FDI in telecom sector

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FDI in Telecom Sector

EXECUTIVE SUMMARY
Foreign Direct Investment (FDI) occurs when an investor in home country acquires an asset in host country to manage that asset. FDI is one of the most important sources of capital. It links the host economy with the global markets and fosters economic growth. FDI can be through Joint venture, collaborations, M & A, private placements etc. FDI potential is determined by seven factors - market, access to resources, low production costs, access to export markets, cultural-cum-geographic proximity, competitor presence and a host of government incentives. In comparison, countries like China have received FDI worth $52 billion, primarily in the manufacturing sector, despite being a relatively closed economy. That's equivalent to the investment needed by India over the next five years to take the subscriber base to over 200 million. Telecom analysts believe that it is likely to come by following the Government's decision to increase FDI cap from 49 per cent to 74 per cent. “Telecom is a capital intensive sector and one needs foreign funds to fulfill the targets of tele-density. If anyone is worried about security concerns in involving foreigners in a crucial sector like communications, then there are other means to monitor and plug leakages.” The biggest investment has been in the cellular segment. The top three private Global System for Mobile (GSM)-based companies Bharti Tele-Ventures, Essar-Hutchison and Idea Cellular have between 49 per cent and 33 per cent foreign equity. However, if one were to remove BSNL, which has a 40-million subscriber base, from the overall investment picture, the foreign influence on the Indian communication sector looks impressive. More than 60 per cent of the booming mobile market is controlled by companies which have 49 per cent foreign stake, 100 per cent of the mobile handset being used in the market are foreign brands, 65 per cent of the call centre business is set up by multinational companies, 80 per cent of the telecom equipment market is dominated by European and American manufacturers and telecom has received the second largest foreign investment in the country after the oil sector. India is among the very few countries in the world where FDI cap is so high in the communications sector.

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FDI in Telecom Sector

CONTENTS Sr. No 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
What is FDI? Benefits of FDI India among the world’s most attractive destinations Why India is a better option? Do we need foreign funds for telecom sector? Telecom investment framework in India Introduction to Telecom Sector Communications Policy Demand and supply Basic/fixed services Cellular services Internet Service Providers (ISP) Vsat services Radio paging Telecom equipment Regulatory authority Telecom research & development Risk involved in investing in India Bibliography

Topic

Pg. No
4 5 7 8 12 14 20 21 22 27 29 35 39 43 44 45 46 47 49 51

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FDI in Telecom Sector

WHAT is FDI?
"Foreign direct investment (FDI) occurs when an investor based in one country (the home country) acquires an asset in another country (the host country) with the intent to manage that asset. It is the amount of financing provided by a foreign owner who is also directly involved in the management of the enterprise. For statistical purposes, the International Monetary Fund (IMF) defines foreign investment as (FDI) when the investor holds 10% or more of the equity of an enterprise. It represents investment in real assets (such as land, building, or even existing plants), in foreign countries.

Definition
A company from one country obtains controlling interest in a (new or existing) firm in another country, and then operates that firm as a part of the multinational business of the investing firm. FDI may be financed through parent company transfer of funds to the new affiliate, borrowing from home-country lenders, borrowing in the host country by the parent company, or any combination of these strategies. FDI comprises activities that are controlled and organized by firms (or groups of firms) outside of the nation in which they are headquartered and where their principal decision makers are located. In the context of the manufacturing sector, FDI is conventionally thought of in terms of branch plant or subsidiary company operations that are controlled by parent companies based in another country.

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FDI in Telecom Sector

BENEFITS OF FDI
To Host Country
Availability of scarce factors of production FDI helps attain a proper balance among different factors of production through the supply of scarce factors and fosters the pace of economic development. FDI brings in capital and supplements the domestic capital. This is a significant contribution where the domestic savings rate is too low to match the warranted rate of investment. It brings in scarce foreign exchange that activates the domestic savings that would not have been put into investment in absence of the availability ot foreign exchange. Also, foreign investors make available raw material and improved technology. Improvement in the balance of payments FDI helps improve the balance of payments of the host country. The inflow of investment is credited to the capital account. At the same time, the current account improves because FDI helps either import substitution or export promotion. Building of economies and social infrastructure When the foreign investors invest in sectors such as the basic economic infrastructure, social infrastructure, financial markets and the marketing system, the host country is able to develop a support system that is necessary for rapid industrialization. Even if there are no investment these sectors, the very presence of foreign investors in the host country creates a multiplier effect and the support system develops automatically. Fostering of economic linkages Foreign firms have forward and backward linkages. They make demand for various inputs that in turn helps develop the input-supplying industries. They employ labour force and so help raise the income of the employed people that in turn raises the demand and industrial production in the country.

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FDI in Telecom Sector

Strengthening of government budget The foreign firms are a source of tax income for the government. They pay not only income tax, but tariff on their import as well. At the same time, they help reduce the government expenditure requirements through supplementing the government's investment activities. All this eases the burden on the national budget.

To Home Country
The country gets a supply of necessary raw material if the investor makes investment in the exploration for a particular raw material. The balance of payments improves insofar as the parent company gets dividend, royalty, technical service fees and other payments, and from the rising export of the parent company to the subsidiary. There is revenue also from imposing tariff on the import of the parent company from its subsidiary abroad. Also benefits arise from a reverse resource transfer effect. A reverse resource-transfer effect arises when the foreign subsidiary learns valuable skills abroad that can be transferred back to the home country

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INDIA AMONG THE WORLD’S MOST ATTRACTIVE DESTINATIONS FOR FOREIGN INVESTMENT
Despite the Asian financial turmoil, India has improved its position among the most attractive foreign investment destinations in the world. India is the sixth most desirable destination for foreign direct investment (FDI), says a recent study conducted by management consultant A T Kearney. In a survey of FDI preferences among top corporate decision-makers, the United States, China, United Kingdom, Brazil, Mexico, India, Australia, Poland, Germany and France (in that order) have been marked as prime destinations for FDI by global multinationals. The survey measured the direct investment sentiment of CEOs, CFOs and other top executives for the world’s 1000 largest firms. These companies have cited market size, quality of infrastructure, political stability and regulatory environment as the most important factors to consider when making direct investments, with market size being the single most important criterion. The survey makes a pointed reference to India when mentioning the importance of the regulatory environment for facilitating FDI. It says “India is a case in point as it is perceived to suffer from an inability to formulate a clear, consistent regulatory environment for FDI. The survey notes that the growth in emerging markets is slower today than in North America or Europe. However, emerging markets — which grew three times faster than developed countries before the Asian crisis — are forecasted to outperform developed countries in growth of income and consumption. Therefore, the survey concludes that emerging markets still represent an integral part of multinational corporations’ international expansion strategies. Not only do emerging markets comprise 60% of the top 25 preferred destinations for FDI, eight of the ten most frequently cited as new investment destinations are emerging markets.

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FDI in Telecom Sector

WHY INDIA IS A BETTER OPTION?
The Indian economy is like the sleeping giant that, if awakened, could by itself transform the face of the global economy. Below are factors, which attract investors from all over globe to invest in India: 1. Reforming Economy India is an open economy in the process of integrating with the world economy. Far- reaching economic reforms initiated in July 1991 have thrown up vast opportunities for business with the involvement of the disbanding of the licensing system.  Huge Market: India has a huge market of nearly 300 million people in its growing middle class. It is one of the top ten big emerging markets today.  Strategic sourcing and production base: India provides an abundance of natural resources, a rich mineral base and one of the largest reservoirs of skilled people. Located strategically, India is a good base for sourcing production for both the domestic market and for export.  Stable growth: India has experienced growth with macro economic stability. Since the liberalisation programme was implemented, GDP growth has accelerated and now stands at over 6.8%.  Large, diversified economy: According to the Asia Week, India was the fifth largest economy in the world, in purchasing power parity terms at last reckoning in 1995, with a GDP of over US$ 1.22 trillion. Agriculture, which employs two-third of India's work force and contributes one-third of GDP, has grown steadily. India has a diversified manufacturing base. The industrial sector has surged ahead registering a growth of 11.7% in 1995-96. The automobile industry has grown at over 30% per annum over the last 2 years.  Increasing world trade: India's trade has increased sharply since the economic reforms programme was initiated and stood at US$68.48 billion in 1995-96.

