fdi in telecom

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FDI in Telecom Sector1

EXECUTIVE SUMMARY

Foreign Direct Investment (FDI) occurs when an investor in home country acquires anasset in host country to manage that asset. FDI is one of the most important sources ofcapital. Itlinks the host economy with the global markets and fosters economic growth. FDI can

bethrough 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 presenceand a host ofgovernment incentives.

In comparison, countries like China have received FDI worth $52 billion, primarily inthemanufacturing sector, despite being a relatively closed economy. That's equivalent totheinvestment needed by India over the next five years to take the subscriber base to over200million. Telecom analysts believe that it is likely to come by following theGovernment'sdecision 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 targetsoftele-density. If anyone is worried about security concerns in involving foreigners in acrucialsector 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 GlobalSystem forMobile (GSM)-based companies Bharti Tele-Ventures, Essar-Hutchison and IdeaCellular 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 Indiancommunication sectorlooks impressive. More than 60 per cent of the booming mobile market is controlled

bycompanies which have 49 per cent foreign stake, 100 per cent of the mobile handset

being usedin the market are foreign brands, 65 per cent of the call centre business is set up bymultinationalcompanies, 80 per cent of the telecom equipment market is dominated by EuropeanandAmerican manufacturers and telecom has received the second largest foreign

investment in the


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country after the oil sector. India is among the very few countries in the world whereFDI cap isso high in the communications sector.http://managementfunda.com | http://hrgyaan.com | http://financenmoney.in |http://mediagyaan.com


CONTENTS

Sr. No Topic Pg. No

1 What is FDI? 42 Benefits of FDI 53 India among the worlds most attractive destinations 74 Why India is a better option? 85 Do we need foreign funds for telecom sector? 126 Telecom investment framework in India 147 Introduction to Telecom Sector 208 Communications 219 Policy 2210 Demand and supply 2711 Basic/fixed services 2912 Cellular services 3513 Internet Service Providers (ISP) 3914 Vsat services 4315 Radio paging 44

16 Telecom equipment 4517 Regulatory authority 4618 Telecom research & development 4719 Risk involved in investing in India 4920 Bibliography 51http://managementfunda.com | http://hrgyaan.com | http://financenmoney.in |http://mediagyaan.com


WHAT is FDI?

"Foreign direct investment (FDI) occurs when an investor based in one country (thehomecountry) acquires an asset in another country (the host country) with the intent tomanage thatasset.It is the amount of financing provided by a foreign owner who is also directlyinvolvedin the management of the enterprise. For statistical purposes, the InternationalMonetary Fund(IMF) defines foreign investment as (FDI) when the investor holds 10% or more ofthe equity ofan enterprise. It represents investment in real assets (such as land, building, or evenexisting plants), in foreign countries.


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DefinitionA company from one country obtains controlling interest in a (new or existing) firm inanothercountry, and then operates that firm as a part of the multinational business of theinvesting firm.

FDI may be financed through parent company transfer of funds to the new affiliate,borrowingfrom home-country lenders, borrowing in the host country by the parent company, oranycombination of these strategies.FDI comprises activities that are controlled and organized by firms (or groups offirms) outsideof the nation in which they are headquartered and where their principal decisionmakers arelocated. In the context of the manufacturing sector, FDI is conventionally thought ofin terms of

branch plant or subsidiary company operations that are controlled by parentcompanies based inanother country.http://managementfunda.com | http://hrgyaan.com | http://financenmoney.in |http://mediagyaan.com


BENEFITS OF FDITo Host CountryAvailability of scarce factors of production

FDI helps attain a proper balance among different factors of production through thesupply ofscarce factors and fosters the pace of economic development. FDI brings in capitalandsupplements the domestic capital. This is a significant contribution where thedomestic savingsrate is too low to match the warranted rate of investment. It brings in scarce foreignexchangethat activates the domestic savings that would not have been put into investment inabsence ofthe availability otforeign exchange. Also, foreign investors make available raw

material andimproved technology.Improvement in the balance of payments

FDI helps improve the balance of payments of the host country. The inflow ofinvestment iscredited to the capital account. At the same time, the current account improves

because FDIhelps 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 todevelop a


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support system that is necessary for rapid industrialization. Even if there are noinvestment thesesectors, the very presence of foreign investors in the host country creates a multipliereffect andthe support system develops automatically.

Fostering of economic linkagesForeign firms have forward and backward linkages. They make demand for variousinputs that inturn helps develop the input-supplying industries. They employ labour force and sohelp raise theincome of the employed people that in turn raises the demand and industrial

production in thecountry.http://managementfunda.com | http://hrgyaan.com | http://financenmoney.in |http://mediagyaan.com

FDI in Telecom Sector

5Strengthening of government budget

The foreign firms are a source of tax income for the government. They pay not onlyincome tax,

but tariff on their import as well. At the same time, they help reduce the governmentexpenditurerequirements through supplementing the government's investment activities. All thiseases the

burden on the national budget.

To Home CountryThe country gets a supply of necessary raw material if the investor makes investmentin theexploration for a particular raw material. The balance of payments improves insofaras the parentcompany gets dividend, royalty, technical service fees and other payments, and fromthe risingexport of the parent company to the subsidiary. There is revenue also from imposingtariff on theimport of the parent company from its subsidiary abroad. Also benefits arise from areverseresource transfer effect. A reverse resource-transfer effect arises when the foreign

subsidiarylearns valuable skills abroad that can be transferred back to the home countryhttp://managementfunda.com | http://hrgyaan.com | http://financenmoney.in |http://mediagyaan.com


INDIA AMONG THE WORLDS MOST ATTRACTIVE

DESTINATIONS

FOR FOREIGN INVESTMENTDespite the Asian financial turmoil, India has improved its position among the mostattractive foreign investment destinations in the world. India is the sixth most

desirable


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destination for foreign direct investment (FDI), says a recent study conducted bymanagementconsultant A T Kearney. In a survey of FDI preferences among top corporatedecision-makers,the United States, China, United Kingdom, Brazil, Mexico, India, Australia, Poland,

Germanyand France (in that order) have been marked as prime destinations for FDI by globalmultinationals. The survey measured the direct investment sentiment of CEOs, CFOsand othertop executives for the worlds 1000 largest firms. These companies have cited marketsize,quality of infrastructure, political stability and regulatory environment as the mostimportantfactors to consider when making direct investments, with market size being the singlemostimportant criterion. The survey makes a pointed reference to India when mentioning

theimportance of the regulatory environment for facilitating FDI. It says India is a casein 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 NorthAmerica or Europe. However, emerging markets which grew three times fasterthandeveloped countries before the Asian crisis are forecasted to outperform developedcountriesin growth of income and consumption.Therefore, the survey concludes that emerging markets still represent an integral partofmultinational corporations international expansion strategies. Not only do emergingmarketscomprise 60% of the top 25 preferred destinations for FDI, eight of the ten mostfrequently citedas new investment destinations are emerging markets.http://managementfunda.com | http://hrgyaan.com | http://financenmoney.in |http://mediagyaan.com


WHY INDIA IS A BETTER OPTION?The Indian economy is like the sleeping giant that, if awakened, could by itselftransform theface 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-reachingeconomic reforms initiated in July 1991 have thrown up vast opportunities for

business with theinvolvement of the disbanding of the licensing system.


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Huge Market: India has a huge market of nearly 300 million people in its growingmiddleclass. It is one of the top ten big emerging markets today.

Strategic sourcing and production base: India provides an abundance of naturalresources,

a rich mineral base and one of the largest reservoirs of skilled people. Locatedstrategically, India is a good base for sourcing production for both the domesticmarketand for export.

Stable growth: India has experienced growth with macro economic stability. Sincetheliberalisation programme was implemented, GDP growth has accelerated and nowstandsat over 6.8%.

