Saudi Telecom has struck a USD 3 billion deal to buy into Malaysian telecom company Maxis. It gives the Saudi PSU giant a share of the Indian pie with an 18.5% indirect stake in Chennai-based Aircel. It is being speculated whether this deal will clear the security test in India.

Saudi Telecom's deal with Maxis gives it a presence in the fastest growing market in the world. Saudi Telecom Company, or STC, has paid a little over USD 3 billion for not just a 25% stake in Maxis' holding company, but also for a 51% stake in Maxis' Indonesia unit.

Malaysia and India are the other two countries where Maxis has a presence. The 25% stake in Maxis, gives STC an 18.5% indirect stake in Aircel. The Chennai-based company operates in nine circles and is awaiting spectrum for a pan-India rollout. Aircel is the biggest operator in Chennai and is the fifth largest GSM operator in the country with about 6.4 million subscribers.

Saudi Telecom said that they will invest with the other shareholders, to fund the rapidly expanding international operations of Maxis, in India and Indonesia. That should augur well for Aircel. But from an operational point of view, STC's purchase may not have too much of an impact on Maxis' India operations.

Department of Telecommunications, or DoT, sources said that Aircel may need to apply for a fresh approval to the Foreign Investment Promotion Board, or FIPB, as there will be a change in the foreign shareholding pattern.

The nature of this deal is similar to the Hutch-Orascom deal in 2005. Egyptian telecom major Orascom has picked up a 19% stake in HTIL by virtue of which it got a 10% indirect stake in Hutch Essar. That delay ran into a lot of regulatory trouble because security agencies had raised question over the investment of the Egyptian company, which was also present in Pakistan and Bangladesh.

Security agencies tell CNBC-TV18 that Saudi Arabia may not be an unfriendly country but it is in on the list of sensitive countries and so clearing the FIPB hurdle may not be that easy, especially since STC is a government-owned company.

However DoT sources also point to the fact, in the case of Orascom, it was the Indian partner Essar which raised objections and the Reddy Family which is the Indian partner in the case of Aircel is unlikely to do the same.

Andrew Critchlow, Managing Editor - Middle East, Zawya Dow Jones said that Saudi Telecom, which has been a traditional monopoly operator in Saudi Arabia, is now facing competition after the liberalisation of its telecommunications sector last year. He looks at this acquisition and the consequent stake in Aircel as Saudi Telecom’s first real move to establish itself outside the Middle East.

Excerpts of CNBC-TV18’s exclusive interview with Andrew Critchlow:

Q: What do you know at this point about the developments as they stand?

A: Well, Saudi Telecom has bought into Maxis and with that acquisition, bought into the Indian telecom market. With India being the second most populous country in the world, a dynamic growing economy is a huge market for telecom.

I think for the backdrop here, you would have to look at what’s happening with Saudi Telecom. It is the largest telco in the Middle East by quite a long way. It’s serving Saudi Arabia, by far the largest economy in the Middle East and the most populous Arab country in the Persian Gulf. So that’s the backdrop.

But Saudi Telecom recently has seen a little bit of its market share clamp down. Saudi Arabia, for the first time last year, allowed foreign operators to come into the country and started to liberalize its telecommunications sector. Traditionally, Saudi Telecom had been the monopoly operator there. It now has to compete against companies like Etisalat and NTC.

So I think that this is its first real move to go outside the Middle East and to play in this global game for telecommunications. What better place to do it than India at the moment!

CNBC-TV18 Disclaimer

This inormation is source-based and has not been provided to the stock-exchanges.