* Govt OKs raising FDI to 26 pct from 20 pct earlier
* Govt sees rev of 17.33 bln rupees from Phase III spectrum auction
* Cos can now own more than one FM station in one city (Adds quotes, details, share movement)
By Manasi Phadke
MUMBAI, July 7 (Reuters) - India's federal cabinet on Thursday raised foreign direct investment in the radio sector to 26 percent from 20 percent, and greenlighted an auction of more spectrum for radio to raise 17.33 billion rupees.
The news brought relief to media companies, many running frequency modulated or FM radio operations in losses, and investors cheered boosting shares of Entertainment Network India Ltd and Reliance Broadcast Network Ltd .
Shares of Entertainment Network, which owns Radio Mirchi, jumped as much as 8.3 percent to a 33-month high of 286 rupees, while shares of Reliance Broadcast, which owns Big FM, soared as much as 13.7 percent to 91.35 rupees.
"The true potential of radio is basically to reach the masses, where newsprint (and) television hasn't been able to reach. So I think Phase III opens the door to that growth," Asheesh Chatterjee, chief financial officer at Reliance Broadcast, told Reuters.
The Phase III auction will extend FM radio services to 227 new cities, in addition to the present 86 cities, with a total of 839 new FM radio channels, a government statement said.
Most of new stations to be commissioned through this auction are going to be in smaller cities and towns, which have none or very few private players in the radio space.
Currently, most of the radio companies, including Reliance Broadcast have very little foreign direct investment, falling short of even the permitted 20 percent, Chatterjee said.
A local analyst, who did not wish to be named as she is not allowed to speak with the media, said the entire radio industry makes less than 1.5 billion rupees in profit.
"It is very small for a foreign guy to even look at it," she said.
"Right now the industry itself is very small because of the Phase II policy structure, which really inhibits growth and scalability is limited."
The phase III auction will address scalability and boost profits, which would then generate interest among foreign investors, she added.
The federal government has also opened doors for radio companies to expand in cities where they are already present, which will encourage niche programming. Currently FM radio companies are only allowed to operate one station in any city.
Under the new policy, a single company can own up to 40 percent of the total number of FM channels in one city, as long as there are at least three operators there.
The cabinet gave its nod for conducting an ascending e-auction, like last year's telecom spectrum auction, replacing the manual auction during the second phase.
An e-auction enables registration of bids and data updation almost simultaneously which had helped players to fast outbid each other in the telecom auction, while companies physically file papers in the manual auction leading to longer disposal times. (Additional reporting by Anurag Kotoky; Editing by Harish Nambiar)
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