Large, diversified economy: According to the Asia Week, India was the fifth

largesteconomy in the world, in purchasing power parity terms at last reckoning in 1995,with aGDP of over US$ 1.22 trillion. Agriculture, which employs two-third of India's workforce and contributes one-third ofGDP, has grown steadily. India has a diversifiedmanufacturing base. The industrial sector has surged ahead registering a growth of11.7%in 1995-96. The automobile industry has grown at over 30% per annum over the last 2years.

Increasing world trade: India's trade has increased sharply since the economicreforms

programme was initiated and stood at US$68.48 billion in 1995-96.http://managementfunda.com | http://hrgyaan.com | http://financenmoney.in |http://mediagyaan.com

FDI in Telecom Sector82. Business Environment

India has several advantages over other countries. Its legal structure is far moreadvanced, it is

politically much better, and has an entrepreneurial class that encourages and attractsforeign

participation.

Foreign investment encouraged: India encourages foreign investors to establishtheir

presence in the Indian market. The procedures and regulations for setting up jointventures have been streamlined. The Indian Investment Centre at New Delhi isresponsible for facilitating foreign investment in India and for advising overseasinvestorsabout regulations, procedures and incentives.

Commencing Business:

Foreign companies may start business operations in India through technicalcollaborations, direct investment or both.

Foreign investors may invest in virtually every sector of the economy.

Foreign companies do not necessarily require local partners.


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Use of foreign trademarks and brand names is permitted.

No industrial license is required in India, except for specified industries ofstrategic, social or environmental concern, and those reserved for the small scalesector.

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.http://managementfunda.com | http://hrgyaan.com | http://financenmoney.in |http://mediagyaan.com


Impressive R&D and human resource base: Sophisticated R&D infrastructure,which isthe foundation for, advances in space technology, satellite communication, computersoftware 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 anextensive

banking network and a well-developed capital market. Several leading internationalbanks operate profitably in India. Capital raised-from the public by companies hasrisen

from Rs.56.8 billion (US$ 2.3 billion) in 199T-92 to Rs.276 billion (US$8.8 billion)in1994-95. Three major all India institutions - ICICI, IDBI and IFCI with total assets ofUS$ 21.2 billion (Rs-667.7 billion) as of end March 1995 dominate India's term-lendingmarket.

Capital Market:

There are 23 exchanges in India trading in Scrips of nearly 9,000companies.

India has the third largest investor base in the world with over 20 millionshareholders.

Trading operations at the Bombay Stock Exchange, Indias largest, are screenbased.

Foreign companies based in India find it easy to raise equity through publicofferings.http://managementfunda.com | http://hrgyaan.com | http://financenmoney.in |http://mediagyaan.com


Corporate sector growth: Sharp increase in the registration of new companies fromabout

22,000 in 1990-91 to over 47,000 in 1994-95. Record increase in corporate sectorprofits


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at 40% during 1994-95. This is the highest-growth in last eight years.

Export promotion: Seven geographically dispersed Export Processing Zones(EPZs) withspecial facilities and incentives for investors have been established. They provide adutyfree

environment and basic infrastructure facilities. The same facilities are also availablefor 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.http://managementfunda.com | http://hrgyaan.com | http://financenmoney.in |

http://mediagyaan.comFDI in Telecom Sector11

DO WE NEED FOREIGN FUNDS FOR TELECOM SECTOR?The debate over raising the foreign direct investment in telecom from 49 per cent to74

per cent has thrown up an interesting question as to how Indian is the country'stelecom sectorand 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 largesttwo

players in the country - Bharat Sanchar Nigam Ltd and Reliance Infocomm - whichtogetheraccount for more than 70 per cent of the investment made in the telecom sector, arefully Indiancompanies. Together, the two companies have about 45 million subscribers of thetotal 70-million 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. RelianceInfocomm and Tata Teleservices have made investments up to $4 billion-$5 billion.

And if youtake the investments made by the state-owned BSNL, which was about Rs 20,000crore in thelast 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 inthemanufacturing sector, despite being a relatively closed economy. That's equivalent totheinvestment needed by India over the next five years to take the subscriber base to over200million. Telecom analysts believe that it is likely to come by following theGovernment's


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decision to increase FDI cap from 49 per cent to 74 per cent. Telecom is a capitalintensivesector and one needs foreign funds to fulfill the targets of tele-density. If anyone isworried aboutsecurity concerns in involving foreigners in a crucial sector like communications, then

there areother means to monitor and plug leakages. The biggest investment has been in thecellularsegment. The top three private Global System for Mobile (GSM)-based companiesBharti Tele-Ventures, Essar-Hutchison and Idea Cellular have between 49 per cent and 33 percent foreignequity.Investments to the tune of Rs 5,000 crore made directly in the cellular sector have

been primarilyby Hong Kong-based Hutchison Whampoa and Singapore Government's investment

vehicleTemasek Holdings. Even the smaller players BPL Communication and SpiceTelecom, thecellular operator in Punjab, has 49 per cent foreign equity.http://managementfunda.com | http://hrgyaan.com | http://financenmoney.in |http://mediagyaan.com

FDI in Telecom Sector12However, if one were to remove BSNL, which has a 40-million subscriber base, fromtheoverall investment picture, the foreign influence on the Indian communication sector

looksimpressive. More than 60 per cent of the booming mobile market is controlled bycompanieswhich have 49 per cent foreign stake, 100 per cent of the mobile handset being usedin themarket are foreign brands, 65 per cent of the call centre business is set up bymultinationalcompanies, 80 per cent of the telecom equipment market is dominated by EuropeanandAmerican manufacturers and telecom has received the second largest foreigninvestment in thecountry after the oil sector. India is among the very few countries in the world whereFDI cap isso high in the communications sector.These five companies together account for about 22 million subscribers of the 29millionGSM users in the country. Even in the mobile handset segment, it's foreign brandssuch as

Nokia, Motorola and Samsung ruling the market. Though no one has invested to setup amanufacturing 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.


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It's the same scenario in the telecom equipment side. Except for a few companies likeITI

primarily catering to the fixed line switching requirements of BSNL, most operatorsprefer toimport. Of the Rs 10,000-crore FDI received by the Indian telecom sector, only Rs

1,500 crorehas gone to the manufacturing segment over the last 15 years.The only segment, other than cellular, which has received attention by foreigninvestors is thetelecom 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 INDIAhttp://managementfunda.com | http://hrgyaan.com | http://financenmoney.in |http://mediagyaan.com


13Investment Policy Framework in IndiaThe 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 aninfrastructure industry it has high capital investment requirement. Since this sector hasshownimpressive growth, therefore, it present a viable investment opportunities to bothdomestic andforeign investors. The Foreign Direct Investments have played a pivotal role in the

Telecomsector.Salient features of various foreign Investment guidelines in India

Foreign Direct Investment of up to 100 % permitted for the following:o Manufacturing of telecom equipment

o Internet service (without international gateways)

o Infrastructure providers (Category I)

o E-mail service

o Voice mail service

o Call Centers and IT enabled services

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

o Internet service (with international gateways)o Infrastructure providers (Category II)

o Radio paging services

Foreign Direct Investment of up to 49 % permitted for the following:o National long distance service

o International Long Distance Service

o Basic telephone service

o Cellular mobile service

o Global Mobile Personal Communication

o Other value added services

Concessions & Fiscal Incentiveshttp://managementfunda.com | http://hrgyaan.com | http://financenmoney.in |http://mediagyaan.com


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Automatic approval for technology fee up to US$ 2 million, royalty up to 5 percentfordomestic sales and 8 percent for exports in telecom manufacturing.

