utf8__india - key statistics and telecommunications market overview

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Copyright Paul Budde Communication Pty Ltd, 2011

Paul Budde Communication Pty LtdIndia - Key Statistics and Telecommunications Market

Overview

1. SYNOPSISIndia continues to be one of the fastest growing major telecom markets in the world. Sweeping reformsintroduced by successive Indian governments over the last decade have dramatically changed thenature of telecommunications in the country. The mobile sector has grown from around 10 millionsubscribers in 2002 to pass the 525 million mark by the end of 2009 and was growing strongly into2010. GSM technology continued to dominate the mobile market in India, while CDMA was hangingon to a market share of around 20%. The boom in the mobile industry was expected to continue at leastinto the medium term, boosted by the allocation of 3G licences in the first half of 2010. The fixed-linemarket, which had grown strongly for a while, was experiencing zero and negative growth of late.There was a fresh effort going into promoting broadband Internet access throughout the country; after a

period in which broadband development languished and the government became concerned, there wasnew hope for serious expansion in this segment of the market. This report presents the key measures

and takes a general look at the market direction.

2. KEY STATISTICS

Table 1 Country statistics India 2011

COUNTRY STATISTICS

Population (2010) 1.21 billion

Number of households 220 million

Land area 3.29 million sq km

Capital New Delhi

Local currency Rupee (Rs)

GDP at current prices (e) US$1,704 billion

GDP per capita (e) US$1,382

GDP real growth rate (e) 8.2%

Government Sovereign Socialist Secular Democratic Republic

Table 2 Telecom revenue and investment statistics 2009

TELECOM REVENUE AND INVESTMENT STATISTICS

US$31.5 billionTelecommunications services revenue

Mobile services revenue US$19.5 billion

Telecommunications investments US$69.8 billion

Table 3 Telephone network statistics 2010

TELEPHONE NETWORK STATISTICS

Fixed telephone lines in service1 35.1 million

urban subscribers 26.2 million

rural subscribers 8.9 million

Fixed-line teledensity 3.0%

Digital lines 100% (reached in 2001)

Public payphones (e) 6.0 million

Major public telecom operators Bharat Sanchar Nigam Ltd (BSNL)

Mahanagar Telephone Nigam Ltd (MTNL)

Tata Indicom

Note: 1Fixed telephone lines in service do not include fixed Wireless Local Loop FWLL services.

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Table 4 Internet user statistics 2010

INTERNET USER STATISTICS

Internet users 70.0 million

Internet penetration 6%

Internet subscribers 18.7 million

Number of PCs (e) 60 millionPC penetration 5%

Table 5 Broadband statistics 2010

BROADBAND STATISTICS

Total broadband subscribers 10.99 million

Broadband penetration 0.9%

DSL subscribers 9.48 million

Wireless subscribers 2.13 million

Cable modem subscribers 766,000

Broadband household penetration 5%

Leased line circuits (e) 35,000

Table 6 Mobile statistics 2010

MOBILE STATISTICS

Mobile subscribers 752 million

Annual growth 43%

Mobile penetration 63%

Major mobile operators Bharti

Reliance

Vodafone

BSNL

Tata Teleservices

Idea/Spice Aircel/Dishnet

Table 7 National telecommunications authorities

NATIONAL TELECOMMUNICATIONS AUTHORITIES

Regulatory authorities Telecom Commission

Telecommunications Regulatory Authorityof India (TRAI)

Ministry of Communications andInformation Technology (MCIT)

Department of Telecommunications (DoT)

Ministry of Information & Broadcasting(MIB)(Compiled by BuddeComm, various industry sources)

2.1 SUBSCRIBERS STATISTICS

Tata Teleservices asked the Department of Telecommunications (DoT) in 2006 to contract anaccredited third party to verify the subscriber bases of the countrys mobile operators, amid claimsthat companies were overstating their customer numbers in order to retain spectrum rights. A newspectrum distribution policy was issued in 2006, which stated that future frequency allocations woulddepend on the size of an operators subscriber base in any given telecom circle or city in metro areas.The revised rules meant that the more subscribers an operator had the more spectrum it could apply for,

subject to availability. The new policy was causing the concern that operators would illegally inflatesubscriber numbers to obtain or retain spectrum. In a letter to the DoT, Tata Teleservices claimed that




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an executive at a rival operator had already admitted to overstating customer figures: It may berecalled that during the course of discussions, one of the heads of a leading telecom company openlyaccepted the fact that verification of existing prepaid subscribers will result in shortfall of up to 40% ofthe subscriber base.