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FDI in Telecom Sector

2. Business Environment India has several advantages over other countries. Its legal structure is far more advanced, it is politically much better, and has an entrepreneurial class that encourages and attracts foreign participation.  Foreign investment encouraged: India encourages foreign investors to establish their presence in the Indian market. The procedures and regulations for setting up joint ventures have been streamlined. The Indian Investment Centre at New Delhi is responsible for facilitating foreign investment in India and for advising overseas investors about regulations, procedures and incentives.  Commencing Business:  Foreign companies may start business operations in India through technical collaborations, direct investment or both.  Foreign investors may invest in virtually every sector of the economy.  Foreign companies do not necessarily require local partners.  Use of foreign trademarks and brand names is permitted.  No industrial license is required in India, except for specified industries of strategic, social or environmental concern, and those reserved for the small scale sector.  Automatic approvals for foreign investment up to 51% in new ventures are granted by the Reserve Bank of India for projects in 35 specified industry groups. All other proposals are processed by the Foreign Investment Promotion Board, located in the Prime Minister's Office  Foreign equity up to 100% is permitted.

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 Impressive R&D and human resource base: Sophisticated R&D infrastructure, which is the foundation for, advances in space technology, satellite communication, computer software and Other areas.  World-class institutions for education and research in Technology,

Engineering and Management.  Vast pool of skilled workers and technical staff.  High quality managerial and supervisory personnel easily available.  Sophisticated financial sector: India has a sophisticated financial sector with an extensive banking network and a well-developed capital market. Several leading international banks operate profitably in India. Capital raised-from the public by companies has risen from Rs.56.8 billion (US$ 2.3 billion) in 199T-92 to Rs.276 billion (US$8.8 billion) in 1994-95. Three major all India institutions - ICICI, IDBI and IFCI with total assets of US$ 21.2 billion (Rs-667.7 billion) as of end March 1995 dominate India's term-lending market.  Capital Market:  There are 23 exchanges in companies.  India has the third largest investor base in the world with over 20 million shareholders.  Trading operations at the Bombay Stock Exchange, India’s largest, are screen based.  Foreign companies based in India find it easy to raise equity through public offerings. India trading in Scrips of nearly 9,000

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 Corporate sector growth: Sharp increase in the registration of new companies from about 22,000 in 1990-91 to over 47,000 in 1994-95. Record increase in corporate sector profits at 40% during 1994-95. This is the highest-growth in last eight years.  Export promotion: Seven geographically dispersed Export Processing Zones (EPZs) with special facilities and incentives for investors have been established. They provide a dutyfree environment and basic infrastructure facilities. The same facilities are also available for 100% Export Oriented Units (EOUs). Incentives for EPZs & EOUs:  100% foreign equity is welcome.  25% of the production in value terms may be sold in the Domestic Tariff Area  (DTA) at concessional duty rates.  Single window clearance.  No import licenses are required.  Import of all industrial inputs exempt from customs duty.

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DO WE NEED FOREIGN FUNDS FOR TELECOM SECTOR?
The debate over raising the foreign direct investment in telecom from 49 per cent to 74 per cent has thrown up an interesting question as to how Indian is the country's telecom sector and whether do we need foreign funds for achieving the tele-density targets. First, look at numbers that point to the Indianess of the telecom sector. The largest two players in the country - Bharat Sanchar Nigam Ltd and Reliance Infocomm - which together account for more than 70 per cent of the investment made in the telecom sector, are fully Indian companies. Together, the two companies have about 45 million subscribers of the total 70million user base in the country. The foreign investment made in the Indian telecom sector, about $2 billion postliberalization, is just about 20 per cent of the total investments made in the sector. Reliance Infocomm and Tata Teleservices have made investments up to $4 billion-$5 billion. And if you take the investments made by the state-owned BSNL, which was about Rs 20,000 crore in the last year, then the investment made by foreign companies in India does look puny. In comparison, countries like China have received FDI worth $52 billion, primarily in the manufacturing sector, despite being a relatively closed economy. That's equivalent to the investment needed by India over the next five years to take the subscriber base to over 200 million. Telecom analysts believe that it is likely to come by following the Government's decision to increase FDI cap from 49 per cent to 74 per cent. “Telecom is a capital intensive sector and one needs foreign funds to fulfill the targets of tele-density. If anyone is worried about security concerns in involving foreigners in a crucial sector like communications, then there are other means to monitor and plug leakages.” The biggest investment has been in the cellular segment. The top three private Global System for Mobile (GSM)-based companies Bharti TeleVentures, Essar-Hutchison and Idea Cellular have between 49 per cent and 33 per cent foreign equity. Investments to the tune of Rs 5,000 crore made directly in the cellular sector have been primarily by Hong Kong-based Hutchison Whampoa and Singapore Government's investment vehicle Temasek Holdings. Even the smaller players BPL Communication and Spice Telecom, the cellular operator in Punjab, has 49 per cent foreign equity.

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However, if one were to remove BSNL, which has a 40-million subscriber base, from the overall investment picture, the foreign influence on the Indian communication sector looks impressive. More than 60 per cent of the booming mobile market is controlled by companies which have 49 per cent foreign stake, 100 per cent of the mobile handset being used in the market are foreign brands, 65 per cent of the call centre business is set up by multinational companies, 80 per cent of the telecom equipment market is dominated by European and American manufacturers and telecom has received the second largest foreign investment in the country after the oil sector. India is among the very few countries in the world where FDI cap is so high in the communications sector. These five companies together account for about 22 million subscribers of the 29 million GSM users in the country. Even in the mobile handset segment, it's foreign brands such as Nokia, Motorola and Samsung ruling the market. Though no one has invested to set up a manufacturing unit in the country so far, with 100 per cent foreign equity allowed in manufacturing, most of the companies are actively looking at the option. It's the same scenario in the telecom equipment side. Except for a few companies like ITI primarily catering to the fixed line switching requirements of BSNL, most operators prefer to import. Of the Rs 10,000-crore FDI received by the Indian telecom sector, only Rs 1,500 crore has gone to the manufacturing segment over the last 15 years. The only segment, other than cellular, which has received attention by foreign investors is the telecom software and call centre business where big names like Nokia, Ericsson, Alcatel, Motorola, GE, Convergys have set up base in the country.