Full repatriatability of dividend income and capital invested in the telecom sectorOther fiscal incentives and concessions for the telecom sector:o Tax holiday for 10 year

o Rebate on subscription to shares/debentures

o Scope for tax exemption on financing through venture capital

o Import duty rates reduced for various telecom equipment including mobile phones

from 20% to 5%o Telecom Service Sector allowed the benefit of carry forward of losses on

Mergers.o Exemption from excise duty on cellular phones and its components, pagers, radio

trunking terminals and parts.o Reduced Central Sales Tax of 2%http://managementfunda.com | http://hrgyaan.com | http://financenmoney.in |http://mediagyaan.com


FOREIGN DIRECT INVESTMENT (FDI) IN TELECOM SECTOR

(AUGUST'91 TO MARCH'2004)Year FDI Inflow (Rs in Million)1993 20.601994 140.20

1995 2067.401996 7648.301997 12451.901998 17756.401999 2126.702000 2885.802001 39709.002002 10815.002003 3014.002004 874.20 (Till March)Total 99509.50http://managementfunda.com | http://hrgyaan.com | http://financenmoney.in |http://mediagyaan.com


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 SectorS.No. SERVICE/ITEM FDI %1 Basic Telephone Service 3937 3.96%

2 Cellular Mobile TelephoneService


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26646 26.78%3 Radio Paging Service 910 0.91%4 E-Mail Service 688 0.69%5 VSAT Service 281 0.28%6 Cable TV Network+Internet 1704 1.71%

7 Satellite Telephone Service 481 0.48%8 Radio Trunking Service 71 0.07%9 Manufacturing & Consultancy 15784 15.86%10 Holding Companies 48420 48.66%11 Other Value Added Services 227 0.23%12 Automatic Route 361 0.36%TOTAL 99509http://managementfunda.com | http://hrgyaan.com | http://financenmoney.in |http://mediagyaan.com


COUNTRY WISE INFLOW OF FDI IN TELECOM SECTOR ININDIA

(AUGUST 91 TO MARCH 2004)( Rs in Million)

S.No Country FDI %

1 Argentina 0.01 0.00%2 Australia 700.9 0.70%3 Austria 9.5 0.01%4 Bahrain 8 0.01%5 Bahamas 13.78 0.01%

6 Bermuda 64.85 0.07%7 Canada 411.6 0.41%8 China 0.1 0.00%9 Denmark 72.5 0.07%10 Finland 355.8 0.36%11 France 1009.37 1.01%12 Germany 12.7 0.01%13 Hong Kong 901.26 0.91%14 Israel 800 0.80%15 Japan 539.8 0.54%16 Kuwait 0.5 0.00%

17 Luxembourg 101.6 0.10%18 Malaysia 599.9 0.60%19 Mauritius 71998.01 72.35%

20 Netherlands 3157.57 3.17%21 NRI 889 0.89%22 Philippines 73.5 0.07%23 Singapore 55.86 0.06%24 South Korea 198.5 0.20%25 Sweden 1531.9 1.54%26 Switzerland 4.7 0.00%27 Spain 0.74 0.00%

28 Thailand 2211.6 2.22%29 UK 8875.89 8.92%


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30 USA 4904.76 4.93%31 Srilanka 4.73 0.00%TOTAL 99508.93 100.00%http://managementfunda.com | http://hrgyaan.com | http://financenmoney.in |http://mediagyaan.com


OPERATIONAL REVENUE OF TELECOM OPERATORS

(BASIC, MOBILE, NLD AND ILD) FOR THE F/Y 2002- 03S.

No

Name of Company Service Provided Amount (Rs

in crore)

Market

share %

1 BSNL Basic 25293.15 55.38%2 MTNL Basic 5806.53 12.71%3 VSNL NLD/ILD 4538.55 9.94%4 Data Access (I) Ltd ILD 601.35 1.32%5 Bharti Infotel Ltd Basic /NLD/ILD 1102.5 2.41%6 TataTeleservices (Maharashtra) Basic 359.59 0.79%7 TataTeleservices Basic 261.89 0.57%8 HFCL Basic 89.48 0.20%9 Shyam Telelink Ltd Basic 58.87 0.13%10 AIRCEL LIMITED Mobile 222.4 0.49%11 AIRCEL Digilink India Ltd. Mobile 125.58 0.27%

12 Bharti cellular Ltd. Mobile 1398.22 3.06%13 Bharti Mobile Ltd. Mobile 671.77 1.47%14 BPL Mobile Communications Ltd. Mobile 442.58 0.97%15 BPL Mobile Cellular Ltd. Mobile 412.48 0.90%16 BTA Cellcom Ltd Mobile 88.86 0.19%17 Escotel Mobile Communication Ltd. Mobile 321.91 0.70%18 Fascel Ltd. Mobile 363.51 0.80%19 Hexacom India Ltd. Mobile 115.34 0.25%20 Hutchison Essar Telecom Ltd. Mobile 533.44 1.17%21 Hutchison Max Telecom Pvt Ltd. Mobile 766.89 1.68%22 Hutchison Telecom East Ltd Mobile 204.3 0.45%

23 IDEA Cellular Ltd. Mobile 851.46 1.86%24 Reliance Telecom Mobile 356.41 0.78%25 RPG Cellular Services Ltd. Mobile 186.05 0.41%26 Spice communications Ltd Mobile 499.13 1.09%Total Revenue 45672.24 100.00%http://managementfunda.com | http://hrgyaan.com | http://financenmoney.in |http://mediagyaan.com


INTRODUCTION TO TELECOM SECTORIndia is 8th largest network in the world and 3rd largest among the emerging

economies


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(after China and Korea). India's has 32.4 million basic telephone lines and 3.6 millioncellularmobile networks. This network is growing annually at an average rate ofapproximately 22% for

basic services and more than 100% for cellular and Internet services. Current Tele-

density ofapproximately 3.5%, is proposed (as per new Telecom Policy 1999) to be increased to7 percent(75 million telephone connections) by 2005 and 15 percent (175 million telephoneconnections)

by 2010.This translates into an investment requirement of approximately US$ 37 billion by2005and approximately US$ 69 billion 2010. If India has to fulfill its full potential of

becoming a keyplayer 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 havetaken place inthis sector and many more profound changes are expected to take place in thisindustry in thecoming years.India is ranked as one of the top ten-telecom networks in the world, its telephonedensityof 2.8 telephone lines per 100 persons compares unfavourably with global standards.The US hasa tele-density of 50 telephone lines per 100 persons, Brazil has a tele-density of 10telephonelines per 100 persons with the global average being 11 per 100. The current low tele-densityoffers telecom companies substantial growth opportunities in India and gives thecountry anoption of adapting new technologies. The New Telecom Policy of 1999 (NTP 99) hasset a targetof 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) areeligiblefor a tax holiday - 100 percent for 5 years and 30 percent for next 5 years. This taxholidaycan be claimed in a block of 10 years out of the first 15 years.

Subscription to shares or debenture of telecom service providers (basic servicesand cellularservices) is eligible for tax rebate.http://managementfunda.com | http://hrgyaan.com | http://financenmoney.in |http://mediagyaan.com


20COMMUNICATIONS


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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 largemetropolitan citieshaving population equivalent to that of many countries needs an extensiveinfrastructure to serve

such a population.India operates one of the largest telecom networks in Asia with 1,23,000 route km ofoptic fibre cables network. As of the beginning of 2000, there were 28 milliontelephone lines inthe country -- approximately 50 people to every landline and 33 people to everycellulartelephone line. The density of available lines is much higher in cities than in theremote villages.At present, the density in rural areas is equal to 0.5 lines per hundred. Approximately60% ofIndian villages have village telephone lines.

The Department of Telecommunication (DOT) until 1994 was the only telecomproviderin the country. With the deregulation of this sector, various private players have comein andimproved not only the services but also cut down on costs. Telecom bandwidth issueshave also

been addressed. Many private ISPs have come in this sector and telecom costs havedropped by85 percent in 3 years.