3. COUNTRY OVERVIEW

3.1 BACKGROUND

India, located in South Asia, is the seventh largest country by land area (3.29 million sq km) and thesecond most populous country with just over 1.2 billion people. It borders Pakistan to the west; Bhutan,China and Nepal to the northeast; and Bangladesh and Myanmar to the east. To the south is the IndianOcean, the Arabian Sea on the south west, and to the south east the Bay of Bengal. Its system ofgovernment is a constitutional democracy described variously in such terms as a Sovereign SocialistSecular Democratic Republic. It is made up of 28 states and seven union and national territories.Indias constitution came into effect in 1950, having become an independent nation in 1947 after a long

period as a British starting in the mid-19th century. The Indian subcontinent sits astride a region of

historic trade routes and vast empires, recognised for its commercial and cultural wealth over much ofits long history. Since independence, India has sought to position itself as a major international player.It was a founding member of the Non-Aligned Movement (NAM). The country has also been an activemember of the United Nations and the British Commonwealth. It has been actively pursuingcooperation with East Asia, including the Association of South East Asian Nations (ASEAN). As itseconomic power develops (see chapter 3.2), India has been seeking to further consolidate its role as aninternational player.

3.2 ECONOMY

The Indian economy is the worlds tenth largest economy measured by nominal GDP and fourth largestby purchasing power parity. Since embracing market-based economic reforms in the 1990s, India hasbecome one of the fastest growing major economies in the world. The country has a broadly-basedeconomy covering a wide range of activities from high technology to subsistence agriculture. Indiaseconomic engagement with the rest of the world has been rapidly increasing, particularly in theservices sector. With its huge population, however, the nation continues to be challenged by majorissues such as poverty, illiteracy and corruption. It must also ensure that the benefits of economicgrowth are spread more widely. To continue its current level of economic performance the governmentrecognises that India will have to generate stronger manufacturing growth and power generation. Andin managing the economy the government must continue to address the fiscal deficit, high inflationrates and the national debt.

The International Monetary Fund (IMF) estimated that Indias GDP growth in 2010 was 10.4% andthis was predicted to slow somewhat to 8.2% in 2011. The Indian economy has recovered from the

global financial crisis (see chapter 4.3) and rising domestic demand is continuing to drive economicgrowth; however it is also contributing to inflation, with food prices being the main driver.

Table 7 Indias GDP real growth rate 2006 - 2011

Year GDP growth

2006 9.7%

2007 9.9%

2008 6.2%

2009 6.8%

2010 10.4%

2011 (e) 8.2%(Source: BuddeComm based on IMF data)




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4. TELECOMMUNICATIONS MARKET

4.1 OVERVIEW

The telecommunications sector in India continues on its remarkable growth path. With plenty of strong potential value still, much attention both local and global is being paid to the sector. The

Telecommunications Regulatory Authority of India (TRAI) reported that India had ended 2009 with atotal teledensity including fixed-line and mobile subscribers of just over 48%. In other words therewere a total of 562 million telephone services comprising 525 million mobile subscribers and 37million fixed-line subscribers. This meant that total telephone services had increased more than seventimes since 2004. In 2008 India had become the second largest mobile subscriber base in the worldafter China.

In 2009 the market overcame predictions of a slowdown in the countrys telecom sector and continuedto grow strongly; in fact India was one of the fastest growing telecom markets in the world. The mobilesegment was leading the way with an annual growth rate in excess of 50% in 2009 and around 45% inthe first half of 2010. Boosted by the availability of cheaper handsets and with local call tariffs as lowas US$0.01 the sector continued to have momentum.

In pursuit of more and more subscribers the mobile operators were pushing deeper and deeper into therural areas. The level of competition in the market place remained a major factor pushing growth.There was no sign of the competition easing either: 2009 had seen a major price war; and the arrival ofa two new mobile operators at the end of the year was certain to add more heat to an already hotmarket. Whilst the mobile market continued to dominate Indias telecom sector, the fixed-line markethad gone into reverse. This was partly an aberration caused by the way the TRAI was countingsubscribers, excluding fixed wireless subscribers from the fixed line numbers. Nevertheless,enthusiasm for the fixed-line subscriber has fallen considerably as the mobile boom swept the country.(See chapter 3.2 for more information on competition in the market.)