TELECOM INVESTMENT FRAMEWORK IN INDIA

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Investment Policy Framework in India
The Indian Telecom sector witnessed of significant Growth in the last few years. Telecom sector is one of the fastest growing sectors of the service sector in India and being an infrastructure industry it has high capital investment requirement. Since this sector has shown impressive growth, therefore, it present a viable investment opportunities to both domestic and foreign investors. The Foreign Direct Investments have played a pivotal role in the Telecom sector. Salient features of various foreign Investment guidelines in India Foreign Direct Investment of up to 100 % permitted for the following:
o o o o o o

Manufacturing of telecom equipment Internet service (without international gateways) Infrastructure providers (Category I) E-mail service Voice mail service Call Centers and IT enabled services

Foreign Direct Investment of up to 74 % permitted for the following:
o o o

Internet service (with international gateways) Infrastructure providers (Category II) Radio paging services

Foreign Direct Investment of up to 49 % permitted for the following:
o o o o o o

National long distance service International Long Distance Service Basic telephone service Cellular mobile service Global Mobile Personal Communication Other value added services

Concessions & Fiscal Incentives

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 Automatic approval for technology fee up to US$ 2 million, royalty up to 5 percent for domestic sales and 8 percent for exports in telecom manufacturing.  Full repatriatability of dividend income and capital invested in the telecom sector  Other fiscal incentives and concessions for the telecom sector:
o o o o o o o

Tax holiday for 10 year Rebate on subscription to shares/debentures Scope for tax exemption on financing through venture capital Import duty rates reduced for various telecom equipment including mobile phones from 20% to 5% Telecom Service Sector allowed the benefit of carry forward of losses on Mergers. Exemption from excise duty on cellular phones and its components, pagers, radio trunking terminals and parts. Reduced Central Sales Tax of 2%

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FOREIGN DIRECT INVESTMENT (FDI) IN TELECOM SECTOR (AUGUST'91 TO MARCH'2004)
Year 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Total FDI Inflow (Rs in Million) 20.60 140.20 2067.40 7648.30 12451.90 17756.40 2126.70 2885.80 39709.00 10815.00 3014.00 874.20 (Till March) 99509.50

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SERVICE-WISE/ITEM WISE INFLOW OF FOREIGN DIRECT INVESTMENT (FDI) IN TELECOM SECTOR (AUGUST ’91 TO MARCH ’2004) (IN MILLION).
Sector Wise actual Inflow of FDI in Telecom Sector S.No. SERVICE/ITEM 1 2 3 4 5 6 7 8 9 10 11 12 Basic Telephone Service Cellular Mobile Telephone Service Radio Paging Service E-Mail Service VSAT Service Cable TV Network+Internet Satellite Telephone Service Radio Trunking Service Manufacturing & Consultancy Holding Companies Other Value Added Services Automatic Route TOTAL 910 688 281 1704 481 71 15784 48420 227 361 99509 0.91% 0.69% 0.28% 1.71% 0.48% 0.07% 15.86% 48.66% 0.23% 0.36% FDI 3937 26646 % 3.96% 26.78%

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COUNTRY WISE INFLOW OF FDI IN TELECOM SECTOR IN INDIA (AUGUST ’91 TO MARCH ’2004)
( Rs in Million) Country FDI Argentina 0.01 Australia 700.9 Austria 9.5 Bahrain 8 Bahamas 13.78 Bermuda 64.85 Canada 411.6 China 0.1 Denmark 72.5 Finland 355.8 France 1009.37 Germany 12.7 Hong Kong 901.26 Israel 800 Japan 539.8 Kuwait 0.5 Luxembourg 101.6 Malaysia 599.9 Mauritius 71998.01 Netherlands 3157.57 NRI 889 Philippines 73.5 Singapore 55.86 South Korea 198.5 Sweden 1531.9 Switzerland 4.7 Spain 0.74 Thailand 2211.6 UK 8875.89 USA 4904.76 Srilanka 4.73 TOTAL 99508.93

S.No 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31

% 0.00% 0.70% 0.01% 0.01% 0.01% 0.07% 0.41% 0.00% 0.07% 0.36% 1.01% 0.01% 0.91% 0.80% 0.54% 0.00% 0.10% 0.60% 72.35% 3.17% 0.89% 0.07% 0.06% 0.20% 1.54% 0.00% 0.00% 2.22% 8.92% 4.93% 0.00% 100.00%

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OPERATIONAL REVENUE OF TELECOM OPERATORS (BASIC, MOBILE, NLD AND ILD) FOR THE F/Y 2002- 03
S. No 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 18 19 20 21 22 23 24 25 26 Name of Company BSNL MTNL VSNL Data Access (I) Ltd Bharti Infotel Ltd TataTeleservices (Maharashtra) TataTeleservices HFCL Shyam Telelink Ltd AIRCEL LIMITED AIRCEL Digilink India Ltd. Bharti cellular Ltd. Bharti Mobile Ltd. BPL Mobile Communications Ltd. BPL Mobile Cellular Ltd. BTA Cellcom Ltd Fascel Ltd. Hexacom India Ltd. Hutchison Essar Telecom Ltd. Hutchison Max Telecom Pvt Ltd. Hutchison Telecom East Ltd IDEA Cellular Ltd. Reliance Telecom RPG Cellular Services Ltd. Spice communications Ltd Total Revenue Service Provided Basic Basic NLD/ILD ILD Basic /NLD/ILD Basic Basic Basic Basic Mobile Mobile Mobile Mobile Mobile Mobile Mobile Mobile Mobile Mobile Mobile Mobile Mobile Mobile Mobile Mobile Mobile Amount (Rs in crore) 25293.15 5806.53 4538.55 601.35 1102.5 359.59 261.89 89.48 58.87 222.4 125.58 1398.22 671.77 442.58 412.48 88.86 321.91 363.51 115.34 533.44 766.89 204.3 851.46 356.41 186.05 499.13 45672.24 Market share % 55.38% 12.71% 9.94% 1.32% 2.41% 0.79% 0.57% 0.20% 0.13% 0.49% 0.27% 3.06% 1.47% 0.97% 0.90% 0.19% 0.70% 0.80% 0.25% 1.17% 1.68% 0.45% 1.86% 0.78% 0.41% 1.09% 100.00%

17 Escotel Mobile Communication Ltd.

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INTRODUCTION TO TELECOM SECTOR
India is 8th largest network in the world and 3rd largest among the emerging economies (after China and Korea). India's has 32.4 million basic telephone lines and 3.6 million cellular mobile networks. This network is growing annually at an average rate of approximately 22% for basic services and more than 100% for cellular and Internet services. Current Tele-density of approximately 3.5%, is proposed (as per new Telecom Policy 1999) to be increased to 7 percent (75 million telephone connections) by 2005 and 15 percent (175 million telephone connections) by 2010. This translates into an investment requirement of approximately US$ 37 billion by 2005 and approximately US$ 69 billion 2010. If India has to fulfill its full potential of becoming a key player in the New Economy and emerge as an IT superpower, it requires a strong and competitive telecom sector. Over the last ten years, significant developments have taken place in this sector and many more profound changes are expected to take place in this industry in the coming years. India is ranked as one of the top ten-telecom networks in the world, its telephone density of 2.8 telephone lines per 100 persons compares unfavourably with global standards. The US has a tele-density of 50 telephone lines per 100 persons, Brazil has a tele-density of 10 telephone lines per 100 persons with the global average being 11 per 100. The current low tele-density offers telecom companies substantial growth opportunities in India and gives the country an option of adapting new technologies. The New Telecom Policy of 1999 (NTP 99) has set a target of increasing tele-density to 15 per cent by 2010. Incentives  Telecom service providers (basic services, cellular services, radio paging services, domestic satellite services, network of trunking, broadband network and Internet services) are eligible for a tax holiday - 100 percent for 5 years and 30 percent for next 5 years. This tax holiday can be claimed in a block of 10 years out of the first 15 years.  Subscription to shares or debenture of telecom service providers (basic services and cellular services) is eligible for tax rebate.

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COMMUNICATIONS
Communications is one of the critical infrastructure requirements of a country. India, with its one billion people, over 500 districts, around 5,000 villages and large metropolitan cities having population equivalent to that of many countries needs an extensive infrastructure to serve such a population. India operates one of the largest telecom networks in Asia with 1,23,000 route km of optic fibre cables network. As of the beginning of 2000, there were 28 million telephone lines in the country -- approximately 50 people to every landline and 33 people to every cellular telephone line. The density of available lines is much higher in cities than in the remote villages. At present, the density in rural areas is equal to 0.5 lines per hundred. Approximately 60% of Indian villages have village telephone lines. The Department of Telecommunication (DOT) until 1994 was the only telecom provider in the country. With the deregulation of this sector, various private players have come in and improved not only the services but also cut down on costs. Telecom bandwidth issues have also been addressed. Many private ISPs have come in this sector and telecom costs have dropped by 85 percent in 3 years.