Importance of telecommunication

The Government of India (Government) recognizes that provision of world classtelecommunications infrastructure and information is the key to rapid economic andsocialdevelopment of the country. It is critical not only for the development of theInformationTechnology industry, but also has widespread ramifications on the entire economy ofthecountry. It is also anticipated that going forward, a major part of the GDP of thecountry would

be contributed by this sector. Accordingly, it is of vital importance to the country thatthere be a

comprehensive and forward looking telecommunications policy which creates anenablingframework for development of this industry.http://managementfunda.com | http://hrgyaan.com | http://financenmoney.in |http://mediagyaan.com


POLICYTill the early 1990s, the government enjoyed full monopoly over telecom serviceswith theDepartment of Telecommunications (DOT) being the sole provider of telecom

services (local


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and long distance) in the country, except in Delhi and Mumbai, where MahanagarTelephone

Nigam Ltd (MTNL) was the sole access provider. International services wereprovidedexclusively by the Videsh Sanchar Nigam Ltd (VSNL).

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

New Telecom Policy '94The first step towards opening the telecom services sector took place with cellularlicences for the four metros being awarded to private companies in 1994. In the sameyear, thegovernment formulated the National Telecom Policy of 1994 (NTP 94) with theobjective ofexpanding the telecom infrastructure by encouraging private sector participation intelecomservices.As per NTP 94, one private company per circle was to be allowed entry into basicservices while two operators were to be allowed to compete in providing cellularservices in eachof the circles.Subsequently, cellular services became operational in four metros and 18 state circlesand

basic services, too, commenced in a few circles. However, high licence fee bids, tariffdistortions, unattractive interconnection and revenue sharing arrangements between

DOT andnew private licensees resulted in most service providers finding themselves infinanciallyunviable situations.http://managementfunda.com | http://hrgyaan.com | http://financenmoney.in |http://mediagyaan.com


New Telecom Policy '99In an attempt to remove the defects of the old policy and provide a new direction tothe 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 regimeto onetime entry fee plus revenue sharing system. Licence period extended from 10 to 20 years. DOTs monopoly over domestic National Long Distance services to end in 2000. Interconnection between fixed, cellular and other telecom service operators to beallowedfreely.

The Tenth Plan (2002-2007)During the 10thplan period (2002-2007), the Government targets to add 81.71 million

lines


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(including fixed and cellular), which translates into the teledensity of 11.5 per cent by2007. TheGovernment has envisaged the total investment of Rs 1,606.7 billion including thetelecominvestment of Rs 441.6 billion in rural areas and Rs 462.9 billion investment by the

privateoperators. In order to accelerate the growth of private investment in telecom industry,theworking group on Information Technology has proposed key measures likeestablishinginterconnection agreements, meeting the requirements of USO fund, utilisation oflicence fee forrural telephony, incentives for roll out in the rural areas, decision on calling party paysregimeetc.

Recent Policy ChangesNew licenses for basic telecom servicesFourth cellular licenseLimited mobility servicesCaling party paysThird phase of tariff rebalancingDomestic long distance servicesInternational long distance servicesInterconnection chargesIP telephony serviceshttp://managementfunda.com | http://hrgyaan.com | http://financenmoney.in |http://mediagyaan.com


New licenses for basic telecom servicesIn January 2001, guidelines for the entry of new fixed service providers wereannounced. Out ofthe applications by 18 companies, 6 companies were issued LoIs for basic telecomservices. ByMarch 2002, 3 companies including Reliance (17 circles), Tata Teleservices (5circles) andBharti (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 licenseIn October 2001, the Government issued licenses to successful bidders forcommencing cellularservices. These include, the Bharti Group in 8 circles, Escotel in 4 circles, HutchisonEssar in 3circles, and Reliance (through Reliable Internet) and Birla-AT&T and Tata in 1 circleeach. The

bidders have paid their entry fees, which aggregated to Rs 16.33 billion, for the fourthcellular

license in the 4 metros and 13 circles.

Limited mobility services


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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 isexpected to adversely affect the Groups, such as Bharti, Hutchison, Essar, Modicorp,

which havea large proportion of revenues from cellular services operations in their total telecomservicesrevenue. The COAI was considering filing a petition with the Supreme Court againstthedecision by the TDSAT. At present, BSNL, MTNL, Tata Teleservices offer limitedmobilityservice. Reliance Communications have introduced limited mobility services in 14cities byMay-June 2002. Hughes Tele.com has indicated its plans to start the limited mobilityservices in

Maharashtra. However, the other basic telecom operators have yet to implement theirplans forlimited mobility service.http://managementfunda.com | http://hrgyaan.com | http://financenmoney.in |http://mediagyaan.com


Calling party paysAccording to the calling party pays (CPP) arrangement, the calling party would payfor the callsthat terminate on mobile phones. The introduction of CPP has resulted in a growth incellularsubscribers in the countries, which have shifted from the mobile party pays (MPP)arrangementto the CPP arrangement. Cellular services would become more affordable, due to theintroduction of CPP and would result in an increase in the minutes of usage bymarginalsubscribers. Hence, it could further accelerate the growth in the mobile subscriber

base. BSNL isnot in favour of introducing the CPP, as the costs to the fixed line subscribers wouldincrease. In

May 2001, TRAI released a consultation paper on issues relating to the introductionof CPP. TheTRAI is yet to finalise its recommendations on the introduction of CPP.

Third phase of tariff rebalancingIn March 2002, the TRAI issued 20th amendment to its Telecom Tariff Order, March1999. It

proposed rebalancing of monthly rentals (increase in rentals for commercialsubscribers) andceiling rates for STD (75-125 per cent higher than prevailing STD tariffs) and ISDtariffs (15-20

per cent lower than prevailing ISD rates). In the actual implementation by BSNL from

April 1,


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2002, monthly rentals were not changed, STD tariff was kept at low levels, and ISDtariff wasreduced as per the TRAIs notification.

Domestic long distance servicesBy March 2002, the Government had issued licenses to Bharti Telesonic Ltd.,

RelianceCommunications Ltd. and VSNL to commence DLD services. In December 2001,Bharticommenced its DLD services. Reliance Communications is expected to commence itsDLDservices in June 2002, on 15 major routes in India. In January 2002, BSNL andMTNL reducedthe average STD tariff (Rs per minute) by 55 per cent. This is expected to result in adecline ofaround 25 per cent in the revenue per subscriber (The elasticity of minutes of usagewith STDtariff has been assumed to be negative 0.5 to negative 0.6 times.) In January 2002,BSNL hadfiled a petition with the TDSAT on the issue of distribution of the default longdistance calls(mobile-to-mobile) between Bharti Telesonic and BSNL.http://managementfunda.com | http://hrgyaan.com | http://financenmoney.in |http://mediagyaan.com


International long distance services

Since April 1, 2002, the ILD telecom sector has been opened for competition. Byearly April2002, out of around 8 applications for the license to offer ILD services, 2 companies(Bharti andReliance have signed license agreement), and 3 companies hold LoI. Bharti Telesonichas

proposed to introduce its ILD services, with the tariffs significantly lower ascompared with theexisting ISD tariffs. The other players have yet to announce their plans for providingILDservice.

Interconnection chargesThe networks of telecom operators are required to interconnect to establish thecommunication

between the subscribers of any operator. According to the TRAIs regulation (issuedinDecember 2001), interconnection charges for call transit and termination for basicoperators arenil for local calls, 40 per cent for STD calls, and 55 per cent for ISD calls. (In thiscase, thetransit and termination service provider is same, like BSNL.) In the case of cellularservice

providers, the interconnection charges are 95 per cent. In April 2002, the TRAI issueddraft


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guidelines for the interconnection charges between the basic, cellular, national andinternationallong distance operators. The interconnection charges would be based as per themutualagreement between the interconnection seeker and the interconnection providers.

