The Fdi In Telecom Sector In India

Published Date: 02 Nov 2017

A

Seminar Report

On

FDI in telecom sector in india

EXECUTIVE SUMMARY

Is the Indian economy showing early signs of revival or a turnaround? It may be too early to say yes, but the figures thrown up in recent days certainly point to that. And that should be good news for the managers of the Indian economy. Despite that there is no room for complacency as the challenges ahead are indeed, enormous.

Let us first talk of the turnaround indicators. The official data shows that the cement sector has grown 9.97 percent in December 2008 as compared to November and the year on year increase is 11%. Steel, which declined from September onwards last year, has shown a recovery in December last and January this year. It has now touched 22.86 million metric tones, a figure it achieved in May 2008 when the sectoral growth rate was 4.1%. This may not be quite impressive but the very fact that the sector is growing is a matter of some satisfaction. Passenger vehicles grew at 32% in January 2009 compared to December 2008. Commercial vehicles grew at 23%. These are all encouraging signs.

Job losses are an area of immense concern to all of us. The Labour Minister Oscar Fernades informed Parliament recently that half a million jobs had been lost in India due to the economic slowdown. That certainly is a cause of concern. But there is a silver lining too.  A recent survey conducted by the HR consultancy firm Hewitt says that less than 13% companies in India were considering retrenchment while 60 % are still hiring. India is at the lowest of the ladder of layoffs, with the US topping the list at 55 %. It is followed by China at 30.6%. Japan, Korea, Singapore and Malaysia also are higher up in the ladder.

On the other hand, the survey shows that India is at the top of the ladder with 8.2% in year on year projected salary hike in Asia- Pacific. Even the US and Japan are expected to have a salary hike of only 3.2 % and 2.3 % this financial year.  The projected salary hike is indeed far less than 13.3 % India witnessed in 2008 but in these hard days the picture is not all that gloomy. Hewitt says the survey was conducted in December and January for 480 Indian companies.

Contents

1.

PREFACE

2.

EXECUTIVE SUMMARY

3.

Overview of Telecom Sector:

1

4.

Progress of reforms

2

5.

Pre reform period and Telecommunication in India

4

6.

Literature Review:

6

7.

Controls:

11

8.

Foreign Direct Investments and there Importance

14

9.

Government Regulations and Initiatives:

16

10.

Recommendatory functions:

18

11.

Mandatory Functions:

21

12.

Understanding Indian Market:

21

13.

Recent Trends in Indian Market:

21

14

Scope for FDIs in India:

25

15.

Position of current players:

26

16.

Conclusion and Recommendations:

28

17.

Bibliography

31

A Report on FDI in Telecom sector in India

Overview of Telecom Sector:

Evolution of Telecom Sector in India:

The telegraph act of 1885 governed the telecommunications sector. Under this act, the government was in-charge of policymaking and provision of services. Major changes in telecommunications in India began in the 1980s. Under the Seventh Plan (1985-90), 3.6 percent of total outlay was set aside for communications and since 1991, more than 5.5 percent is spent on it (Figure 1). The initial phase of telecom reforms began in 1984 with the creation of Center for Department of Tele matics (C-DOT) for developing indigenous technologies and private manufacturing of customer premise equipment. Soon after, the Mahanagar Telephone Nigam Limited (MTNL) and Videsh Sanchar Nigam Limited (VSNL) were set up in 1986. The Telecom Commission was established in 1989.When telecom reforms were initiated in 1994, there were three incumbents in the fixed service sector, namely DoT (Department of Telecom), MTNL and VSNL. Of these, DoT operated in all parts of the country except Delhi and Mumbai. MTNL operated in Delhi and Mumbai and VSNL provided international telephony.