Importance of telecommunication
The Government of India (Government) recognizes that provision of world class telecommunications infrastructure and information is the key to rapid economic and social development of the country. It is critical not only for the development of the Information Technology industry, but also has widespread ramifications on the entire economy of the country. It is also anticipated that going forward, a major part of the GDP of the country would be contributed by this sector. Accordingly, it is of vital importance to the country that there be a comprehensive and forward looking telecommunications policy which creates an enabling framework for development of this industry.

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POLICY
Till the early 1990s, the government enjoyed full monopoly over telecom services with the Department of Telecommunications (DOT) being the sole provider of telecom services (local and long distance) in the country, except in Delhi and Mumbai, where Mahanagar Telephone Nigam Ltd (MTNL) was the sole access provider. International services were provided exclusively by the Videsh Sanchar Nigam Ltd (VSNL).
   

New Telecom Policy '94 New Telecom Policy '99 The Tenth Plan (2002-2007) Recent Policy Changes

New Telecom Policy '94
The first step towards opening the telecom services sector took place with cellular licences for the four metros being awarded to private companies in 1994. In the same year, the government formulated the National Telecom Policy of 1994 (NTP 94) with the objective of expanding the telecom infrastructure by encouraging private sector participation in telecom services. As per NTP 94, one private company per circle was to be allowed entry into basic services while two operators were to be allowed to compete in providing cellular services in each of the circles. Subsequently, cellular services became operational in four metros and 18 state circles and basic services, too, commenced in a few circles. However, high licence fee bids, tariff distortions, unattractive interconnection and revenue sharing arrangements between DOT and new private licensees resulted in most service providers finding themselves in financially unviable situations.

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FDI in Telecom Sector

New Telecom Policy '99
In an attempt to remove the defects of the old policy and provide a new direction to the telecom sector, the government came out with NTP 99. The highlights of NTP 99 are:


Private basic and cellular operators allowed to migrate from revenue sharing regime to one time entry fee plus revenue sharing system. Licence period extended from 10 to 20 years. DOT’s monopoly over domestic National Long Distance services to end in 2000. Interconnection between fixed, cellular and other telecom service operators to be allowed freely.

  

The Tenth Plan (2002-2007)
During the 10th plan period (2002-2007), the Government targets to add 81.71 million lines (including fixed and cellular), which translates into the teledensity of 11.5 per cent by 2007. The Government has envisaged the total investment of Rs 1,606.7 billion including the telecom investment of Rs 441.6 billion in rural areas and Rs 462.9 billion investment by the private operators. In order to accelerate the growth of private investment in telecom industry, the working group on Information Technology has proposed key measures like establishing interconnection agreements, meeting the requirements of USO fund, utilisation of licence fee for rural telephony, incentives for roll out in the rural areas, decision on calling party pays regime etc.

Recent Policy Changes
        

New licenses for basic telecom services Fourth cellular license Limited mobility services Caling party pays Third phase of tariff rebalancing Domestic long distance services International long distance services Interconnection charges IP telephony services

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New licenses for basic telecom services
In January 2001, guidelines for the entry of new fixed service providers were announced. Out of the applications by 18 companies, 6 companies were issued LoIs for basic telecom services. By March 2002, 3 companies including Reliance (17 circles), Tata Teleservices (5 circles) and Bharti (4 circles) had signed license agreements by paying the total entry fee of Rs 8.39 billion. These players have started their operations from the second half of 2002-03.

Fourth cellular license
In October 2001, the Government issued licenses to successful bidders for commencing cellular services. These include, the Bharti Group in 8 circles, Escotel in 4 circles, Hutchison Essar in 3 circles, and Reliance (through Reliable Internet) and Birla-AT&T and Tata in 1 circle each. The bidders have paid their entry fees, which aggregated to Rs 16.33 billion, for the fourth cellular license in the 4 metros and 13 circles.

Limited mobility services
In March 2002, the TDSAT gave the decision, against the petition filed by COAI, allowing the basic telecom operators to provide limited mobility services (using CDMA-WiLL). This is expected to adversely affect the Groups, such as Bharti, Hutchison, Essar, Modicorp, which have a large proportion of revenues from cellular services operations in their total telecom services revenue. The COAI was considering filing a petition with the Supreme Court against the decision by the TDSAT. At present, BSNL, MTNL, Tata Teleservices offer limited mobility service. Reliance Communications have introduced limited mobility services in 14 cities by May-June 2002. Hughes Tele.com has indicated its plans to start the limited mobility services in Maharashtra. However, the other basic telecom operators have yet to implement their plans for limited mobility service.

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Calling party pays
According to the calling party pays (CPP) arrangement, the calling party would pay for the calls that terminate on mobile phones. The introduction of CPP has resulted in a growth in cellular subscribers in the countries, which have shifted from the mobile party pays (MPP) arrangement to the CPP arrangement. Cellular services would become more affordable, due to the introduction of CPP and would result in an increase in the minutes of usage by marginal subscribers. Hence, it could further accelerate the growth in the mobile subscriber base. BSNL is not in favour of introducing the CPP, as the costs to the fixed line subscribers would increase. In May 2001, TRAI released a consultation paper on issues relating to the introduction of CPP. The TRAI is yet to finalise its recommendations on the introduction of CPP.

Third phase of tariff rebalancing
In March 2002, the TRAI issued 20th amendment to its Telecom Tariff Order, March 1999. It proposed rebalancing of monthly rentals (increase in rentals for commercial subscribers) and ceiling rates for STD (75-125 per cent higher than prevailing STD tariffs) and ISD tariffs (15-20 per cent lower than prevailing ISD rates). In the actual implementation by BSNL from April 1, 2002, monthly rentals were not changed, STD tariff was kept at low levels, and ISD tariff was reduced as per the TRAI’s notification.

Domestic long distance services
By March 2002, the Government had issued licenses to Bharti Telesonic Ltd., Reliance Communications Ltd. and VSNL to commence DLD services. In December 2001, Bharti commenced its DLD services. Reliance Communications is expected to commence its DLD services in June 2002, on 15 major routes in India. In January 2002, BSNL and MTNL reduced the average STD tariff (Rs per minute) by 55 per cent. This is expected to result in a decline of around 25 per cent in the revenue per subscriber (The elasticity of minutes of usage with STD tariff has been assumed to be negative 0.5 to negative 0.6 times.) In January 2002, BSNL had filed a petition with the TDSAT on the issue of distribution of the default long distance calls (mobile-to-mobile) between Bharti Telesonic and BSNL.

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International long distance services
Since April 1, 2002, the ILD telecom sector has been opened for competition. By early April 2002, out of around 8 applications for the license to offer ILD services, 2 companies (Bharti and Reliance have signed license agreement), and 3 companies hold LoI. Bharti Telesonic has proposed to introduce its ILD services, with the tariffs significantly lower as compared with the existing ISD tariffs. The other players have yet to announce their plans for providing ILD service.

Interconnection charges
The networks of telecom operators are required to interconnect to establish the communication between the subscribers of any operator. According to the TRAI’s regulation (issued in December 2001), interconnection charges for call transit and termination for basic operators are nil for local calls, 40 per cent for STD calls, and 55 per cent for ISD calls. (In this case, the transit and termination service provider is same, like BSNL.) In the case of cellular service providers, the interconnection charges are 95 per cent. In April 2002, the TRAI issued draft guidelines for the interconnection charges between the basic, cellular, national and international long distance operators. The interconnection charges would be based as per the mutual agreement between the interconnection seeker and the interconnection providers.