IP telephony servicesThe ISPs are allowed to offer internet telephony services in the form of personalcomputer-topersonalcomputer and personal computer-to-phone (only for international calls) from April 1,2002. The TRAI has recommended that the basic telecom operators, cellular operatorsand DLDtelecom service providers be allowed to provide internet protocol based telephonyservices,subject to meeting the existing norms of end-to-end voice quality. By mid April 2002,theGovernment received over 20 applications, out of which, around 5 companies were

permitted tooffer internet telephony services. The ISPs are expected to charge a price of Rs 6-8

per minutefor a call from India to US, which is significantly lower than existing peak tariff of Rs40.8charged by the access providerhttp://managementfunda.com | http://hrgyaan.com | http://financenmoney.in |http://mediagyaan.com


DEMAND AND SUPPLYThe average teledensity in the 4 metros is around 14 per cent, as compared with 3 percent in the rest of India. In the metros, the penetration of cellular to fixed lines isaround 33 percent. In end March 2002, around 4 lakh out of 6 lakh villages had access totelephones. In India,the penetration of telephone lines is low, due to a low per capita income and low levelofurbanisation. The demand for fixed telephone lines is expected to increase at a CAGRof 12 percent, from around 38 million DELs in end March 2002 to around 67 million DELs in

end March2007. The incremental growth of telephone lines is expected largely from the semi-urban andrural areas. In the metros, growth rates in telephone lines are not expected to be high,due to thehigh teledensity, high penetration of cellular to fixed lines, and high averagehousehold

penetration of telephones. The demand for cellular lines is expected to grow at ahigher rate of 32

per cent from 6.48 million in end March 2002 to around 26 million in end March2007.

TARIFF


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FDI in Telecom Sector27The removal of cross-subsidisation of rentals and local calls by long distance calls

(tariffrebalancing) would continue till 2004-05. Gradually, market forces, rather than the

policy, woulddetermine the realignment of tariffs with costs, due to increasing competition,introduction ofalternative technologies and services, and the removal of policy barriers controllingthe industrystructure (for instance, not allowing resellers). Rentals would gradually increase tocost basedlevels, however, the cross subsidisation of marginal users by high usage urbansubscribers is

likely to continue. Alternatively, the regulator could consider the introduction ofdifferentialtariffs for commercial and residential subscribers. STD and ISD tariff is expected todeclinefurther, due to expected increase in competition.Internationally, the monthly subscription charges (monthly rentals) for residentialsubscribers are cross-subsidised by higher subscription charges for commercialsubscribers. Thecross-subsidisation of subscription charges for residential subscribers by that forcommercialsubscribers are higher in the low- income countries. In the countries like United States

andPhilippines the local calls are completely subsidised with monthly subscriptioncharges. Themonthly subscription charges for residential subscribers and charges for local calls, inIndia, arecomparable to those in Malaysia and Brazil. However, in India, the subscriptioncharges forcommercial subscribers are significantly lower as compared with those in the othercountries.http://managementfunda.com | http://hrgyaan.com | http://financenmoney.in |http://mediagyaan.com


TELECOM SERVICESBasic/Fixed Services

Cellular Services

Paging Services

VSAT Services

Internet Service Providers (ISPs)

Basic/Fixed ServicesIndia has a fixed line network of around 29 million lines which is among the largestnetworks in the world. Nevertheless, the tele-density of 2.8 telephones per 100

persons is much


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below international tele-density levels and access to telecom services is still limited toa small

proportion of the population. There is a high demand for basic telephone services anda hugewaitlist for telephone connections.

The government-owned Bharat Sanchar Nigam Ltd (BSNL) is the largest provider ofbasic services in the country. BSNL along with MTNL account for 28.70 millionfixed lines inthe country with the private basic operators at the moment accounting for just 0.30millionsubscribers. At present, there are six private players operating basic services in thecountry.These are: Bharti Telenet in Madhya Pradesh; Tata Teleservices in Andhra Pradesh;HughesTele.com in Maharashtra; Shyam Telecom in Rajasthan; Reliance in Gujarat andHFCL in

Punjab.Notwithstanding the slow progress made in the opening of basic services so far, theoutlook for this segment looks very bright in the country. The government hasrecently invitedapplications for basic services licences for state circles and the response has beenoverwhelming.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 couldtranslate into anentry fee of Rs 4,00 crore for the government.The rush for licences reflects the potential of basic services segment, which hasincreasedas a result of the governments decision to allow limited mobility for basic serviceoperators.http://managementfunda.com | http://hrgyaan.com | http://financenmoney.in |http://mediagyaan.com


Subscriber BaseAs on 31st March 2004, the total Fixed & WLL (F) subscribers are 42.84 million. The

actualnumber of DELs has increased from 41.48 million as on 31st March 2003 to 42.84million as on31st March 2004. The overall percentage of growth in subscriber base during the yearis 3.28%.The subscriber base of Fixed lines including WLL (F) for last five years is depicted inthe barchart below:S. No. BSO Area of Operation March03 March04

1 BSNL All India (except Delhi &Mumbai)

35,907,691 36,112,0932 MTNL Delhi & Mumbai 4,633,665 4,367,264


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3 Bharti Group MP, Delhi, Haryana, TN,Karnataka370,973 636,7254 Tata Teleservices Maharastra, AP, TN,Karnataka, Gujrat, Delhi

449,924 1,003,5855 HFCL Infotel Punjab 79,502 125,3316 Shyan Telelink Rajasthan 49,138 92,3927 Reliance Infocom 18 Circles 160 503,353Grand Total 41,491,053 42,840,743http://managementfunda.com | http://hrgyaan.com | http://financenmoney.in |http://mediagyaan.com

FDI in Telecom Sector30The average percentage growth rate of the subscriber (including Fixed & WLL (F) forlast four

years are as shown below:Switching Capacity

The actual total equipped switching capacity of all the basic service operators(including BasicService Operators who migrated to Unified Access Service regime) in the country hasregistereda growth of 10.5 million switch capacity during the year. The total equippedswitching capacityhas increased from 52.8 million as on 31st March 2003 to 63.4 million as on 31stMarch 2004.The Equipped Capacity (including Fixed,WLL(F) & WLL(M)) of the Basic service

providers forlast five years is depicted in the bar chart below:http://managementfunda.com | http://hrgyaan.com | http://financenmoney.in |http://mediagyaan.com

FDI in Telecom Sector31S. No Service

Providers

Area of Operation Equipped

Capacity as on

31.03.03

Equipped

Capacity as on

31.03.04

1 BSNL All India 45,031,557 46,336,8182 MTNL Delhi & Mumbai 5,852,639 6,552,5393 BhartiMP, Delhi, Haryana,TN, Karnataka558,834 800,1404 HFCL Punjab 192,660 207,660

5 TataMaharastra, AP, TN,


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Karnataka, Gujarat,Delhi 820,984 1,873,6206 Reliance 18 Circles 300,000 7,451,8327 Shyam Rajasthan 70,000 140,000TOTAL 52,826,670 63,362,609

Public Call Offices (PCOs)Total number of PCOs in the country was 19.24 lakhs as on 31 st March 2004 ascompared to14.93 lakhs on 31st March 2003. 4.31 lakhs new PCOs have been added during theyear 2003-04. The total number of PCOs for last five years has been depicted in the bar chart

below.S.No Service

Providers

Area of Operation PCOs as on

31.03.03

PCOs as on31.03.04

1 BSNLAll India1,195,678 1,519,6862 MTNLDelhi & Mumbai204,433 239,6543 BhartiMP, Delhi, Haryana, TN,Karnataka 42,706 73,8694 HFCL Punjab 15,032 22,2635 TataMaharastra, AP, TN,Karnataka, Gujrat, Delhi 31,768 51,8226 Reliance 18 Circles - 2,5377 Shyam Rajasthan 3,747 14,347TOTAL 1,493,364 1,924,178http://managementfunda.com | http://hrgyaan.com | http://financenmoney.in |http://mediagyaan.com

FDI in Telecom Sector32Village Public Telephones (VPTs)