In the second half of 2010 growth in telephone subscribers in rural areas was running at around 65% oftotal subscriber growth.

4.2 COMPETITION

The opening up of the telecom market in India to private operators in 2002 has been a major factor inincreasing the rate of development. The countrys private operators have been playing a major role inthe growth of the sector. Indias reform process for the telecom sector, although somewhat erratic attimes, appeared to be achieving its fundamental objectives.

During the 2000/01 period, the government produced a series of initiatives to encourage theparticipation of the private sector, opening up long-distance telephony, allowing unrestricted entry inbasic and mobile services and offering a shift from migration to revenue sharing to the mobile, fixed(basic) and paging operators, to name a few. Virtually all telecommunications service segments had

been opened up to private sector participation. The last of Indias telecom monopoly businesses,Videsh Sanchar Nigam Ltd (VSNL), lost its monopoly control over the international voice telephonymarket in 2002. The governments commitment to reform was amply demonstrated by this move, asthe VSNL monopoly had simply been scheduled for review in 2004. But instead, the governmentmoved earlier and with a surprising forthrightness. In what many regarded as a surprising and early move, the government made telephony over Internet services (also called Voice over Internet Protocol

VoIP) legal in 2002. The TRAI reported that by 2009 there were 32 ISPs in India licensed to operatein the VoIP services market.

In the head-to-head competition between the two government-owned operators, Bharat Sanchar NigamLtd (BSNL) and Mahanagar Telephone Nigam Ltd (MTNL), on one hand and the private operators onthe other, the private operators had claimed 44% of the market (38 million subscribers) by 2004. Thisfigure had reached 50% by mid-2005, as the private operators took the lead. The private operators had

53.8 million subscribers by year-end compared with the combined subscriber base of BSNL andMTNL which stood at 53.2 million. By end-2009 the balance of the market had changed dramatically.The combined BSNL/MTNL share of the total telephone market had dropped to just under 18%, the




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private operators having built a huge total subscriber base of 463 million to secure their 82% marketshare of mobile and fixed services.

The initial push to expand telecommunications services on a large scale throughout the country hadcertainly been successful. However, one major issue stood out the lopsided nature of thedevelopment. Much to the concern of the government, whilst the urban areas were booming, the rural

sector was languishing with continuing low telephone penetration levels. The government wasvigorously arguing that the country could not move forward unless the 70% of the population wholived in rural India were supported. In the last few years there has been a marked improvement in rural

penetration thanks to the mobile operators pushing their networks into the countryside and vigorouslymarketing the services there. As a consequence, mobile penetration in Indias rural areas had reachedalmost 20% by end-2009; this compared with a mobile penetration of 103% in the cities. In themeantime, however, rural fixed-line penetration remained low. By end-2009, rural fixed teledensitywas just over 1% compared to an urban teledensity of 8%.

Table 8 Fixed-line services versus mobile services and penetration 2010

Fixed Mobile Total

Subscribers Penetration Subscribers Penetration Subscribers Penetration

35.1 million 3.0% 752.2 million 63.2% 787.3 million 66.2%(Source: BuddeComm based on TRAI data)

The development of the Internet Service Provider (ISP) sector in India has been less encouraging,however; with the vast majority of ISPs operating at a loss, there had been a major shake-out in themarket. By mid-2002, of 570 ISP licences granted by the government, 166 had been returned to theregulator; of the 404 licences still valid, only 213 were operational. And it was reported at the time thatonly one VSNL was profitable. By 2005 the number of licensed ISPs had dropped to 155. It hadrisen slightly by 2009 to reach 162. However, the large number of service providers in the internetmarket did not guarantee a competitive environment. It had become a feature of the ISP sector in Indiathat a small number of service providers dominate the market. By 2005 BSNL and MTNL held acombined share of 58%. By 2007 the five leading ISPs in India were holding around 86% of themarket. This proportion had increased to more than 88% by 2009.This was despite the 162 operational

ISPs by that time. BSNL held almost 56% of the market share with a subscriber base of 8.5 million atthe end of 2009.

