Home | Feedback | Contact Us
Legal Articles  
"INDIA CALLING" - the rise of the Indian telecommunications industry

Rohan Raichaudhuri provides a brief insight into the swift expansion of the Indian telecommunications market, the services offered by its key market players, the legal and regulatory framework and the present scenario of the telecommunication market in India.

Introduction

The rapid growth of the Indian telecom industry in recent years has made a significant contribution to the socio-economic progress and development of India. All corners of the country are now inter-connected through an extensive telecommunication network, which is now the third largest in the world and the second largest amongst the developing nations of Asia. Despite the on-going global economic slowdown that has pushed markets to the doldrums, the telecommunications market in India continues to thrive and remain as one of the fastest growing markets the world.

The Telecommunications Market

Continuing Efforts

Although the first operational landlines were laid near Kolkata during British rule in 1851 and there after telephone services were introduced in India in 1881, the economic and regulatory reforms in this sector have been very gradual and measured.

It all began with the nationalization of all the foreign telecommunication companies at the time in 1947, to constitute a monopoly under the Ministry of Communications. This was followed by the establishment of the Department of Telecommunications ("DoT") in 1985 and the Telecom Regulatory Authority of India ("TRAI") in 1997.

The industry was gradually privatized by the Government of India ("GoI") in value-added services, and consequently cellular and basic services which led to an enormous drive in competition, which coupled with the GoI's liberal policies and a favourable legal and regulatory framework, favoured colossal growth for the industry.

Present day scenario

Today affordable prices of telecom services for the common man has resulted in more than 225 million telecom subscribers in the country, which has a tele-density of almost 25.31%, a sharp increase from the tele-density figures for the years 1995 and 2001, which were at 1.29% and 3.38% respectively. The annual growth rate of telecom subscribers in the year 2006-07 was almost 47%, while more than 7 million new mobile subscriptions were added every month. It is estimated that revenues worth almost US$20 billion were generated from the Indian telecom market in 2006-07.

The telecom industry has also transformed into a manufacturing hub for state-of-the-art equipment due to the availability of low cost raw materials, skilled manpower as well as an abundant labour force. The telecom equipment market and particularly, the handset market for the year 2006-07 (which grew at 50% in the year), was valued at more than US$17 billion and US$4 billion respectively.

The Indian economy has been projected to retain its current 7-9% Gross Domestic Product growth rate along with a stable business environment. An enormous potential therefore exists for the telecom companies to expand its telecom network and resources on account of the very low tele-density in the country. Hence, it is anticipated that India shall transform into the second largest global telecom market by 2010.

The industry players

The key industry players in the current Indian telecom market could be broadly categorized into three different types of companies, which operate in the 23 different circles in the country. The companies are either are state-owned companies, (Indian) privately owned companies or (Indian) companies with foreign investment.

State-owned Companies

The existing operations of the DoT were corporatized in 2000 and renamed as Bharat Sanchar Nigam Limited ("BSNL"). It is the 7th largest telecommunications company in world and India's leading state-owned telecommunications company with a network of over 47 million fixed lines, covering more than 7000 cities/ towns. Its current turnover is more than US$8 billion with a customer base of over 35 million basic phone subscribers.

Mahanagar Telephone Nigam Limited ("MTNL") was set up in 1986 by the GoI to upgrade, expand and raise revenue for the telecom development needs for only a couple of India's key metropolitan cities (i.e. New Delhi and Mumbai). The company today has over 5 million subscribers and 329,374 mobile subscribers.

Indian Privately Owned Companies

Reliance Communications Limited was launched in 2002 that offers a complete range of telecom services, including mobile and fixed line telephony, broadband, national and international long distance services and a wide range of value added services. It is the country's largest private sector information and communications company with a subscriber base of over 60 million customers.

Tata Teleservices Limited is a part of the $29 billion diversified Tata Group, which has over 80 companies, over 330,000 employees and more than 3.2 million shareholders. The company was incorporated in 1996 and provides mobile services, wireless desktop phones, public booth telephony, wire line services and value-added services.

Foreign Invested Indian Companies

Established in 1985, Bharti Tele-ventures Limited (later renamed Bharti Airtel Limited) is India's first telecom services provider and the largest integrated company. The company's footprint extends across all the 23 circles in India and has a total customer base of almost 64 million subscribers. The revenues for the company in 2007-08 were at approximately US$5.5 billion.