There are around 6.07 lakhs villages in India. During the year ending 31stMarch2003 there were 5.13 lakhs VPTs in the country whereas by the end ofthisfinancial year, the total number of VPTs has increased to 5.23 lakhs. Thusaround0.09 lakhs VPTs have been added during the current year. The totalnumber of

village public telephones of the Basic Service Operators/UASPs for lastfive years


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is depicted in the bar chart belowS.No Service

Providers

Area of Operation VPTs as on

31.3.03VPTs as on

31.3.041 BSNL All India 503,420 509,4912 MTNL Delhi & Mumbai 191 1913 Bharti **MP, Delhi, Haryana, TN,Karnataka 348 6074 HFCL Punjab 831 7895 TataMaharastra, AP, TN,

Karnataka, Gujrat, Delhi 3,333 4,0616 Reliance 18 Circles 3,988 4,1147 Shyam Rajasthan 1,016 3,010TOTAL 513,127 522,263http://managementfunda.com | http://hrgyaan.com | http://financenmoney.in |http://mediagyaan.com

FDI in Telecom Sector33During the year 2003-04, 5.22 lakhs villages are having VPTs whereas about 0.85lakhs villagesare left uncovered. The overall percentage of villages left uncovered, at the end of

year 2003-04is depicted in the chart given below.http://managementfunda.com | http://hrgyaan.com | http://financenmoney.in |http://mediagyaan.com


Cellular ServicesCellular services commenced in the four metros-Delhi, Mumbai, Kolkata and Chennaifrom September 1995 and in the state circles from December 1996. At present, thereare eightcellular service providers operating in the four metros and 34 licensees in 18 statecircles, out ofwhich 29 are operational.

Service

Provider Service Area No. of Circles

BhartiAndhra Pradesh, Karnataka, Punjab,Delhi, UP(W), MP, Maharashtra,Gujrat, Himachal Pradesh, Mumbai,Tamil Nadu, Kerala, Haryana, Chennai,Kolkata 15Hutch


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Delhi, Kolkata, Mumbai, AndhraPradesh, Karnataka, Chennai, Gujrat,Punjab, Haryana, Rajasthan, UP(E) 11MTNL Delhi, Mumbai 2IdeaGujarat, Madhya Pradesh, AndhraPradesh, Maharashtra, Delhi 5RelianceMadhya Pradesh, West Bengal,Himachal Pradesh, Assam, Bihar,Orissa, NE 7BPLMumbai, Maharashtra, Kerala, Tamil

Nadu4Aircel Tamil Nadu, Chennai 2Spice Punjab, Karnataka 2BSNLAndhra 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 21

Escotel Kerala, Haryana, UP(W) 3Hexacom Rajasthan 1http://managementfunda.com | http://hrgyaan.com | http://financenmoney.in |http://mediagyaan.com

FDI in Telecom Sector35Subscribers Base

The Mobile service subscribers consisting of Cellular & WLL (M) have reached33.69 million atthe end of March 2004 as against 13.00 millions at the end of March 2003, thusregistering a

growth of 159.15% during the year.Mar'03 Mar04 %age share for Mar04Reliance 5.41 72.65 21.6Bharti 30.17 65.04 19.3BSNL 22.98 55.36 16.4Hutchison 21.63 51.48 15.3Idea 12.80 27.33 8.1BPL 11.31 18.83 5.6Spice 6.40 12.08 3.6Escotel 5.87 9.89 2.9Tata 1.47 6.25 1.9

MTNL 3.47 4.63 1.4Hexacom 1.32 2.57 0.8


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Shyam 0.33 0.27 0.1HFCL 0.32 0.29 0.1Others (Aircel,

RPG etc.) 6.43 10.26 2.9Total Sub. Base 130 336.91 100

Addition in Subscribers BaseDuring the year 2003-2004, 20.69 million mobile subscribers were added ascompared to 6.56million during the preceding financial year.Growth Rate

All India growth rate in 2004 was 159.15% as compared to 98.7% for the perviousyear, i.e.,2002-03.http://managementfunda.com | http://hrgyaan.com | http://financenmoney.in |http://mediagyaan.com


36Entry of 3rd and 4th Operator

BSNL has commenced its services during March 2002 and as third operator has beenprovidingits cellular services in 21 circles by the end of March 2004. BSNL is the third largestmobileservice provider after Reliance and Bharti. Reliance Infocomm started its commercialoperationsin May 2003 and achieved a subscriber base of 7.26 million at the end of March 2004.Fouroperators (Reliance, Bharti, BSNL & Hutch) have already achieved a subscriber base

exceeding5 million each.Company-wise Market Share

The market share of different Mobile operators as on March 2004 is given. The topfive Mobileoperators on the basis of market share alongwith subscriber base in March 2003 andMarch 2004are as under: -Service

provider

Subscriber Base (in million)

%age share

on March03

%age share

March '03 March '04 on March04

Reliance 0.54 7.26 4.15 21.55Bharti 3.07 6.50 23.62 19.29BSNL 2.29 5.53 17.62 16.41Hutchison 2.16 5.15 16.62 15.29Idea 1.28 2.73 9.85 8.10http://managementfunda.com | http://hrgyaan.com | http://financenmoney.in |

http://mediagyaan.comFDI in Telecom Sector


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37

GSM Services Trends In the last five years, distribution of market share between postpaid and prepaidserviceshas 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 prepaidsegments have grown, but growth of prepaid segment has been tremendous. Prepaidsegment has grown by 26.7 times whereas growth in postpaid has been just 5.6 timesinlast five years. Unprecedented growth achieved by prepaid service in the years 2002 and 2004 weredriven by TRAIs 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 leastonemonth and introduction of CPP in May 2003 With the introduction of low rental plans by the CMSPs, the postpaid segment hasalsostarted recording impressive growth rates in the recent times. Plans with Rs.150monthlyrental are available in almost all the areas enabling the consumer to remain connectedtothe 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)http://managementfunda.com | http://hrgyaan.com | http://financenmoney.in |

http://mediagyaan.comFDI in Telecom Sector38

Internet Service Providers (ISPs)Around 189 Internet Service Providers were operational during the year 2004. BharatSanchar

Nigam Ltd (BSNL) has emerged at top position and reported a subscriber base of11.28 lakhs.Mahanagar Telephone Nigam Limited (MTNL) follows it with a subscribers base of7.69 lakhsThe reported subscriber base has touched 45.49 lakhs as on 31st March 2004 as

compared to36.36 lakhs during the preceding year registering an increase of 25.11% during theyear.Internet Telephony

The Internet Telephony was thrown open for Internet service providers w.e.f 1stApril02. DOThas given permission to 121 ISPs to offer Internet Telephony services as on 31stMarch 2004 andas per the report submitted to TRAI, 43 ISPs have started Internet Telephony services.TotalMinutes of Use (MOU) for Internet Telephony during year 2003-2004 were estimated

to be of


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the order of around 70 millions. List of Internet Service Providers, offering InternetTelephonyMarket Share

At the end of March 2004, Bharat Sanchar Nigam Ltd (BSNL) is at top position andreported a

subscriber base of 11.28 lakhs. Mahanagar Telephone Nigam Limited (MTNL)follows it with asubscribers base of 7.69 lakhs. M/s Sify Ltd. has reported a subscriber base of 6.58lakhs.Videsh Sanchar Nigam Limited (VSNL) was having a subscriber base of 6.01 lakhs.DishnetDSL 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 thenumber ofsubscribers 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% from26.5 as onMarch, 2003 to 27.6 as on March,2004.The top five service providers in March 2004 & March 2003 are given belowhttp://managementfunda.com | http://hrgyaan.com | http://financenmoney.in |http://mediagyaan.com

