Telecommunications is one of the fastest growing industries in India that has undergone an innovative phase over the past few years and stands as the second largest telecommunications market in the world after China. It is due to liberalization policy that telecom sector could attract more FDI flows in private sector participation increased in total telephone connections of the nation. This led the sector to competitive stimulus, high telecom penetration and substantial reduction in tariffs. Though foreign telecom players have been present in India for almost more than a decade with tremendous growth, the sector is yet to witness the expected vibrancy and infusion of innovative technologies. FDI in the telecom sector was initially allowed at 74%. It was subject to the condition that companies bringing in FDI shall obtain necessary license from the Telecom Regulatory Authority of India (TRAI) for undertaking telecom activities. By recent decision government of India did hike FDI ceiling from 74% to 100% through the Foreign Investment Promotion Board (FIPB) and Government’s consolidated FDI Policy.
The latest FDI policy circular has retained the FDI cap of 100% in telecom services (including Telecom Infrastructure Providers Category – I), of which up to 49 per cent investment can be done through the automatic route. The inflow of overseas investment beyond that requires government approval because of security reasons.
*This is applicable in case of Basic, Cellular, Unified License (Access Services), Unified License, National/ International Long Distance, Commercial V-Sat, Public Mobile Radio Trunked Services (PMRTS), Global Mobile Personal Communications Services (GMPCS), all types of ISP licenses, Voice Mail / Audiotex / UMS, Resale of IPLC, Mobile Number Portability Services, Infrastructure Provider Category – I (providing dark fibre, right of way, duct space, tower) except Other Service Providers.
However, 100% FDI is permitted through automatic route in the area of telecom equipment manufacturing and provision of IT enabled services.
FDI in Telecom sector is subject to observance of licensing and security conditions by licensee as well as investors as notified by the Department of Telecommunications (DoT) from time to time, except “Other Service Providers”, which are allowed 100% FDI on the automatic route.
The Unified License paves the way for the implementation of DoT’s One Nation – One License plan by consolidating license terms for different telecom services under the ambit of one license, i.e. the Unified License. The Unified License replaces the old regime of a telecom operator applying for separate licenses for separate services proposed to be offered by bringing all the major telecom services under one license. The Unified License includes within its ambit the following services:
Access Service providers can provide, within their area of operation, wireline (basic) as well as wireless (cellular) services in a service area. Access Service providers have also been permitted to provide internet telephony, internet services including IPTV, broadband services and triple play i.e voice, video and data. Importantly, Access Service is the only authorization which is permitted to provide full-fledged Internet Telephony, i.e. they are permitted to interconnect Internet Telephony network with the PSTN network.
ISP licensees are primarily allowed to provide services such as internet access (through any method including IPTV) and internet telephony (which is a service to process and carry voice signals offered through the internet by the use of personal computers (“PC”) or internet protocol based equipment). Currently the ISP license allows limited internet telephony by permitting connections between the following:
Audiotex / Voicemail / Ums License includes the authorization to provide, voicemail services or call conferencing services or unified messaging services. With 100% foreign investment being permitted for this license. An applicant can provide the aforementioned services upon obtaining the requisite ‘Audiotex / Voicemail / UMS’ license from with the DoT. However, it is pertinent to note that a prerequisite of obtaining a UMS license is having an ISP Authorization under the Unified License.
Sharing of “passive” infrastructure viz., building, tower, dark fiber, duct space, etc. between licensees is permitted for Access Services. However, sharing of active infrastructure amongst licensees shall be governed by the license conditions/amendments issued by the DoT. Similarly, ISPs, NLD and ILD authorization holders have been permitted to share “passive” infrastructure namely building, tower, dark fiber, duct space, Right of Way owned by other authorization holders.
As per New Telecom Policy (NTP) 1999, Other Service Providers (OSPs) do not require a specific license; however a registration process is required to be fulfilled subject to fulfilling certain criteria. The most important of which is the Other Service Providers registration. Call centers (international and domestic), BPOs, Network Operation Centers, Vehicle Tracking Systems, services with respect to tele-banking, tele-medicine, tele-education are allowed to operate (with 100% FDI) upon registration as “Other Service Provider” or “OSP” with the DoT. These OSP’s operate the service using the telecom infrastructure provided by licensed telecom service providers.
There are various security related obligations imposed on various telecom licensees. As security related conditions are applicable to all licensed telecom service providers, the security conditions shall not be separately enforced on OSPs. An interesting development in the OSP registration policy is the amendment which officially recognized the “work from home” provided certain financial guarantees are provided.
Benefits of FDI in Indian Telecom Sector
1. Private participation has ensured that the best of services are provided to consumers at reasonable rates. Due to the increase in the number of telecom companies, the competition has enhanced consumer experience with the freedom of choice between these networks.
2. The Indian telecom sector is growing at a steady rate as more and more of the population becomes connected. The investment opportunities are immense since the subscriber base is showing healthy growth. Hence, for foreign investors, Indian telecom sector is a very attractive and promising one.
3. Private investment has also improved the allied telecom infrastructure. This has ensured maximum connectivity to the general population with telecom connectivity reaching all corners of the country.
Impact of relaxation
The sector is witnessing steady growth since the government has increased FDI in the telecom space to 100%. FDI in the telecom sector has jumped nearly five times in the past 3 years – from $1.3 billion in 2015-16 to $6.2 billion in 2017-18. However, FDI has plunged to $2.6 billion in 2018-19. The quantum and nature of FDI inflows depend on many factors and accordingly no specific reasons can be attributed for increase or decrease of inflows on year-to-year basis.
There has been neither a regulatory uncertainty nor the lack of conducive environment to invest in the Telecom Sector which may be cited as a reason for the year-to-year decline in FDI.
The telecom sector is facing financial stress due to stiff competition and reduction in tariffs. The country needs massive investment in developing newer technologies which could be accessible and affordable to the people and at the same time creates productive employment.
The government is aiming the commercial rollout of fifth-generation or 5G services by the end of 2020. The newer technology is also expected to bring in potential investment in the country with an array of multinational expressing interest in the enterprise applications and utility services.
About the Author
Author is Neeraj Bhagat, FCA helping foreign companies in setting up of business in India and complying with various tax laws applicable to foreign companies while establishing a business in India. He is also founder of Neeraj Bhagat & Co. Chartered Accountants, a Chartered Accountancy firm established in the year 1997 with its head office at New Delhi. He can be reached at [email protected]