4.3 ANALYSIS:INDIA IN THE AFTERMATH OF THE GLOBAL FINANCIAL CRISIS

JUNE 2010

In the wake of the Global Financial Crisis it quickly became apparent that the economies of Asia weregenerally better placed to weather the financial storm than other parts of the world. Although by nomeans decoupled from the financial problems in the US and Europe, there was an obvious robustnessin the way the Asian markets continued to perform. This was in part due to significant foreign reserves;for some countries in the region the painful lessons gleaned from the 1997 crisis may also have helped

them manage the latest crisis. Although there was some moderation in growth for a while, most of Asiahas continued to power along and the earlier growth rates have been picked up once more. India, in

particular, has been performing in an impressive fashion.

When the crisis initially hit, India was looking especially vulnerable, with a threatening situationunfolding as foreign institutional investors had already pulled out close to US$12 billion from thecountry in the first nine months of 2008. On 17th October 2008 the Sensex dived below 10,000, fallingthrough a dramatic psychological barrier after having lost 11,000 points over the previous 10 months.During the first two weeks of October 2008, Indias foreign-exchange reserves fell by more thanUS$17 billion, partly due to foreign capital outflows.

Despite the falling market, the flight of capital and the tightening liquidity, reports coming out of Indiain the midst of the global crisis remained almost bizarrely upbeat about the country getting through the

difficulties unscathed. The government was claiming that it had taken timely steps to ward off theeffects of the market turmoil on the domestic economy. Efforts to ease a cash squeeze in the financial




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system have included cutting the reserve requirements of banks. Importantly, the government alsoplanned extra expenditure totalling US$21.7 billion in the year to March 2009, including funds for afarm debt waiver scheme, food and fertiliser subsidies.

Indias economy has certainly continued to deliver strong growth results. The lowest the countrysannual GDP growth rate fell was to 5.8% in the March quarter of 2009. And the release of latest figures

showed that Indias GDP expanded by 8.6% in the year to March 2010. Critical to all this had no doubtbeen the timely boost to fiscal expenditure. But the financial splurge saw the budget deficit reaching10% of GDP in the fiscal year ended in March 2010; this in turn was presenting a fresh challenge.

The recent growth figures revealed that the major source of this growth has been investment in fixedassets, while the contribution from government consumption was not significant.

Indias mobile operators have been leading the way, with their vigorous bidding in the governments3G spectrum auction in early 2010, putting up a total of INR677 billion (US$14.6 billion) in bids . Asecond auction now under way may raise another 300 billion rupees from firms seeking to offer

broadband internet over wireless networks. The windfall returns from these auctions (which were far inexcess of what the government had targeted) offered the government a genuine opportunity to reducethe budget deficit in the 2010/11 fiscal year. The downside of all this is that the telecom operators now

owe large amounts of money to foreign creditors.

By May 2010 the government was signalling that inflation was an issue of prime concern as the priceof food, fuel and other essential commodities surged around the country. A slowdown in privateconsumption was evident. Whilst remaining watchful on inflation, the government said that the signswere in fact indicating it was already moderating. At the same time, the Reserve Bank of India (RBI)had already raised interest rates twice in 2010 and more rises were anticipated. The task of managingIndias inflation rate has commenced, but needs to be handled carefully and in the wider context of theglobal economy.

4.4 THIRD GENERATION (3G) AND WIMAX SPECTRUM AUCTIONS

For years there had been speculation within Indias telecom market about exactly when 3G serviceswould be introduced into the country. COAI had anticipated that 3G services would be launched asearly as 2003, but the government continued to move slowly on the whole process. So it was with asense of relief within the industry when the government carried through on its plans to auction the 3Gspectrum. The 3G auction was finally commenced in April 2010. Bidding ran over 34 days, pushing thefinal stage of the auction well into May.

Bidding was fierce due to the fact that the nine contenders were battling it out for limited spectrum only three or four licences being up for sale in each of the 22 circles. By the end of the process, all butS Tel and Videocon had secured spectrum in at least some of the services areas. Somewhatsurprisingly, not one of the bidding operators managed to secure a full national licence.

Bharti Airtel, Vodafone and Reliance Communications all picked up the key licences covering the twomain cities of Mumbai and Delhi, while operators Tata Teleservices and Idea Cellular went for themiddle range of licences. Reliance, with its business focus on low-cost markets, was successful in themore rural areas where the price of a licence was much lower.