FDI in Telecom Sector39Service Provider March 2003 March 2004

BSNL 4,45,992 11,28,172MTNL 5,44,659 7,66,585

Sify Ltd. 6,17,324 6,58,192VSNL 7,00,558 6,00,509Dishnet DSL 1,78,434 3,65,126http://managementfunda.com | http://hrgyaan.com | http://financenmoney.in |http://mediagyaan.com

FDI in Telecom Sector40Growth Trend

Growth trend in Internet subscriber base during last 4 years is shown below. Growthbetween FE2001 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, duringthe precedingyear, 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 comparedto 8,388 inMarch 2003, thereby showing a growth of 22% during the year.http://managementfunda.com | http://hrgyaan.com | http://financenmoney.in |http://mediagyaan.com

FDI in Telecom Sector41High Speed Connectivity


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On the Broadband front, there were 97,525 DSL customers, 5308 DIAS and 2948radio-basedcustomers, in addition to 82805 subscribers, who access the Internet through CableTV 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 isapproximately 400minutes.Average Revenue Per User (ARPU) for ISPs

A total of approx. Rs. 1520 crores revenue has been estimated during the year. TheAverageRevenue Per User (ARPU) for Internet usage during the year was of the order of Rs310 per

month.International connectivity

The bandwidth owned by various Internet Gateway Service Providers for their ISPoperationsand leasing to other ISPs was 3.4 GB for downlinking and 3.0 GB for uplinking.http://managementfunda.com | http://hrgyaan.com | http://financenmoney.in |http://mediagyaan.com


VSAT ServicesVSAT services are being provided by 11 service providers.The total subscriber base of VSAT subscribers on March 2002, March 2003 andMarch 2004 was9762, 16988 and 27601 respectively. The %age growth of the subscriber base was74.02% and62.47% during the year ended March 2003 and March 2004 respectively.7Hughes Escort Communications Ltd (HECL) remained the market leader withsubscriber base of8,395 VSAT subscribers followed by HCL Comnet with 8,376, Comsat Max with4,210 andBharti BT with 3,829 VSAT subscribers respectively for year ending 2004.

Sr.No.

Name of the Service Provider Subscriber Base

March, 2002 March,

2003

March, 2004

1 Hughes 3147 4992 83952 HCL Comnet 2051 3022 83763 Comsat Max 1998 3493 42104 Bharti BT 1974 3047 38295 Essel Shyam 186 1997 2040

6 Tata Services - 58 3677 Telstra Vishesh 188 134 159


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8 RPG Satellite Communications 121 103 799 HFCL 58 67 6710 ITI 39 53 5311 GNFC - 22 26Total Subscriber base 9762 16988 27601

Growth in %age 74.02% 62.47%http://managementfunda.com | http://hrgyaan.com | http://financenmoney.in |http://mediagyaan.com


RADIO PAGINGThe Radio paging Industry has been declining gradually as the subscriber base has

beendecreasing from 578397 in the year ending March 2002 to 289265 for year endingMarch 2003and 102569 for year ending March 2004 respectively. The paging segment has had a

tough ridein India and after achieving a peak subscriber base of 14.5 lakh, the number ofsubscribers hasdwindled down to 6.4 lakh. According to the paging industry, while the cost ofcellularcommunication has come down, the cost of paging has gone up and this has resultedin a largenumber of subscribers shifting from paging to cellular services. The paging operatorshavetherefore proposed a series of measures to the government, which will reduce pagingcosts andmake their operations viable.Sr.

NoName of the Service Providers March, 2002 March, 2003 Sept, 20031. DSS Mobile Comm Ltd 126947 72133 Not Reported2 Page Point Services (India)Limited 118121 61898 389063 Microwave CommunicationsLtd (Pagelink) 209957 48147 335404 RPG Paging Services Limited 55595 37982 Not Reported

5 Modi KoreaTelecommunications Ltd. Not Reported 17685 Not Reported6 Matrix Paging 26247 17378 140637 ABC Communications 15398 11512 64948 Telesistem(I) 14635 11754 50869 Easy Call 11497 7824 448010 Netherlands IndiaCommunications Ltd. Not Reported 2952 Not ReportedTotal no. of Subscriber base578397 289265 102569%age of Growth

-49.98% -64.54%


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TELECOM EQUIPMENT

Domestic industry manufactures a complete range of telecom equipment using state-of-the-arttechnologies 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 varioususers duringthe five year period, 1997-2002, has been estimated to be in the region of $22.3

billion and thedemand for telecom products is likely to rise still further.

Switching Equipment

Switching involves routing the traffic from source to destination after setting up afree path. Switching can be circuit switched as is the case in nearly all telecomnetworksor packet switched as with the internet. The major manufacturers of switchingequipmentinclude ITI Ltd., Hindustan Teleprinters Limited, Tata Technologies, Siemens,EriccsonIndia, 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 tocustomers. The major manufacturers of transmission equipment in the country includeITI, HTL, Punjab Communications, Punjab Wireless Systems, HFCL, Fujitsu Optel,Fibcom, Shyam Telecom and Tata Lucent. Transmission equipment can be copper,opticfibre, radio, cellular and satellite. The domestic manufacturers of transmission mediainclude Sterlite, Vindhya Telelinks, Optel Telecom, Birla Ericcson Optical, HFCL,ARMand Aksh Industries.

Terminal Equipment

Terminal equipment refers to customer premises equipment that provides aninterface between the user and the service provider. This includes telephoneinstruments,facsimile, answering machines, mobile handsets, pagers, cordless telephones andanswering machines. The major terminal equipment manufacturers are ITI, HTL,BhartiTelecom, Siemens, Tata Technologies, BPL Telecom, Himachal Exicom, PunjabWireless Systems and Crompton Greaves.http://managementfunda.com | http://hrgyaan.com | http://financenmoney.in |http://mediagyaan.com


45REGULATORY AUTHORITY


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The TELECOM REGULATORY AUTHORITY OF INDIA (TRAI) was set up inMarch, 1997, to arbitrate between Department of Telecommunications (DOT) and

privateoperators 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 effortto remove ambiguities and put an end to the controversy surrounding the regulatoryauthority, inJanuary 2000, the government promulgated the TRAI (Amendment Act) in January2000, toreconstitute the powers of TRAI.The role of TRAI has been redefined and it has been bifurcated into two bodies, oneacting as a regulator and the other acting as an adjudicator, in the form of a tribunal.The newTRAI sets tariffs and fixes terms and conditions under which operators can

interconnect withothers and the government is required to seek recommendations from the authority

before issuinga licence. The judicial powers have been vested with the Telecomhttp://managementfunda.com | http://hrgyaan.com | http://financenmoney.in |http://mediagyaan.com


TELECOM RESEARCH & DEVELOPMENTGartner has declared that India is indeed the undisputed BPO king. It has also saidthatdespite the political backlash in the United States, outsourcing of informationtechnology jobswill continue, and one out of every four high-technology jobs in developed nationstoday may beoutsourced to emerging markets such as India by 2010.Outsourcing to India can be traced back to 1985, when Texas Instruments first set upaResearch and Development centre in Bangalore. Since then, more and more foreigncompanieshave realised the benefits of carrying out significant R&D work in India and have

establishedtheir R&D centers here, in India. According to a study conducted by theAdministrative StaffCollege of India (ASCI), 77 global firms have established R&D centres as directsubsidiaries;several others have formed R&D alliances with or have contracted research to localfirms.The people interested in setting up R&D centres, here include telecom service

providersand equipment manufacturers, chip designers, IT hardware companies, medicalequipment

makers, engineering design companies, consumer durables, automotive products,chemicals,


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plastics and pharmaceuticals producers.Besides the Software firms, a host of telecom service providers and equipmentmanufacturers have shown interest in shifting their R&D work to India. Motorola wasone of thefirst telecom companies to realise India's potential for software development. It set up

MotorolaIndia 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 developremote access products for data communications. Ericsson too identified India as animportantoutsourcing location for R&D. In 2002, Wipro purchased the Ericsson softwaredevelopmentcentres in Bangalore, Hyderabad and New Delhi. Wipro will continue Ericsson'sdevelopmentwork in India through outsourcing.The outsourcing to India has increased by leaps and bounds. The latest ones to join

theleague are Alcatel and Kyocera, while Qualcomm and Chinese ZTE Corporation are

planning toset up their R&D centres in India.The companies are using use all three models for carrying out R&D in India whollyowned subsidiary, joint venture with an Indian partner and R&D contracted to anIndiancompany.http://managementfunda.com | http://hrgyaan.com | http://financenmoney.in |http://mediagyaan.com

FDI in Telecom Sector47Most of the companies, who have established their R&D centres here, have identifiedthatIndia is the destination for cost-effective and high quality work. And as Mr Ransomof Alcatel

puts it, growth is organic in India and is at a pace that can be handled. India's rapidlyimprovingtelecom infrastructure and a growing army of lower cost English-speaking workers isanotheradvantage that has been a major attraction for the global corporations seeking toreduce costs.Ericsson claims that it chose Indian Wipro for its technical depth, technical leadershipandtelecom domain expertise.