Given its all-India presence and policy-making powers, the DoT enjoyed a monopoly in the telecom sector prior to the major telecom reforms. However, subsequent to the second phase of reforms in 1999, which included restructuring the DoT to ensure a level playing field among private operators and the incumbent, the service-providing sector of DoT was split up and called Department of Telecom Services (DTS). DTS was later corporatized and renamed Bharat Sanchar Nigam Limited (BSNL). This meant separation of the incumbent service provider from the policy-maker. Broadly, DoT is now responsible for policy-making, licensing and promotion of private investments in both telecom equipment and manufacture and provision of telecom services. BSNL, a corporate body, is responsible for the provision of services.

A crucial aspect of the institutional reform of the Indian telecom sector was setting up of an independent regulatory body in 1997 â€" the Telecom Regulatory Authority of India (TRAI), to assure investors that the sector would be regulated in a balanced and fair manner. TRAI has been vested with powers to ensure its independence from the government. The government has retained the licensing function with itself. The main issue with respect to licensing has not been whether it should be with the regulator but that the terms and conditions of licensing should involve consultations with TRAI to ensure transparency in the bidding process Some of the main functions of TRAI include fixing tariffs for telecom services, dispute-settlement between service providers, protecting consumers through monitoring of service quality and ensuring compliance to license conditions, setting service targets and pricing policy for all operators and service providers. Further changes in the regulatory system took place with the TRAI Act of 2000 that aimed at restoring functional clarity and improving regulatory quality. necessary. The regulatory body also has a separate fund (called the TRAI General Fund) to facilitate its functioning. To fairly adjudicate any dispute between licensor and licensee, between service provider, between service provider and a group of consumers, a separate disputes settlement body was set up called Telecom Disputes Settlement and Appellate Tribunal(TDSAT).Telecommunications is the transmission of data and information between computer susing a communications link such as a standard telephone line. Typically, a basic telecommunications system would consist of a computer or terminal on each end, communication equipment for sending and receiving data, and a communication channel connecting the two users. Appropriate communications software is also necessary tomanage the transmission of data between computers. Some applications that rely on this communications technology include the following: Electronic mail (e-mail) is a message transmitted from one person to another through computerized channels. Both the sender and receiver must have access to online services if they are not connected to the same network. E-mail is now one of the most frequently used types of telecommunication. `Facsimile (fax) equipment transmits a digitized exact image of a document over telephone lines. At the receiving end, the fax machine converts the digitized data back into its original form.Voice mail is similar to an answering machine in that it permits a caller to leave a voice message in a voice mailbox. Messages are digitized so the caller's message can be stored on a disk.Video conferencing involves the use of computers, television cameras, and communications software and equipment. This equipment makes it possible to conduct electronic meetings while the participants are at different locations. The Internet is a continuously evolving global network of computer networks that facilitates access to information on thousands of topics. The Internet is utilized by millions of people daily. Actually , telecommunications is not a new concept. It began in the mid-1800s with the telegraph, whereby sounds were translated manually into words; then the telephone, developed in 1876, transmitted voices; and then the teletypewriter, dev

eloped in the early 1900s, was able to transmit the written word.

Since the 1960s, telecommunications development has been rapid and wide reaching. The development of dial modem technology accelerated the rate during the 1980s. Facsimile transmission also enjoyed rapid growth during this time. The 1990s have seen the greatest advancement in telecommunications. It is predicted that computing performance will double every eighteen months. In addition, it has been estimated that the power of the computer has doubled thirty-two times since World War II (With row, 1997). The rate of advancement in computer technology shows no signs of slowing. To illustrate the computer's rapid growth, Ronald Brown, former U.S. secretary of commerce, reported that only fifty thousand computers existed in the world in 1975, whereas, by 1995, it was estimated that more than fifty thousand computers were sold every ten hours (U.S. Department of Commerce, 1995).

Deregulation and new technology have created increased competition and widened the range of network services available throughout the world. This increase in telecommunication capabilities allows businesses to benefit from the information revolution in numerous ways, such as streamlining their inventories, increasing productivity, and identifying new markets. In the following sections, the technology of modern telecommunications will be discussed.