IP telephony services
The ISPs are allowed to offer internet telephony services in the form of personal computer-topersonal computer and personal computer-to-phone (only for international calls) from April 1, 2002. The TRAI has recommended that the basic telecom operators, cellular operators and DLD telecom service providers be allowed to provide internet protocol based telephony services, subject to meeting the existing norms of end-to-end voice quality. By mid April 2002, the Government received over 20 applications, out of which, around 5 companies were permitted to offer internet telephony services. The ISPs are expected to charge a price of Rs 6-8 per minute for a call from India to US, which is significantly lower than existing peak tariff of Rs 40.8 charged by the access provider

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DEMAND AND SUPPLY
The average teledensity in the 4 metros is around 14 per cent, as compared with 3 per cent in the rest of India. In the metros, the penetration of cellular to fixed lines is around 33 per cent. In end March 2002, around 4 lakh out of 6 lakh villages had access to telephones. In India, the penetration of telephone lines is low, due to a low per capita income and low level of urbanisation. The demand for fixed telephone lines is expected to increase at a CAGR of 12 per cent, from around 38 million DELs in end March 2002 to around 67 million DELs in end March 2007. The incremental growth of telephone lines is expected largely from the semi-urban and rural areas. In the metros, growth rates in telephone lines are not expected to be high, due to the high teledensity, high penetration of cellular to fixed lines, and high average household penetration of telephones. The demand for cellular lines is expected to grow at a higher rate of 32 per cent from 6.48 million in end March 2002 to around 26 million in end March 2007.

TARIFF

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The removal of cross-subsidisation of rentals and local calls by long distance calls (tariff rebalancing) would continue till 2004-05. Gradually, market forces, rather than the policy, would determine the realignment of tariffs with costs, due to increasing competition, introduction of alternative technologies and services, and the removal of policy barriers controlling the industry structure (for instance, not allowing resellers). Rentals would gradually increase to cost based levels, however, the cross subsidisation of marginal users by high usage urban subscribers is likely to continue. Alternatively, the regulator could consider the introduction of differential tariffs for commercial and residential subscribers. STD and ISD tariff is expected to decline further, due to expected increase in competition. Internationally, the monthly subscription charges (monthly rentals) for residential subscribers are cross-subsidised by higher subscription charges for commercial subscribers. The cross-subsidisation of subscription charges for residential subscribers by that for commercial subscribers are higher in the low- income countries. In the countries like United States and Philippines the local calls are completely subsidised with monthly subscription charges. The monthly subscription charges for residential subscribers and charges for local calls, in India, are comparable to those in Malaysia and Brazil. However, in India, the subscription charges for commercial subscribers are significantly lower as compared with those in the other countries.

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TELECOM SERVICES
 Basic/Fixed Services  Cellular Services  Paging Services  VSAT Services  Internet Service Providers (ISPs)

Basic/Fixed Services
India has a fixed line network of around 29 million lines which is among the largest networks in the world. Nevertheless, the tele-density of 2.8 telephones per 100 persons is much below international tele-density levels and access to telecom services is still limited to a small proportion of the population. There is a high demand for basic telephone services and a huge waitlist for telephone connections. The government-owned Bharat Sanchar Nigam Ltd (BSNL) is the largest provider of basic services in the country. BSNL along with MTNL account for 28.70 million fixed lines in the country with the private basic operators at the moment accounting for just 0.30 million subscribers. At present, there are six private players operating basic services in the country. These are: Bharti Telenet in Madhya Pradesh; Tata Teleservices in Andhra Pradesh; Hughes Tele.com in Maharashtra; Shyam Telecom in Rajasthan; Reliance in Gujarat and HFCL in Punjab. Notwithstanding the slow progress made in the opening of basic services so far, the outlook for this segment looks very bright in the country. The government has recently invited applications for basic services licences for state circles and the response has been overwhelming. As many as 13 companies have applied for 103 licences by the first week of February, 2001. With there being no restriction on the number of operators per circle, this could translate into an entry fee of Rs 4,00 crore for the government. The rush for licences reflects the potential of basic services segment, which has increased as a result of the government’s decision to allow limited mobility for basic service operators.

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Subscriber Base
As on 31st March 2004, the total Fixed & WLL (F) subscribers are 42.84 million. The actual number of DELs has increased from 41.48 million as on 31 st March 2003 to 42.84 million as on 31st March 2004. The overall percentage of growth in subscriber base during the year is 3.28%. The subscriber base of Fixed lines including WLL (F) for last five years is depicted in the bar chart below: S. No. 1 2 3 4 5 6 7 BSO BSNL MTNL Bharti Group Tata Teleservices HFCL Infotel Shyan Telelink Reliance Infocom Area of Operation All India (except Delhi & Mumbai) Delhi & Mumbai MP, Delhi, Haryana, TN, Karnataka Maharastra, AP, TN, Karnataka, Gujrat, Delhi Punjab Rajasthan 18 Circles March’03 35,907,691 4,633,665 370,973 449,924 79,502 49,138 160 March’04 36,112,093 4,367,264 636,725 1,003,585 125,331 92,392 503,353

Grand Total

41,491,053

42,840,743

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The average percentage growth rate of the subscriber (including Fixed & WLL (F) for last four years are as shown below:

Switching Capacity The actual total equipped switching capacity of all the basic service operators (including Basic Service Operators who migrated to Unified Access Service regime) in the country has registered a growth of 10.5 million switch capacity during the year. The total equipped switching capacity has increased from 52.8 million as on 31st March 2003 to 63.4 million as on 31 st March 2004. The Equipped Capacity (including Fixed,WLL(F) & WLL(M)) of the Basic service providers for last five years is depicted in the bar chart below:

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S. No

Service Providers BSNL MTNL Bharti HFCL Tata Reliance Shyam

Area of Operation All India Delhi & Mumbai MP, Delhi, Haryana, TN, Karnataka Punjab Maharastra, AP, TN, Karnataka, Gujarat, Delhi 18 Circles Rajasthan TOTAL

Equipped Capacity as on 31.03.03 45,031,557 5,852,639 558,834 192,660 820,984 300,000 70,000 52,826,670

Equipped Capacity as on 31.03.04 46,336,818 6,552,539 800,140 207,660 1,873,620 7,451,832 140,000 63,362,609

1 2 3 4 5 6 7

Public Call Offices (PCOs) Total number of PCOs in the country was 19.24 lakhs as on 31st March 2004 as compared to 14.93 lakhs on 31st March 2003. 4.31 lakhs new PCOs have been added during the year 200304. The total number of PCOs for last five years has been depicted in the bar chart below. S.No 1 2 3 4 5 6 7 Service Providers BSNL MTNL Bharti HFCL Tata Reliance Shyam TOTAL Area of Operation All India Delhi & Mumbai MP, Delhi, Haryana, TN, Karnataka Punjab Maharastra, AP, TN, Karnataka, Gujrat, Delhi 18 Circles Rajasthan PCOs as on 31.03.03 1,195,678 204,433 42,706 15,032 31,768 3,747 1,493,364 PCOs as on 31.03.04 1,519,686 239,654 73,869 22,263 51,822 2,537 14,347 1,924,178

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Village Public Telephones (VPTs)

There are around 6.07 lakhs villages in India. During the year ending 31 st March 2003 there were 5.13 lakhs VPTs in the country whereas by the end of this financial year, the total number of VPTs has increased to 5.23 lakhs. Thus around 0.09 lakhs VPTs have been added during the current year. The total number of village public telephones of the Basic Service Operators/UASPs for last five years is depicted in the bar chart below

S.No
1 2 3 4 5 6 7

Service Providers
BSNL MTNL Bharti ** HFCL Tata Reliance Shyam

Area of Operation
All India Delhi & Mumbai MP, Delhi, Haryana, TN, Karnataka Punjab Maharastra, AP, TN, Karnataka, Gujrat, Delhi 18 Circles Rajasthan TOTAL

VPTs as on VPTs as on 31.3.03 31.3.04
503,420 191 348 831 3,333 3,988 1,016 513,127 509,491 191 607 789 4,061 4,114 3,010 522,263

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During the year 2003-04, 5.22 lakhs villages are having VPTs whereas about 0.85 lakhs villages are left uncovered. The overall percentage of villages left uncovered, at the end of year 2003-04 is depicted in the chart given below.