Hutchinson Telecom, renamed Vodafone Essar after the company's acquisition, is a subsidiary of Vodafone Group Plc with the Essar group as its joint venture partner in India. It began its operations in 1994 and now operates in 22 circles in India with a customer base of over 60 million.

Services

The industry can be broadly divided into three categories, viz. basic, mobile and internet services. There are other ancillary services such as radio paging services, very small aperture terminal services, public mobile radio trunk services, global mobile personal communication by satellite services that have not been dealt with in this article.

Basic Services

Basic services cover fixed wire line and wireless in local loop services. BSNL leads in this sector by having a market share of 74%. In 2006, the total number of basic service subscribers exceeded 50 million.

Mobile Services

There are an estimated 346.9 million mobile phone (i.e. wireless) subscribers in India today with 12 service providers in the market, which has grown over 48.5% in 2008. There are two types of mobile services in India - Global System for Mobile Communications ("GSM") and Code Division Multiple Access ("CDMA"), the former leading this sector. India is one of the few select countries in the world where there are more GSM subscribers than there are fixed telephone lines.

It is to be noted that while the tariffs for usage of talk time have been reduced in India over the years, the corresponding number of subscribers have considerably increased leading to higher revenues.

Regulatory Framework

Regulatory Bodies

The Indian telecom industry is governed by the DoT (under the Ministry of Communications and Information Technology). The DoT along with the Telecom Commission are responsible for all matters relating to, amongst others, policy formulation, licensing, wireless spectrum management, administrative monitoring, research and development, standardization and validation of equipment as well as private investment in the sector.

In order to streamline policy reforms, safeguard consumer interests as well establish an adequate framework, so as to ensure fair and healthy competition, an independent regulatory body, the TRAI was established. The TRAI was empowered under the TRAI Act, 1997, to look into matters relating to, amongst others, the need and timing for introduction of new service providers and the terms and conditions of license to them, ensure technical compatibility and effective inter-connection between different service providers, regulate arrangements of revenue sharing amongst the service providers, ensure compliance of terms and conditions of license as well as recommend revocation of license for non-compliance, protect the interest of the consumers of telecommunication service, conduct periodical survey to monitor the quality of services provided by the service providers.

The TRAI Act, 1997 as amended in 2000, set up the Telecom Disputes Settlement and Appellate Tribunal ("TDSAT"), a dispute settlement body in order to protect the interests of the various service providers as well as consumers of telecom services. The TDSAT is empowered to adjudicate on any dispute between a licensor and a licensee, two or more service providers, a service provider and a group of consumers and to hear and dispose of appeals against any direction and even a decision or order of the TRAI.

There are other regulatory bodies such as the Wireless Planning Commission, Group on Telecom and IT that look into specific issues concerning telecom. The GoI has also formulated several guidelines to encourage for the private sector participate in the central sector public private partnership projects due to the lack of much needed quality infrastructure in India, under the Public Private Partnership Appraisal Committee with the Ministry of Finance, GoI as the nodal ministry.

Foreign Direct Investment ("FDI")

The GoI has further liberalized the telecom industry by allowing up to 74% FDI (from erstwhile 49%) for the following services under the automatic route: basic and cellular, unified access, national/ international long distance, global mobile personal communications and other value added telecom services. While such investments may be made/ in the form of, amongst others, foreign institutional investors, non-residents Indians, foreign currency convertible bonds, convertible preference shares, proportionate foreign equity in Indian promoters or the investing company, the investments would have to comply with the provisions of Press Note 3 of 2007.

FDI beyond 49% in the aforementioned areas would require an approval from the Foreign Investment Planning Board ("FIPB"), Secretariat of Industrial Assistance, Ministry of Finance, GoI. It is to be noted that FDI in the manufacture of telecom equipments is at 100%, under the automatic route.

It is estimated that FDI in the Indian telecommunications market is at almost US$6 billion as at November 2008, making it the third largest sector in terms of FDI in India. FDI in Indian companies would necessarily entail compliance with the provisions of the Foreign Exchange Management Act, 1999 and its allied regulations as well as the SEBI Takeover Code in the event the company is listed.