Progress of reforms

A. Private Participation in Telecom - For the provision of basic services, the entire country was divided into 21 telecom circles, excluding Delhi and Mumbai (Singh et. al. 1999). With telecom markets opened to competition, DoT and MTNL were joined by private operators but not in all parts of the country. By mid-2001,all six of the private operators in the basic segment had started operating (Table 1). Table 2 shows the number of village public telephones issued by private licensees by 2002.

After a recent licensing exercise in 2002, there exists competition in most service areas. However, the market is still dominated by the incumbent. In December 2002, the private sector provided approximately 10 million telephones in fixed, WLL (Wireless Local Loop) and cellular lines compared to 0.88 million cellular lines in March 1998 (DoT Annual Report, 2002). 72 per cent of the total private investment in telecom has been in cellular mobile services followed by 22 per cent in basic services. After the recent changes, the stage is now set for greater competition in most service areas for cellular mobile Over time, the rise in coverage of cellular mobile will imply increased competition even for the basic service market because of competition among basic and cellular mobile services.

Foreign Participation â€" India has opened its telecom sector to foreign investors up to 100 percent holding in manufacturing of telecom equipment, internet services, and infrastructure providers (e-mail and voice mail), 74 percent in radio-paging services, internet (international gateways) and 49 percent in national long distance, basic telephone, cellular mobile, and other value added services(FICCI, 2003). Since 1991, foreign direct investment (FDI) in the telecom sector is second only to power and oil - 858 FDI proposals were received during 1991-2002 totaling Rs. 56,279 crores (Figure 4) (DoT Annual Report, 2002). Foreign investors have been active participants in telecom reforms even though there was some frustration due to initial dithering by the government. Until now, most of the FDI has come in the cellular mobile sector partly due to the fact that there have been more cellular mobile operators than fixed service operators. For instance, during the period 1991-2001, about 44 percent of the FDI was in cellular mobile and about 8 percent in basic service segment. This total FDI includes the categories of manufacturing and consultancy and holding companies

Tariff-setting - An essential ingredient of the transition from a protected market to competition is the alignment of tariffs to cost-recovery prices. In basic telecom for example, pricing of the kind that prevailed in India prior to there forms, led to a high degree of cross-subsidization and introduced inefficient decision-making by both consumers and service-providers. Traditionally, DoT tariffs cross-subsidized the costs of access (as reflected by rentals) with domestic and international long distance usage charges (Singh et. al. 1999). Therefore, re-balancing of tariffs - reducing tariffs that are above costs and increasing

those below costs - was an essential pre-condition to promoting competition among different service providers and efficiency in general. TRAI issued its first directive regarding tariff-setting following NTP 99 aimedat re-balancing tariffs and to usher in an era of competitive service provision. Subsequently , it conducted periodic reviews and made changes in the tariff levels, if necessary. Table 4 shows the current level of telephone charges in India effective from January, 2003. Re-balancing led to a reduction in cross-subsidization in the fixed service sector. Cost based pricing, a major departure from the pre-reform scenario, also provides a basis for making subsidies more transparent and better targeted to specific social objectives, e.g. achieving the USO.

Service Quality - One of the main reasons for encouraging private participation in the provision of infrastructure rests on its ability to provide superior quality of service. In India, as in many developing countries, low tele density resulted in great emphasis being laid on rapid expansion often at the cost of quality of service. One of the benefits expected from the private sector's entry into telecom is an improvement in the quality of service to international standards. Armed with financial and technical resources, and greater incentive to make profits, private operators are expected to provide consumers value for their money. Telephone faults per 100 main lines came down to 10.32 and 19.14 in Mumbai and Delhi respectively in 2002-03 compared to 11.72 and 26.6 in 1997-98 (Figures 6and 7). Quality of service was identified as an important reform agenda and TRAI has devised QOS (Quality of Service) norms that are applicable across the board to all operators (Singh et. al. 1999).