Nortel has carried out significant offshore software development through agreementswith TCS, Infosys, Wipro and SAS. It regards them as strategic partners for the long-termsuccess of its R&D activity in India. All major technology labs have assigned part oftheirdevelopment activity to India. The products being developed cover a wide range.

Qualcomms interest in India shows that Telecom sector in India has the potential totake


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lead in the telecom sector. Looking at the rapid developments in this sector, itwouldnt beaudacious to claim that India might take the center stage in world telecomdevelopment verysoon. All we would wish to say is: Amen to that



RISK INVOLVED IN INVESTING IN INDIAIndia is one among a hundred destinations where a foreign company can make aninvestment.The investor will naturally weigh the opportunities and the risks. You have alreadyseen whyIndia is a land of opportunities for a foreign investor. Now consider the downside, therisks

Security Risk.The first risk is the security risk. Investor and the investors company has no intentiontoharm a soul, yet every investor is made up of human beings will not venture intoterritorywhere the lives of their personnel and their families are at risk. Travel advisories havenow

become very common. And with the help of media the happenings in the world isavailable intothe living rooms of investors every day. If there is a war (as in Kargil) new investmentwill dryup for many months, even years. If there are riots (as in Gujarat) no one will goanywhere nearthat state. Not only Gujarat, but also Goa and Maharashtra will be affected. It is thechaoticconditions in Bihar and UP the private armies, the indiscriminate killings and the

bandhs thatfrighten away investors.Political Risk

The next and most obvious risk is the political risk. Most foreign investors are stillwary

of India. They accept that India is a democracy, that it will always remain so and that,by andlarge, the rule of law prevails in the country. From their point of view, there are toomany

political parties and every one of them appears only to change its colours. A foreigninvestordoes not care whether a country follows a presidential system or a parliamentarysystem. Aninvestor would be happy if there were only two, or may be three; political parties andif the partyvoted to power will govern for a period of four or five years. What is the biggest fear

in an


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investors mind is of Parliament for several days, the no-confidence motions, the threatofdestabilisation and the fall of governments in rapid succession (1996, 1998, 1999).When the PMof India tells an audience in the US that there is no threat to his position, far from

beingreassured, the foreign investor will report to his Board that he wonders why the PrimeMinistershould worry about his tenure when he is thousands of miles away from home.http://managementfunda.com | http://hrgyaan.com | http://financenmoney.in |http://mediagyaan.com

FDI in Telecom Sector49Policy Risk

The third risk is the policy risk. There must be a policy, and that policy must bestable.

Especially, investors like stable taxation policies. There have been too many policycircling inIndia. The finance ministry has been the worst offender. It promised an export-friendlyenvironment and then taxed export profits. It re-introduced the tax on dividends whenit wasgenerally 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. Ifforeigninvestors have quit the power, telecommunication and pharmaceutical sectors in India,

we haveonly ourselves to blame.Tax administration adds to policy confusion. There are many cases where doubletaxationavoidance agreements have been summarily brushed aside, laws of tax have beensubjected tochange, and repatriation of salaries and other earnings subjected to unnecessaryharassment. Whywould any foreign investor want to come and live and work in India, if the policymaker and thetaxman 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.http://managementfunda.com | http://hrgyaan.com | http://financenmoney.in |http://mediagyaan.com


SUGGESTIONS FOR ATTRACTING A HIGHER QUANTUM OF

FDI IN

INDIA

Further liberalization of foreign trade policy


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The export- import policy needs to be further liberalized. The negative lists underboth headingshave to be substantially reduced. With the lowering of import duty, production inIndia for reexportcould be enhanced with increasing international competitiveness. Also India's archaic

regulatory structure needs wholesale change. A new set of flexible systems andregulations,which can compete, with the regulatory structures of competence like China will haveto becreated.Investor Friendliness

It means how easy it is to establish a business. A team from World Bank has collecteddata from75 countries on government-mandated entry requirements to establish a businesslegally. Thenumber of procedures required to be completed before a business starts varies from

two inCanada to 20 in Bolivia, with average being 10. Start-to-finish time varies from twodays inCanada to 174 days in Mozambique, with average being 63 days. Total entry costvaries from0.4% of per capita CDP in New Zealand to 216% in Egypt, average being 34%. Indiaranks at 35in the list, where the mandatory procedure is 10, start-to-finish time is 61 days andentry cost is12.8%. Further the study confirms that corruption increases as the number of entry

proceduresincreases. These factors put together certainly deter investments. Therefore it isimportant toreduce the number of procedures to the average of 10 to make India an investorfriendlydestination. Forbes Global Compilation of countries that are friendly to entrepreneursshows USat the top and Singapore at number2. India stands at a lowly 20~ rank in a study of 25countries.Setting up of Industrial Townships

Analogous to the concept of free trade zones, India can develop industrial townships

to attractFDI. The idea is to have all basic necessities tor setting up an industry within ademarcated area

preferably near a port or rail ahead to help facilitate movement of raw materials andproducts.Within the townships, the investment climate could be the same as prevailing in otherdevelopedcountries.http://managementfunda.com | http://hrgyaan.com | http://financenmoney.in |http://mediagyaan.com


51Eliminating Corruption


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This needs to be eliminated by reducing the level of governmental interference andbeauracraticinterference to the minimal at both the Central as well as State Government level.Further thestudy confirms that corruption increases as the number of entry procedures increases.

Hugebureaucracies, who have become life threatening over the years, must be squeezed.Somedepartments must be abolished right away to inculcate a sense of confidence amongtheinvestors. India is ranked top ten in terms of most corrupt country. This binders theflow of FDIin India.Reducing Corporate Tax

To the surprise of many, the maximum corporate tax rate, the most vital facetaffecting flow of

FDI, in India is still much higher than other countries competing for FDI. Forexample, the taxrate is 17.5 % in Hong Kong, 25 % in Brazil, Finland and Turkey, 30% in Argentina,China andThailand, 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 experienceda seachange and the FDI inflows have been concentrated in Latin America, East andSoutheast 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 facilitiesare inadequate and the system is fragile and tends to breakdown under pressure.Availability oftelecommunications, facsimile, e-mail and computer networking is an integral part ofglobalcommunication. To attract substantial inflow of capital, it is necessary to upgradethese services.Given the fact that India already has a middle class of around 300 million, there exists

a backlogand with continuously increasing demand, the domestic market itself is a majorattraction forinternational firms.http://managementfunda.com | http://hrgyaan.com | http://financenmoney.in |http://mediagyaan.com


BIBLIOGRAPHY

Book and Magazine:Indian Foreign Trade

India TodayPolicy Impediments to Trade and FDI in India


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Websites:

www.CII.comwww.indiainfoline.comwww.Trai.com

www.moneycontrol.com

fdi in telecom

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