The seven winners of the auction were required to pay a combined INR509.68 billion to thegovernment within 10 days of auction close. When the amount payable by BSNL and MTNL wasincluded, the 3G spectrum auction earned revenue of INR677.2 billion (US$14.6 billion) for thegovernment, an amount that far exceeded expectations. In fact it was more than double the US$7.6

billion the government had initially projected.

In late May 2010 the State Bank of India reported that it had received INR180 billion (US$3.8 billion)worth of loan demands from telecommunication companies that were preparing to make payments for

their 3G bandwidth concessions. It was noted that the bank was in a position to meet the full demand.




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In early June 2010 the seven operators whose bids had won concessions in the 3G auction duly paidtheir spectrum fees totalling INR677.2 billion. The operators reportedly borrowed a collective INR450

billion to raise funds for the fees.

BSNL and MTNL did not participate in the auction as the two state-operated companies had already been issued 3G spectrum by the government in 2008. As part of the arrangement both BSNL (20

circles) and MTNL (2 circles, Delhi and Mumbai) were required to match the highest bid after theauction had been completed. This early allocation of licences was designed to give the two companies anominal five-month head start over their private sector. MTNL, which had been struggling financially,

borrowed INR25 billion from Axis Bank in a short term loan to help fund the purchase.

Table 9 3G auction: Number of licences and total fees paid by operators 2010

OperatorNumber of telecom

circles

Total bid

(billion rupees)

BSNL1 20 101.90

Bharti 13 122.95

Reliance 13 85.85

Aircel 13 64.99

Idea Cellular 11 57.69Vodafone Essar 9 116.18

Tata Teleservices 9 58.64

S Tel 3 3.40

MTNL1 2 65.60(Source: BuddeComm based on DoT data)

Note: 1BSNL and MTNL did not participate in the auction but were liable for the spectrum fees under an earlier

agreement.

Clearly pleased with the outcome of the spectrum auctions, the government noted in June 2010 thatproceeds from the auctions for 3G and WiMAX bandwidth had the potential to lower the countrysfiscal deficit as a percentage of GDP by 1%. Keen to restrict Indias fiscal deficit, the government saidthat it would not exceed the projected 5.5%. (See chapter 3.3.)

For more information on the development of 3G in India, see separate reports: India - MobileCommunications - Technologies including 3GandIndia - Mobile Communications - Major Operators.

4.5 WIMAX SPECTRUM AUCTION

It was not until May 2010, once the 3G auctions had been completed, that the first moves were made toformally initiate the auction process to sell bandwidth for broadband wireless (WiMAX) services. Theauctions had been deferred three times since January 2009 due to disagreements over the base price, thenumber of slots to be sold and the availability of bandwidth. The 11 companies bidding for thespectrum were listed as:

Qualcomm Inc (US) Bharti Airtel Ltd

Vodafone Essar Ltd

Idea Cellular Ltd

Aircel Ltd

Tata Communications Ltd

Augere (Mauritius) Ltd

Infotel Broadband Services Pvt Ltd

Spice Internet Service Provider Pvt Ltd

Tikona Digital Networks Pvt Ltd

Reliance WiMax Ltd.

The government auctioned two bandwidth slots (two 20MHz blocks of bandwidth in the 2.3GHz range)in each of the countrys 22 service areas. It set INR17.50 billion (US$370 million) as the base price for


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one such slot to provide nationwide services; it was noted that this was half of the starting price in theauction for 3G bandwidth.

The bidding took place over 16 days and 117 rounds of bids. The following is a snapshot of thebidding:

Base price: INR17.50 billion (US$370 million);

Day 16 bidding ended: INR128.48 billion (US$2.74 billion).

In mid-June 2010 the DoT published the provisional results of its broadband wireless spectrum auction.The DoT report revealed that Infotel Broadband Services Pvt Ltd acquired spectrum in all 22 of theservice areas for a final price of INR128.48 billion (US$2.74 billion). In fact Infotel proved to be thesurprise package of the auction. Other winners included Bharti Airtel, which paid INR33.14 billion(US$708 million) for spectrum in four circles, and Aircel, which acquired bandwidth in eight circlesfor INR34.38 billion (US$735 million). Qualcomm also won spectrum in four circles with a total bid

price of INR49.13 billion ($1.05 billion). Augere won just one concession for INR1.25 billion. Mobileoperators Reliance Com, Vodafone India, Idea Cellular and Tata Communications all failed to secure2.3GHz frequencies. The provisional results need to be approved by the government. Thegovernmental approval was given shortly after the auction. The winning bidders were then required to

pay their successful bid amounts.