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Cellular Services
Cellular services commenced in the four metros-Delhi, Mumbai, Kolkata and Chennai from September 1995 and in the state circles from December 1996. At present, there are eight cellular service providers operating in the four metros and 34 licensees in 18 state circles, out of which 29 are operational.

Service Provider

Service Area Andhra Pradesh, Karnataka, Punjab, Delhi, UP(W), MP, Maharashtra, Gujrat, Himachal Pradesh, Mumbai, Tamil Nadu, Kerala, Haryana, Chennai, Kolkata Delhi, Kolkata, Mumbai, Andhra Pradesh, Karnataka, Chennai, Gujrat, Punjab, Haryana, Rajasthan, UP(E) Delhi, Mumbai Gujarat, Madhya Pradesh, Andhra Pradesh, Maharashtra, Delhi Madhya Pradesh, West Bengal, Himachal Pradesh, Assam, Bihar, Orissa, NE Mumbai, Maharashtra, Kerala, Tamil Nadu Tamil Nadu, Chennai Punjab, Karnataka Andhra Pradesh, Karnataka, Punjab, UP(W), Madhya Pradesh, Maharashtra, Gujrat, Himachal Pradesh, Tamil Nadu, Kerala, Haryana, Chennai, Kolkata, UP(E), Rajasthan, West Bengal, Bihar, Orissa, North-East, Assam, J&K Kerala, Haryana, UP(W) Rajasthan

No. of Circles

Bharti

15

Hutch MTNL Idea Reliance BPL Aircel Spice

11 2 5 7 4 2 2

BSNL Escotel Hexacom

21 3 1

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Subscribers Base The Mobile service subscribers consisting of Cellular & WLL (M) have reached 33.69 million at the end of March 2004 as against 13.00 millions at the end of March 2003, thus registering a growth of 159.15% during the year. Reliance Bharti BSNL Hutchison Idea BPL Spice Escotel Tata MTNL Hexacom Shyam HFCL Others (Aircel, RPG etc.) Total Sub. Base Mar'03 5.41 30.17 22.98 21.63 12.80 11.31 6.40 5.87 1.47 3.47 1.32 0.33 0.32 6.43 130 Mar’04 72.65 65.04 55.36 51.48 27.33 18.83 12.08 9.89 6.25 4.63 2.57 0.27 0.29 10.26 336.91 %age share for Mar’04 21.6 19.3 16.4 15.3 8.1 5.6 3.6 2.9 1.9 1.4 0.8 0.1 0.1 2.9 100

Addition in Subscribers Base During the year 2003-2004, 20.69 million mobile subscribers were added as compared to 6.56 million during the preceding financial year. Growth Rate All India growth rate in 2004 was 159.15% as compared to 98.7% for the pervious year, i.e., 2002-03.

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Entry of 3rd and 4th Operator BSNL has commenced its services during March 2002 and as third operator has been providing its cellular services in 21 circles by the end of March 2004. BSNL is the third largest mobile service provider after Reliance and Bharti. Reliance Infocomm started its commercial operations in May 2003 and achieved a subscriber base of 7.26 million at the end of March 2004. Four operators (Reliance, Bharti, BSNL & Hutch) have already achieved a subscriber base exceeding 5 million each. Company-wise Market Share The market share of different Mobile operators as on March 2004 is given. The top five Mobile operators on the basis of market share alongwith subscriber base in March 2003 and March 2004 are as under: Subscriber Base (in million) Service provider Reliance Bharti BSNL Hutchison Idea March '03 0.54 3.07 2.29 2.16 1.28 March '04 7.26 6.50 5.53 5.15 2.73 %age share %age share on March’03 on March’04 4.15 21.55 23.62 19.29 17.62 16.41 16.62 15.29 9.85 8.10

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GSM Services Trends


In the last five years, distribution of market share between postpaid and prepaid services has shifted in favour of prepaid service. At the end of financial year 2004, 75% of the cellular subscribers were on prepaid service.



As far as rate of growth of subscriber base is concerned, both postpaid and prepaid segments have grown, but growth of prepaid segment has been tremendous. Prepaid segment has grown by 26.7 times whereas growth in postpaid has been just 5.6 times in last five years.



Unprecedented growth achieved by prepaid service in the years 2002 and 2004 were driven by TRAI’s order of May 2001 making it mandatory for the CMSPs to offer a prepaid card with a denomination value of Rs. 300 with a validity period of at least one month and introduction of CPP in May 2003



With the introduction of low rental plans by the CMSPs, the postpaid segment has also started recording impressive growth rates in the recent times. Plans with Rs.150 monthly rental are available in almost all the areas enabling the consumer to remain connected to the network at a cost which is lower than the minimum outgo of Rs.300 per month in prepaid.

Growth Rate of Cellular Mobile subscribers (SUBSCRIBERS IN LAKHS)

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Internet Service Providers (ISPs)
Around 189 Internet Service Providers were operational during the year 2004. Bharat Sanchar Nigam Ltd (BSNL) has emerged at top position and reported a subscriber base of 11.28 lakhs. Mahanagar Telephone Nigam Limited (MTNL) follows it with a subscriber’s base of 7.69 lakhs The reported subscriber base has touched 45.49 lakhs as on 31 st March 2004 as compared to 36.36 lakhs during the preceding year registering an increase of 25.11% during the year. Internet Telephony The Internet Telephony was thrown open for Internet service provider’s w.e.f 1 st April’02. DOT has given permission to 121 ISPs to offer Internet Telephony services as on 31 st March 2004 and as per the report submitted to TRAI, 43 ISPs have started Internet Telephony services. Total Minutes of Use (MOU) for Internet Telephony during year 2003-2004 were estimated to be of the order of around 70 millions. List of Internet Service Providers, offering Internet Telephony Market Share At the end of March 2004, Bharat Sanchar Nigam Ltd (BSNL) is at top position and reported a subscriber base of 11.28 lakhs. Mahanagar Telephone Nigam Limited (MTNL) follows it with a subscriber’s base of 7.69 lakhs. M/s Sify Ltd. has reported a subscriber base of 6.58 lakhs. Videsh Sanchar Nigam Limited (VSNL) was having a subscriber base of 6.01 lakhs. Dishnet DSL has reported a subscriber base of 2.65 lakhs. Share of PSU ISPs has shown an increase of 91.62% over the last year, increasing the number of subscribers from 9.91 lakhs as on March, 2003 to 18.98 lakhs as on March 2004. During the same time, the share of Private ISPs have shown a marginal increase of 4.2% from 26.5 as on March, 2003 to 27.6 as on March,2004.

The top five service providers in March 2004 & March 2003 are given below

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Service Provider BSNL MTNL Sify Ltd. VSNL Dishnet DSL

March 2003 4,45,992 5,44,659 6,17,324 7,00,558 1,78,434

March 2004 11,28,172 7,66,585 6,58,192 6,00,509 3,65,126

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Growth Trend Growth trend in Internet subscriber base during last 4 years is shown below. Growth between FE 2001 to 2003 had flattened but has gained momentum during year FE 2004.