Legislations

Broadly, the laws that apply to the telecommunications are the Indian Telegraph Act, 1885, Indian Telegraph (Amendment) Rules, 2004, Indian Wireless Act, 1933. In 1994 the GoI announced the National Telecom Policy ("NTP") that allowed private fixed operators to participate in the Indian telecom market for the first time. The new NTP was announced in 1999 that resulted in the telecom regime shifting from fixed license to a revenue sharing regime, a new dawn in the liberalization of the telecom industry in India.

Other allied legislations include the Information Technology Act, 2000, Communication Convergence Bill, 2001, Indian Telegraph Rules, 2008, TRAI Act, 1997, and several other subordinate rules and regulations.

Independent Regulations


The GoI has from time to time has passed independent regulations to ensure fair competition and augment growth in the industry. Some of these are stated below.

Unified Access Licensing Regime, 2003 ("UALR") - brought an end to the license regime in the telecom industry and the requirement of separate licenses for different services (i.e. currently allow offer both mobile and fixed-line services under a single license, after paying an additional entry fee).

Access Deficit Charge ("ADC") - a certain percentage of the revenue is shared that effectively subsidises the infrastructure costs. ADC is charged from all service providers as a certain percentage of their adjusted gross revenue (for 2007-08, the total ADC was estimated to amount to US$444 million). ADC has now been reduced to 0.75% (erstwhile 1.50%) of AGR for all service providers.

Universal Service Obligation ("USO") - introduced along with the new NTP in 1999, in order to widen the reach of telephony services in rural India, thereby bridging the gap between urban and rural tele-densities, under which all the telecom operators are bound to contribute 5% of their revenues to the fund.

Effect of Policy Changes

Some of the notable events following the liberalization of the telecom industry and the introduction of new policies that has led to such a massive push in the telecom industry would be the corporatization of the DoT and the consequent creation of a new state-owned telecom company, Bharat Sanchar Nigam Limited, the opening up of India's internal long-distance market in 2000, significant drop in long-distance rates as part of TRAI's tariff rebalancing exercise; termination of the state-owned Videsh Sanchar Nigam Limited's monopoly over international traffic and partial privatization of the company that same year, the gradual easing of the original duopoly licensing policy allowing a greater number of operators in each circle, the legalization of IP telephony, introduction of a 'calling party pays' system for cell phones.

Recent Trends

Despite the current global slowdown, there have significant mergers and acquisitions that have been valued at over US$9 billion in the last year. Recent transactions include English telecommunications giant Vodafone's acquisition of Hutchinson Telecom International Limited's 67% share in Hutchinson Essar Limited valued at US$11.2 billion, Japanese mobile operator NTT DOCOMO's acquisition of 26% stake in Tata Teleservices valued at US$2.7 billion, Dubai's Emirates Telecommunications Corporation - Etisalat acquisition of 45% stake in Swan Telecom valued at almost US$ 900 million, Idea Cellular's acquisition of 40.8% stake in Spice Communications valued at almost US$ 700 million.

Mergers and acquisitions in the telecommunications industry have taken place with an objective to acquire a license (i.e. geographical territory), acquisition of spectrum, telecom infrastructure/ network or even brand value. The landmark judgment of the hon'ble Supreme Court of India upheld the Income Tax Department's view in the case of Vodafone acquiring the shares of Hutchinson (January 2009), that capital gains tax would be payable on any income that has arisen or accrued whether directly or indirectly on a transfer of capital assets located in India, even where the transferee and the transferor of the shares are located outside India. It directed the Income Tax Department to determine if it had the jurisdiction to levy the tax and the penalty for the late payment on the transaction. This will have major ramification in the future on any mergers and acquisitions carried out in India.

Conclusion

With the world's largest democracy opening its doors each day to foreign participation by liberalizing the FDI regime, there exists tremendous opportunity for investors in the telecommunications sector.

With over 1.1 billion people in India coupled with the low tele-density of the country, a lot remains to be done when in comes to connectivity between the people. Further, the rising middle class, the growing awareness of the rural population and the availability of the requisite resources makes opportunity abundant in this sector.

Appendix


ROHAN RAICHAUDHURI is a foreign law consultant with WongPartnership LLP in Singapore.
 
© 2007 India Law Journal   Permission and Rights | Disclaimer