Pre reform period and Telecommunication in India

Before 1990's Telecommunication services in India were complete government Monopoly - the Department of Telecommunication (DoT). Government also retained the rights for manufacturing of Telecommunication equipments. MTNL and VSNL were created in the year 1986.Early 1990's saw initial attempts to attract private investment. Telecommunication equipment manufacturing was deli censed in the year 1991.A notable revolution has occurred in the telecom sector. In the pre reforms era, this was entirely in the hands of the central government and due to lack of competition, the call charges were quite high. Further, due to lack of funds with the government, the government could never meet the demand for telephones. In fact, a person seeking a telephone connection had to wait for years before he couldget a telephone connection. The service rendered by the government monopoly was also very poor. Wrong billing, telephones lying dead for many days continuously due to slackness on the part of the telecom staff to attend to complaints, cross connections due to faulty / ill maintained telephone lines, obsolete instruments and machinery in the telephone department were the order of the day in the pre reforms era.

Today, there are many players in the telecom sector. The ultimate beneficiary has been the consumer. Prices of services in this sector have fallen drastically. Telephone connections are today affordable to everyone and are also easily available. Gone are the days, when one had to wait for years to get a telephone connection. The number of telephone connections which was only 2.15 million (fixed lines) in 1981 increased to 5.07 million(fixed lines) in 1991. Today (as in 2003),there are 54.62 million telephone connections of which 41.33 million are fixed line telephone connections, 12.69 million are cellular mobiles and the remaining0.60 million are WLL telephones1. Wireless in Local Loop (WLL) telephones and cellular mobile telephones were unknown in India a few years ago. Cell phones charges have come down so much that today one can see even a common man going around with a cell phone in his hand. The private companies are giving various incentives to attract customers, a situation which is entirely opposite to the conditions prevailing in the pre reforms era when one had to wait for years to get a telephone connection.

The first step toward deregulation and beginning of liberalization and private sector participation was the announcement of National Telecom Policy 1994.NTP 1994 , for the first time, allowed private/foreign players to enter the 'basic' and the 'new cellular mobile section. FDI up to 49% of total equity was also allowed in these sectors. The policy allowed one private service provider to compete in basic services with the incumbent DoT in each DoT internal circle. It allowed duopoly in cellular mobile services in each circle. As part of the implementation of the NTP 94, licenses were issued against license fees through a bidding process . This policy initiated the setting up of an independent regulatorâ€"the Telecom Regulatory Authority of India (TRAI), which was established in 1997. The main objective of TRAI is to provide an effective regulatory framework to ensure fair competition while, at the same time, protect the interest of the consumers. Liberalization and reforms in Telecom sector since early 1990's till date are briefed below:

1991-92:

1. On 24th July 1991, Government announced the New Economic Policy.

2. Telecom Manufacturing Equipment license was delicensed in 1991.

3. Automatic foreign collaboration was permitted with 51 per cent equity by the collaborator.

1992-93:

Value added services were opened for private and foreign players on franchise or license basis. These included cellular mobile phones, radio paging, electronic mail, voice mail, audiotex services, videotex services, data services using VSAT's, and video conferencing.

1994-95:

1. The Government announced a National Telecom Policy 1994 in September 1994. It opened basic telecom services to private participation including foreign investments.

2. Foreign equity participation up to 49 per cent was allowed in basic telecom services, radio paging and cellular mobile. For value added services the foreign equity cap was fixed at 51 per cent.

3. Eight cellular licensees for four metros were finalized.

1996-97:

1. TRAI was set up as an autonomous body to separate the regulatory functions from policy formulations and operational functions

2. Coverage of the term "infrastructure" expanded to include telecom to enable the sector to avail of fiscal incentives such as tax holiday and concessional duties.

3. An agreement between Department of Telecommunication (DoT) and financial institutions to facilitate funding of cellular and basic telecom projects.

4. External Commercial Borrowing (ECB) limits on telecom projects made flexible with an increased share from 35 per cent to 50 per cent of total project cost.5. Internet Policy was finalized.

1998-99:

FDI up to 49 per cent of total equity, subject to license, permitted in companies providing Global Mobile Personal Communication (GMPC) by satellite services.

1999-00

1. National Telecom Policy 1999 was announced which allowed multiple fixed Services operators and opened long distance services to private operators.