Leased Lines Connectivity The leased line customer base has increased to 12,782 as compared to 8077, during the preceding year, showing a growth of 59% over previous year. Cafes/Community Internet Centres (CIC) There are reported to be 10,237 Cyber Cafes/ CICs during March 2004 as compared to 8,388 in March 2003, thereby showing a growth of 22% during the year.

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High Speed Connectivity On the Broadband front, there were 97,525 DSL customers, 5308 DIAS and 2948 radio-based customers, in addition to 82805 subscribers, who access the Internet through Cable TV network. The "Always-On" Internet connections have shown a growth of 150% over the previous year, totalling about 1.90 lakhs as compared to 0.75 lakhs connections during the last year. Minutes of use per subscriber As reported by 44 ISPs the average minutes of use per subscriber/ month is approximately 400 minutes. Average Revenue Per User (ARPU) for ISPs A total of approx. Rs. 1520 crores revenue has been estimated during the year. The Average Revenue Per User (ARPU) for Internet usage during the year was of the order of Rs 310 per month. International connectivity The bandwidth owned by various Internet Gateway Service Providers for their ISP operations and leasing to other ISPs was 3.4 GB for downlinking and 3.0 GB for uplinking.

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VSAT Services
VSAT services are being provided by 11 service providers. The total subscriber base of VSAT subscribers on March 2002, March 2003 and March 2004 was 9762, 16988 and 27601 respectively. The %age growth of the subscriber base was 74.02% and 62.47% during the year ended March 2003 and March 2004 respectively.7 Hughes Escort Communications Ltd (HECL) remained the market leader with subscriber base of 8,395 VSAT subscribers followed by HCL Comnet with 8,376, Comsat Max with 4,210 and Bharti BT with 3,829 VSAT subscribers respectively for year ending 2004. Sr. No. 1 2 3 4 5 6 7 8 9 10 11 Name of the Service Provider Subscriber Base March, 2002 March, March, 2004 2003 3147 4992 8395 2051 3022 8376 1998 3493 4210 1974 3047 3829 186 1997 2040 58 367 188 134 159 121 103 79 58 67 67 39 53 53 22 26 9762 16988 74.02% 27601 62.47%

Hughes HCL Comnet Comsat Max Bharti BT Essel Shyam Tata Services Telstra Vishesh RPG Satellite Communications HFCL ITI GNFC Total Subscriber base Growth in %age

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RADIO PAGING
The Radio paging Industry has been declining gradually as the subscriber base has been decreasing from 578397 in the year ending March 2002 to 289265 for year ending March 2003 and 102569 for year ending March 2004 respectively. The paging segment has had a tough ride in India and after achieving a peak subscriber base of 14.5 lakh, the number of subscribers has dwindled down to 6.4 lakh. According to the paging industry, while the cost of cellular communication has come down, the cost of paging has gone up and this has resulted in a large number of subscribers shifting from paging to cellular services. The paging operators have therefore proposed a series of measures to the government, which will reduce paging costs and make their operations viable. Sr. No 1. 2 3 4 5 6 7 8 9 10 Name of the Service Providers DSS Mobile Comm Ltd Page Point Services (India) Limited Microwave Communications Ltd (Pagelink) RPG Paging Services Limited Modi Korea Telecommunications Ltd. Matrix Paging ABC Communications Telesistem(I) Easy Call Netherlands India Communications Ltd. Total no. of Subscriber base %age of Growth March, 2002 126947 118121 209957 55595 Not Reported 26247 15398 14635 11497 Not Reported 578397 March, 2003 72133 61898 48147 37982 17685 17378 11512 11754 7824 2952 289265 -49.98% Sept, 2003 Not Reported 38906 33540 Not Reported Not Reported 14063 6494 5086 4480 Not Reported 102569 -64.54%

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TELECOM EQUIPMENT
Domestic industry manufactures a complete range of telecom equipment using state-of-the-art technologies designed specially to match the diverse terrain and climatic conditions. The production of telecom equipment in the country increased from $1.3 billion in 1993-94 to about $2.5 billion in 1998-99. However, the requirement of telecom equipment by various users during the five year period, 1997-2002, has been estimated to be in the region of $22.3 billion and the demand for telecom products is likely to rise still further.  Switching Equipment Switching involves routing the traffic from source to destination after setting up a free path. Switching can be circuit switched as is the case in nearly all telecom networks or packet switched as with the internet. The major manufacturers of switching equipment include ITI Ltd., Hindustan Teleprinters Limited, Tata Technologies, Siemens, Ericcson India, Crompton Greaves and Bharat Electronics.  Transmission Equipment and Media Transmission equipment provide connectivity between various networks, transport traffic between various elements of the network and provide access to customers. The major manufacturers of transmission equipment in the country include ITI, HTL, Punjab Communications, Punjab Wireless Systems, HFCL, Fujitsu Optel, Fibcom, Shyam Telecom and Tata Lucent. Transmission equipment can be copper, optic fibre, radio, cellular and satellite. The domestic manufacturers of transmission media include Sterlite, Vindhya Telelinks, Optel Telecom, Birla Ericcson Optical, HFCL, ARM and Aksh Industries.  Terminal Equipment Terminal equipment refers to customer premises equipment that provides an interface between the user and the service provider. This includes telephone instruments, facsimile, answering machines, mobile handsets, pagers, cordless telephones and answering machines. The major terminal equipment manufacturers are ITI, HTL, Bharti Telecom, Siemens, Tata Technologies, BPL Telecom, Himachal Exicom, Punjab Wireless Systems and Crompton Greaves.

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REGULATORY AUTHORITY
The TELECOM REGULATORY AUTHORITY OF INDIA (TRAI) was set up in March, 1997, to arbitrate between Department of Telecommunications (DOT) and private operators with respect to licensing issues, technical compatibility and tariff setting. However, since the role of TRAI under the TRAI Act was unclear, protracted litigation ensued. In an effort to remove ambiguities and put an end to the controversy surrounding the regulatory authority, in January 2000, the government promulgated the TRAI (Amendment Act) in January 2000, to reconstitute the powers of TRAI. The role of TRAI has been redefined and it has been bifurcated into two bodies, one acting as a regulator and the other acting as an adjudicator, in the form of a tribunal. The new TRAI sets tariffs and fixes terms and conditions under which operators can interconnect with others and the government is required to seek recommendations from the authority before issuing a licence. The judicial powers have been vested with the Telecom

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FDI in Telecom Sector

TELECOM RESEARCH & DEVELOPMENT
Gartner has declared that India is indeed the undisputed BPO king. It has also said that despite the political backlash in the United States, outsourcing of information technology jobs will continue, and one out of every four high-technology jobs in developed nations today may be outsourced to emerging markets such as India by 2010. Outsourcing to India can be traced back to 1985, when Texas Instruments first set up a Research and Development centre in Bangalore. Since then, more and more foreign companies have realised the benefits of carrying out significant R&D work in India and have established their R&D centers here, in India. According to a study conducted by the Administrative Staff College of India (ASCI), 77 global firms have established R&D centres as direct subsidiaries; several others have formed R&D alliances with or have contracted research to local firms. The people interested in setting up R&D centres, here include telecom service providers and equipment manufacturers, chip designers, IT hardware companies, medical equipment makers, engineering design companies, consumer durables, automotive products, chemicals, plastics and pharmaceuticals producers. Besides the Software firms, a host of telecom service providers and equipment manufacturers have shown interest in shifting their R&D work to India. Motorola was one of the first telecom companies to realise India's potential for software development. It set up Motorola India Electronics, a wholly owned subsidiary, for R&D, in India. Nortel then followed Motorola and set up its own R&D lab in New Delhi to develop remote access products for data communications. Ericsson too identified India as an important outsourcing location for R&D. In 2002, Wipro purchased the Ericsson software development centres in Bangalore, Hyderabad and New Delhi. Wipro will continue Ericsson's development work in India through outsourcing. The outsourcing to India has increased by leaps and bounds. The latest ones to join the league are Alcatel and Kyocera, while Qualcomm and Chinese ZTE Corporation are planning to set up their R&D centres in India. The companies are using use all three models for carrying out R&D in India — wholly owned subsidiary, joint venture with an Indian partner and R&D contracted to an Indian company.