In total the DoT raised INR385 billion (US$8.23 billion) from the broadband wireless auction, thefigure including payments from the state-run operators BSNL and MTNL (which were required tomatch the winning bids for spectrum they were previously awarded). The windfall revenue from the

broadband and 3G auctions was likely to be used to part-fund government payouts toward food, fueland fertilizer subsidies and also help shrink the fiscal deficit.

Mumbai was the most sought-after service area, receiving two bids of INR22.73 billion each. Delhiwas second having received two bids of INR22.21 billion, while third-placed Tamil Nadu got two bidsof INR20.49 billion.

For more information on the development of WiMAX in India, see separate report: India - BroadbandMarket.

4.6 FOREIGN INVESTMENT

While the government continued to be the single largest investor in the telecom sector, the level ofForeign Direct Investment (FDI) continued to present a challenge to the governments reformstrategies. There has been considerable attention paid to the level of FDI over the years. According toErnst & Young, the total amount of FDI approved in the telecom sector between 1991 and 2002 wasover US$11.25 billion; however, the actual inflow of foreign investment was only US$1.9 billion, or17% of the approved amount. In order for India to achieve its strategic targets for the sector it mustattract the necessary levels of foreign investment.

The governments rules for foreign investment indicate that FDI is permitted up to 100% in telecommanufacturing, ISPs without Gateway, Category I infrastructure providers, call centres and IT-enabledservices; investment of up to 74% is permitted in ISPs with Gateways, Category II infrastructure

providers and radio paging operators; a limit of 49% have been established for all other telecomservices including the operation of mobile, basic, national long-distance and other value-addedservices. By 2002, the government was considering raising the FDI ceiling on basic telecom service

providers from 49% to 74%. However, the issue of management control remained contentious. Thecountrys coalition government has been facing increased opposition to a faster pace of liberalisationand privatisation from within the ruling alliance.

In 2003 Indias national budget made provision for the ceiling on FDI limit to be increased to 74% forthe telecom sector. The Planning Commission had forecast a capital requirement of US$2.5 billionannually for the sector. However, it was expected that the change would encounter political resistance

and was certainly not a foregone conclusion. The DoT has been continuing to support the increasing ofthe FDI cap, subject to keeping local management control.


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While the mobile sector has been the most attractive to foreign investors, there has been a move awayfrom mobiles to investment in the national and international long-distance markets. Early movers inthis included Worldtel, AT&T Corporation and SingTel(see separate reports). Before being weigheddown by bankruptcy proceedings, MCI(see separate archived research report) had shown interest ininvesting in VSNL. Some foreign companies, including BellSouth, Telecom Italia, Swisscom, Telstraand Vodafone, have pulled out of India.

SingTel moved into the Indian market in 2000, investing US$400 million for a minority stake in twoBharti Group companies. SingTel-Bharti proposed entering the national long-distance market and wasalso planning to build a 7.7Tb/s submarine cable (Network i2i) connecting Chennai with Singapore.AT&T has invested some US$300 million in Indias telecom sector and a further US$12 million wasset for investment in its Birla-AT&T-Tata joint venture and other cellular acquisitions.

Some major ISPs were also successful in attracting foreign investment, although interest in the ISPsector diminished as the need for industry rationalisation became more obvious.

In late 2004, the government was looking set to increase FDI in telecommunications to 74% from 49%.The government was reportedly arguing that the growth in the number of telephone connections has

been exceptional, but to sustain this growth and to lift network coverage from 20% to 70%, the country

required investments on an unprecedented scale which is possible only through foreign investment. Anestimated 1.6 trillion rupees (US$35 billion) was needed to achieve the target of 200 million telephoneservices by 2007. Analysts believe the government will ultimately raise the FDI cap for the sector, butit may not be attractive to investors if management control is not included in any amendedarrangement.

In early 2005, the government announced that the FDI limit for the telecommunications sector had been raised from 49% to 74%, with certain conditions being imposed to address security concerns.Indias Left-wing parties strongly opposed the move.