2. TRAI reconstituted: clear distinction was made between the recommendatory and regulatory functions of the Authority.

3. DOT/MTNL was permitted to start cellular mobile telephone service.

4. To separate service providing functions from policy and licensing functions, Department of Telecom Services was set up.

5. A package for migration from fixed license fee to revenue sharing offered to existing cellular and basic service providers.

6. First phase of re-balancing of tariff structure started. STD and ISD charges were reduced by 23 per cent on an average.

7. Voice and data segment was opened to full competition and foreign ownership increased to 100 per cent from 49 per cent previously.

2000-01:

1. TRAI Act was amended. The Amendment clarified and strengthened the recommendatory power of TRAI, especially with respect to the need and timing of introduction of new services provider, and in terms of licenses to a services provider.

2. Department of Telecom Services and Department of Telecom operations corporatized by creating Bharat Sanchar Nigam Limited.

3. Domestic long distance services opened up without any restriction on the number of operators.

4. Second phase of tariff rationalization started with further reductions in the long distance STD rates by an average of 13 per cent for different distance slabs and ISD rates by 17 per cent.

5. Internet Service Providers were given approval for setting up of International Gateways for Internet using satellite as a medium in March 2000.

6. In August 2000, private players were allowed to set up international gateways via the submarine cable route.

7. The termination of monopoly of VSNL in International Long Distance services was antedated to March 31, 2002 from March 31, 2004.

2001-02:

1. Communication Convergence Bill, 2001 was introduced in August 2001.

2. Competition was introduced in all services segments. TRAI recommended opening up of market to full competition and introduction of new services in the telecom sector. The licensing terms and conditions for Cellular Mobile were simplified to encourage entry for operators in areas without effective competition.

3. Usage of Voice over Internet Protocol permitted for international telephony service.

4. The five-year tax holiday and 30 per cent deduction for the next five years available to the telecommunication sector till 31st March 2000 was reintroduced for the units commencing their operations on or before 31st March 2003. These concessions were also extended to internet services providers and broadband networks.

5. Thirteen ISP's were given clearance for commissioning of international gateways for Internet using satellite medium for 29 gateways.

6. License conditions for Global Mobile Personal Communications by Satellite finalized in November 2001.

7. National Long Distance Service was opened up for unrestricted entry with the announcement of guidelines for licensing NLD operators. Four companies were issued Letter of Intent (LOI) for National Long Distance Service of which three licenses have been signed.

8. The basic services were also opened up for competition. 33 Basic Service licenses (31 private and one each to MTNL and BSNL) were issued up to 31stDecember 2001.

9. Four cellular operators, one each in four metros and thirteen were permitted with 17 fresh licenses issued to private companies in September/October 2001. The cell phone providers were given freedom to provide, within their area of operation, all types of mobile services equipment, including circuit and/or package switches that meet the relevant International Telecommunication Union (ITU)/ Telecom Engineering Centre (TEC) standards.

10. Wireless in Local Loop (WLL) was introduced for providing telephone connection in urban, semi-urban and rural areas.

11. Disinvestment of PSU's in the telecom sector was also undertaken during the year. In February 2002, the disinvestment of VSNL was completed by bringing down the government equity to 26 per cent and the management of the company was transferred to Tata Group, a strategic partner. During the year, HTL was also disinvested.

12. Government allowed CDMA technology to enter the Indian market.13. Reliance, MTNL and Tata were issued licenses to provide the CDMA based services in the country.

14. TRAI recommended deregulating regulatory intervention in cellular tariffs, which meant that operators need no longer have prior approval of the regulator for implementing tariff plans except under certain conditions.

2002-03

1. International long distance business opened for unrestricted entry.

2. Telephony on internet permitted in April 2002.

3. TRAI finalized the System of Accounting Separation (SAS) providing detailed accounting and financial system to be maintained by telecom service providers.

2003-04

1. Unified Access Service Licenses regime for basic and cellular services was introduced in October 2003. This regime enabled services providers to offer fixed and mobile services under one license. Consequently 27 licenses out of 31 licenses converted to Unified Access Service Licenses.