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FDI in Telecom Sector

Most of the companies, who have established their R&D centres here, have identified that India is the destination for cost-effective and high quality work. And as Mr Ransom of Alcatel puts it, growth is organic in India and is at a pace that can be handled. India's rapidly improving telecom infrastructure and a growing army of lower cost English-speaking workers is another advantage that has been a major attraction for the global corporations seeking to reduce costs. Ericsson claims that it chose Indian Wipro for its technical depth, technical leadership and telecom domain expertise. Nortel has carried out significant offshore software development through agreements with TCS, Infosys, Wipro and SAS. It regards them as strategic partners for the long-term success of its R&D activity in India. All major technology labs have assigned part of their development activity to India. The products being developed cover a wide range. Qualcomm’s interest in India shows that Telecom sector in India has the potential to take lead in the telecom sector. Looking at the rapid developments in this sector, it wouldn’t be audacious to claim that India might take the center stage in world telecom development very soon. All we would wish to say is: Amen to that

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FDI in Telecom Sector

RISK INVOLVED IN INVESTING IN INDIA
India is one among a hundred destinations where a foreign company can make an investment. The investor will naturally weigh the opportunities and the risks. You have already seen why India is a land of opportunities for a foreign investor. Now consider the downside, the risks Security Risk. The first risk is the security risk. Investor and the investor’s company has no intention to harm a soul, yet every investor is made up of human beings — will not venture into territory where the lives of their personnel and their families are at risk. Travel advisories have now become very common. And with the help of media the happenings in the world is available into the living rooms of investors every day. If there is a war (as in Kargil) new investment will dry up for many months, even years. If there are riots (as in Gujarat) no one will go anywhere near that state. Not only Gujarat, but also Goa and Maharashtra will be affected. It is the chaotic conditions in Bihar and UP the private armies, the indiscriminate killings and the bandhs that frighten away investors. Political Risk The next and most obvious risk is the political risk. Most foreign investors are still wary of India. They accept that India is a democracy, that it will always remain so and that, by and large, the rule of law prevails in the country. From their point of view, there are too many political parties and every one of them appears only to change its colours. A foreign investor does not care whether a country follows a presidential system or a parliamentary system. An investor would be happy if there were only two, or may be three; political parties and if the party voted to power will govern for a period of four or five years. What is the biggest fear in an investors mind is of Parliament for several days, the no-confidence motions, the threat of destabilisation and the fall of governments in rapid succession (1996, 1998, 1999). When the PM of India tells an audience in the US that there is no threat to his position, far from being reassured, the foreign investor will report to his Board that he wonders why the Prime Minister should worry about his tenure when he is thousands of miles away from home.

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FDI in Telecom Sector

Policy Risk The third risk is the policy risk. There must be a policy, and that policy must be stable. Especially, investors like stable taxation policies. There have been too many policy circling in India. The finance ministry has been the worst offender. It promised an export-friendly environment and then taxed export profits. It re-introduced the tax on dividends when it was generally believed that the debate had ended on the subject. Among other ministries that have been guilty of policy muddles are the ministries of power, petroleum, civil aviation, telecommunication and chemicals and fertilizers. If foreign investors have quit the power, telecommunication and pharmaceutical sectors in India, we have only ourselves to blame. Tax administration adds to policy confusion. There are many cases where double taxation avoidance agreements have been summarily brushed aside, laws of tax have been subjected to change, and repatriation of salaries and other earnings subjected to unnecessary harassment. Why would any foreign investor want to come and live and work in India, if the policy maker and the taxman do not treat him with the courtesy and consideration that he deserves? It is, therefore, not surprising that foreign direct investment in India is languishing between $2 billion and $3 billion a year. Thanks to so many risks around.

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FDI in Telecom Sector

SUGGESTIONS FOR ATTRACTING A HIGHER QUANTUM OF FDI IN INDIA
Further liberalization of foreign trade policy The export- import policy needs to be further liberalized. The negative lists under both headings have to be substantially reduced. With the lowering of import duty, production in India for reexport could be enhanced with increasing international competitiveness. Also India's archaic regulatory structure needs wholesale change. A new set of flexible systems and regulations, which can compete, with the regulatory structures of competence like China will have to be created. Investor Friendliness It means how easy it is to establish a business. A team from World Bank has collected data from 75 countries on government-mandated entry requirements to establish a business legally. The number of procedures required to be completed before a business starts varies from two in Canada to 20 in Bolivia, with average being 10. Start-to-finish time varies from two days in Canada to 174 days in Mozambique, with average being 63 days. Total entry cost varies from 0.4% of per capita CDP in New Zealand to 216% in Egypt, average being 34%. India ranks at 35 in the list, where the mandatory procedure is 10, start-to-finish time is 61 days and entry cost is 12.8%. Further the study confirms that corruption increases as the number of entry procedures increases. These factors put together certainly deter investments. Therefore it is important to reduce the number of procedures to the average of 10 to make India an investor friendly destination. Forbes Global Compilation of countries that are friendly to entrepreneurs shows US at the top and Singapore at number 2. India stands at a lowly 20~ rank in a study of 25 countries. Setting up of Industrial Townships Analogous to the concept of free trade zones, India can develop industrial townships to attract FDI. The idea is to have all basic necessities tor setting up an industry within a demarcated area preferably near a port or rail ahead to help facilitate movement of raw materials and products. Within the townships, the investment climate could be the same as prevailing in other developed countries. 50

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FDI in Telecom Sector

Eliminating Corruption This needs to be eliminated by reducing the level of governmental interference and beauracratic interference to the minimal at both the Central as well as State Government level. Further the study confirms that corruption increases as the number of entry procedures increases. Huge bureaucracies, who have become life threatening over the years, must be squeezed. Some departments must be abolished right away to inculcate a sense of confidence among the investors. India is ranked top ten in terms of most corrupt country. This binders the flow of FDI in India. Reducing Corporate Tax To the surprise of many, the maximum corporate tax rate, the most vital facet affecting flow of FDI, in India is still much higher than other countries competing for FDI. For example, the tax rate is 17.5 % in Hong Kong, 25 % in Brazil, Finland and Turkey, 30% in Argentina, China and Thailand, 35 % in Australia, France, Luxembourg, New Zealand and the UK, and 35 % in Netherlands, Spain and the USA. This is why the global FDI scenario has experienced a sea change and the FDI inflows have been concentrated in Latin America, East and Southeast Asia. This is also why India has been getting an insignificant volume of FDI. Infrastructure Given the size of the economy and the projected inflow of foreign capital, infrastructure facilities are inadequate and the system is fragile and tends to breakdown under pressure. Availability of telecommunications, facsimile, e-mail and computer networking is an integral part of global communication. To attract substantial inflow of capital, it is necessary to upgrade these services. Given the fact that India already has a middle class of around 300 million, there exists a backlog and with continuously increasing demand, the domestic market itself is a major attraction for international firms.

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FDI in Telecom Sector

BIBLIOGRAPHY Book and Magazine:
Indian Foreign Trade India Today Policy Impediments to Trade and FDI in India

Websites: www.CII.com www.indiainfoline.com www.Trai.com www.moneycontrol.com

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