The MCIT reported that the telecom sector had seen FDI inflows of 409 million rupees over an eightmonth period in 2004. FDI inflows into Indias telecommunications sector were the second largest inthe country after the power and petroleum sector. The government also said it expected over US$800

million investment from foreign telecom companies in 2005, as interest in Indias telecom market rosefollowing the governments decision to lift the FDI cap in the sector to 74%. The MCIT said it hadalready held successful meetings with Nokia, Alcatel and Ericsson, with all three companies looking atinvesting in India.

FDI of US$2 billion into Indias telecom operators in 2005 saw the total annual FDI in the countrystelecoms and IT sector reach US$9 billion. The manufacture of network equipment and handsetscontributed US$2.5 billion in FDI for the year. There were also major investments made by CiscoSystems and several chip makers in production facilities in the country. Rising investment had been

boosted in part by Vodafones purchase of a 10% stake in Bharti Tele-Ventures.

Table 10 Foreign Direct Investment in telecom sector 2004 - 2008

Year1 Total FDI(Rs billion)

Telecom FDI(Rs billion)

Telecom FDI as aproportion of total FDI

2004 121 5.3 4.4%

2005 171 5.9 3.4%

2006 246 30.2 12.3%

2007 706 23.6 3.3%

20082 202 36.5 18.1%(Source: BuddeComm based on TRAI data)Notes:1Fiscal year to March of year indicated.2Part year only to June 2007.


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4.6.1 Foreign investment and national security

In 2006, Indias National Security Council (NSC) was proposing a new law to regulate FDI in anumber of sensitive sectors including telecommunications. The National Security Exemption Act wasaimed at empowering the government to suspend or prohibit any foreign acquisition, merger ortakeovers of an Indian company that is considered prejudicial to national interests. A list of sensitivelocations covered the states of Jammu and Kashmir, Chattisgarh, and North Eastern states, as well as

areas in proximity to vital nuclear, space and defence installations and border areas. It was reported thatcountries of concern included China, Hong Kong, Macau, Taiwan, Pakistan, Bangladesh, Afghanistanand North Korea as the NSC believed investment from these areas could threaten security interests asthe entities from these countries could be manipulated.

It was noted that the NSC had opposed a proposal by mobile operator Hutchison Essar Ltd to raise itsFDI because the company included an indirect holding by Egypt-based Orascom Telecom Holding(OTH). Orascom was the dominant operator in countries such as Pakistan and Bangladesh, which haddifficult relations with India. The proposal was eventually cleared and Orascom said it wanted tofurther raise its holding in Hutchison Essar.

A joint venture between AT&T and Mahindra Telecommunications Investment Private Ltd launchedan operation in India in November 2006. This saw the US-based AT&T become the first foreigntelecom operator to get a licence under the Indian governments revised FDI policy allowing up to 74%foreign ownership.

Chinas Huawei Technologies announced in 2007 that it was putting on hold a US$100 millioninvestment to build a manufacturing plant in India, saying that it was because it was unclear about thegovernments national security policy. Prior to this, the Indian government had been in the process offormulating a security policy on foreign investment in key sectors - especially with respect to Chinaand Pakistan. The Foreign Investment Promotion Board (FIPB), the government agency responsible forclearing all foreign equity investment in the country, was reported to have held back approval forHuaweis proposal following objections from security agencies.

For more information on the impact of security concerns on foreign investment activity, see chapter3.8.

For more information on foreign investment in Indias telecommunications sector, see separate report:India - Telecommunications Regulatory Overview.

4.7 UNIVERSAL SERVICE

India has taken a number of dramatic steps toward providing telephone services to rural villages. In ajoint effort with fixed service providers, the government originally set out plans to connect all villagesin India to the Public Switched Telephone Network (PSTN) by March 2002. The strategy involved the

provision of a Village Public Telephone (VPT) in each village. But when the deadline was reachedonly about 468,000 out of 607,500 villages (77%) had been connected. BSNL had carried out the bulk

of the work and was continuing in its effort to complete the project.Private operators had committed to provide connections to 97,000 villages, but had only delivered on846 villages. The private service providers have been warned against delays in connecting villages,which was part of their licence conditions. Those that do not meet their obligations would be penalisedand could possibly have their licences cancelled. A suggestion that the private operators carry out workon a further 60,000 by December 2002 has been rejected by the operators. The operators argued thatthe VPTs should be financed from the USO or directly by the government. They also argue that BSNLwas specifically subsidised by the government for this work.

