within a city would certainly drive existing FM radio companies to provide multiple channels of various genre, which would further diversify the quality and genre of content available to FM radio listeners.
Any potential concerns on concentration and abuse of market dominance by a single FM radio company in the sector can be suitably addressed by the Competition Commission of India (CCI) under the aegis of the Competition Act, 2002. Under the circumstances, it may not be necessary to impose additional checks and balances on preserving competition in the industry. The aforesaid issue also gives rise to multiple regulatory authorities (i.e., the CCI and the MIB), both regulating prevention of anti-competitive effects in the FM radio sector. Given that the CCI has been established with the objective of preventing anti-competitive practices in India, there appears to be a strong case for the MIB to consider relaxing / withdrawing the caps on the maximum number of FM radio channels which can be operated by a single company in a city and on a nation-wide basis.
Requirement of MIB approval
The potential uncertainty on obtaining a MIB approval and the lack of clarity on the timelines within which a MIB approval would be granted can dissuade investors from acquiring any significant strategic interest in Indian FM radio companies.
As per the Phase III Policy, the largest Indian shareholder of a FM radio company is not permitted to "dilute" its stake to less than 51 per cent for a period of 3 years from the date of operationalisation of the concerned license, and thereafter with the prior approval of the MIB. In case a FM radio company has urgent capital requirements within 3 years of the date of operationalisation of its license(s) under the Phase III regime, it appears to be unreasonable that the said company would not be permitted to raise capital from a third-party investor, in case the capital proposed to be raised potentially dilutes the equity stake of the largest Indian shareholder to less than 51 per cent. Further, after the said period of 3 years, the potential delay which could be caused by the time required for MIB approval could severely hamper a company's operations (owing to the lack of capital), in case the equity stake of the largest Indian shareholder falls below 51 per cent pursuant to such proposed capital raise.
Therefore, it is imperative that the MIB re-looks at the requirement of the MIB approval in a FM radio company proposes to raise capital, even if such capital raise potentially dilutes the equity stake of the largest Indian shareholder to less than 51 per cent. Any potential roadblocks to a FM radio company's ability to raise capital as and when required, could severely impact the operations of such companies, which is counterproductive to the Government's intent to expand the reach of the sector across the country.
Further, in case of share transfers or fresh capital infusion in a FM radio company, the said company would continue to be governed by the provisions of the GOPA. Also, as stated earlier, all directors of FM radio companies need to necessarily obtain a security clearance from the Indian government, and a change in the directors of a FM radio company currently requires prior MIB approval. Furthermore, currently, any FDI in the FM radio company requires the prior approval of the FIPB. In appropriate cases, the approval of the CCI may also be required in case of acquisition of shares of a FM radio company. Under the circumstances, it is not clear why a separate MIB approval would be required for share transfers / capital infusion in FM radio companies. It is important to note that notwithstanding any share transfer / capital raise, the target company would continue to be bound by the license terms set forth under the GOPA, and any concerns regarding the identity of the potential foreign investors can be suitably assessed by the FIPB (where applicable). Similarly, any competition related concerns would be addressed by the CCI. Under the circumstances, while a MIB approval can be understandable in case of a slump sale / business transfer transaction (where the license in itself is sold to a new Indian company), it is not clear why a separate MIB approval would be required for approving share transfers exceeding 51 per cent of the company's share capital, and the target company remains the same and continues to be bound by the applicable GOPA.
In light of the foregoing, there is a need for the Government to re-consider some of the provisions of the GOPA and the policy governing radio channels in India, and take steps to liberalise the license conditions, which could potentially give a much needed boost to the FM radio sector, and permit promoters of Indian FM radio channels to unlock the value in their shareholding. As stated earlier, liberalising the license conditions and FDI norms applicable to FM radio companies could potentially permit Indian FM radio sector to access global technology used in the said sector and provide the Indian public to global content, besides permitting Indian FM radio companies to further expand their operations in the country with minimal roadblocks.
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.