The USO Fund was designed to use licensing fees and other income from the operators to cover servicein rural areas. All private operators had been advised to work out a plan to link villages. Despiteopposition from mobile operators, huge tracts of rural areas could be covered by allowing fixed service

operators to provide limited mobile services through the use of WLL technology.


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The MCIT said in December 2004 that it was set to collect INR29 billion for the USO Fund in thefiscal year ending March 2005. The funding would continue to be used for the expansion of telecomservices in rural and remote locations. In the fiscal year ending March 2004, the government collected21.4 billion rupees for the USO Fund.

By end-2008, a total of 539,500 villages across the country had been connected to the telephone

network, representing 91% of the governments target. This left a further 54,000 villages remaining tobe serviced. The year 2009 saw further significant progress along this path and by year-end there were573,000 villages connected, lifting the proportion to 97%.

Table 11 Telephone services to villages 2010

Service Unit

Total number of villages 593,731

Number with telephone service 581,000

Percentage with telephone service 98%(Source: BuddeComm based on TRAI data)

4.8 IMPORT OF CHINESE TELECOM EQUIPMENT

The link between the telecom industry and national security has been looming as a major in India forsome time. It came to a head with government decision to ban the import of telecom equipment fromChinese suppliers. More precisely, in December 2009, operators were told by the government that theyneeded security clearance on all equipment importation from China. Whilst there was a lot ofinconsistent rhetoric around the subject, it was clear that the issue was not a trivial one and would notsimply go away. The dispute was even starting to impact on third parties.

The controversy appeared to be intensifying when, in April 2010, the Foreign Investment PromotionBoard (FIPB) deferred for a third time a proposal by the UAEs Etisalat to increase its stake in itsIndian venture to 54.27%, up from 49%. The deferral came after the Ministry of Home Affairs (MHA)

raised various security concerns, including that of the companys technical tie-up with Huawei. TheFIPB had asked the DoT for its comments on the issue.

Later in April 2010, once more citing security concerns, the Indian government again banned telecomoperators from buying Chinese-made equipment. The DoT was quoted as saying at the time: Proposalsfor procurement of equipment from Chinese original equipment manufacturing vendors have not beenrecommended due to security concerns. Despite this, the government was saying that there was no

blanket ban on the import of Chinese telecom equipment. However, the original order had been issuedon the back of MHA concerns that telecoms equipment from some countries could contain malware orthat there could be some security backdoor embedded in the equipment.

Not surprisingly, the affected equipment manufacturers started to lobby the Indian government as theyfaced significantly higher equipment costs if forced to deal exclusively with Western vendors.

(Typically, the price of equipment from Chinese equipment suppliers was 30% cheaper than pricesbeing offered by their Western equipment supplier counterparts.) The government responded in May2010 by giving Huawei and ZTE one month to disclose full details of their corporate ownership. Thenit was reported that the government was considering conducting checks on all Chinese equipmentalready installed in India before allowing new imports.

In late May 2010 BSNL excluded Huawei and ZTE from bidding for a INR20 billion (US$426 million)GSM contract. The operator had specified that only Ericsson, Nokia Siemens and Alcatel Lucent could

bid for the 5.5 million line expansion contract. BSNL appeared most reluctant to exclude the Chinesesuppliers from the bidding process but was acting under government instructions. The move escalatedthe diplomatic row over the issue.

By June 2010 the federal government was considering changing licensing rules for telecom providers

in order to address security concerns associated with the countrys telecommunications networks.




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For more information on national security issues in Indias telecommunications sector, see separatereport:India - Telecommunications Regulatory Overview.

5. RELATED REPORTS

See separate reports for more information relating to:

the telecom sector, see:India;

telecom regulatory issues in India, see:India - Telecommunications Regulatory Overview;

For information relating to:

Technical information relating to the telecommunications industry, see: TelecommunicationsTechnologies Library;

Technology - Terminology - Glossary of Abbreviations (free report);

Worldwide activities in the telecommunications industry see: Global Overviews.

Copyright Paul Budde Communication Pty Ltd, 2011. All rights reserved.

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