2. Interconnection Usage Charge regime was introduced with the view of providing termination charge for cellular services and enable introduction of Calling Party Pays regime in voice telephony segment.

3. The Telecommunication Interconnection Usage Charges Regulation 2003 was introduced on 29th October 2003 which covered arrangements among service providers for payment of Interconnection Usage Charges for Telecommunication Services and covered Basic Service that includes WLL (M) services, Cellular Mobile Services, and Long Distance Services (STD/ISD) throughout the territory of India

4. The Universal Service Obligation fund was introduced as a mechanism for transparent cross subsidization of universal access in telecom sector. The fund was to be collected through a 5 per cent levy on the adjusted gross revenue of all telecom operators.

5. Broadcasting notified as Telecommunication services under Section 2(i)(k) of TRAI Act.

2004-05:

1. Budget 2004-05 proposed to lift the ceiling from the existing 49 per cent to74 per cent as an incentive to the cellular operators to fall in line with the new unified licensing norm.

2. 'Last Mile' linkages permitted in April 2004 within the local area for ISP's for establishing their own last mile to their customers.

3. Indoor use of low power equipments in 2.4 GHz band de-licensed from August 2004.

4. Broadband Policy announced on 14th October 2004. In this policy, broadband had been defined as an "always-on" data connection supporting interactive services including internet access with minimum download speed of 256 kbps per subscriber.

5. The Telecommunications (Broadcasting and Cable Services) Interconnection Regulation 2004 was introduced on 10th December 2004.

6. BSNL and MTNL launched broadband services on 14th January 2005.

7. TRAI announced the reduction of Access Deficit Charge (ADC) by 41 per cent on ISD calls and by 61 per cent on STD calls which were applicable from 1st February 2005.

2005-2006

1. Budget 2005-2006 cleared a hike in FDI ceiling to 74 per cent from the earlier limit of 49 per cent. 100 per cent FDI was permitted in the area of telecom equipment manufacturing and provision of IT enabled services.

2. Annual license fee for National Long Distance (NLD) as well as International Long Distance (ILD) licenses reduced to 6 per cent of Adjusted Gross Revenue (AGR) with effect from 1st January 2006.

3. BSNL and MTNL launched the 'One-India Plan' with effect from 1st March 2006 which enable the customers of BSNL and MTNL to call from one end of India to other at the cost of Rs. 1 per minute, any time of the day to phone.

4. TRAI fixed Ceiling Tariff for International Bandwidth, Ceiling Tariff for higher capacities reduced by about 70 per cent and for lower capacity by 35 per cent.

5. Regulation on Quality of Service of Basic and Cellular Mobile Telephone Services 2005 introduced on 1st July 2005.

6. BSNL announced 33 per cent reduction in call charges for all the countries for international calls.

5.6.1: Recommendatory functions:

• Need and timing for introduction of new service provider

• Terms and conditions of licence to a service provider

• Revocation of license for non-compliance of terms and conditions of license

• Measures to facilitate competition and promote efficiency in the operation to facilitate growth in industry

• Technological improvement in services by service providers

• Inspection of type of equipment used by service provider

• Measures for Technological development

• Efficient Management of available spectrum

5.6.2: Mandatory Functions:

• Fix the terms and conditions of their inter connectivity between service providers

• Ensure Technical compatibility and effective inter-connection between different service providers

• Regulate arrangements for sharing of revenues amongst service providers.

• Lay-down the standards of quality of services to be provided by service provider ensure this by periodical survey.

• Lay-down and ensure time period for providing local and long-distance circuits of telecommunication between different service providers

• Maintain inter-connect agreement register

• Ensure compliance of USO (universal service obligation)

Understanding Indian Market:

1: P.E.S.T. Analysis of Indian Market:

Political: Since liberalization, the timely interventions carried out by the policy and regulatory institutions of Government of India coupled with the operators initiative has catapulted India into a coveted exclusive club of high telecom growth nations. The chart below shows the impact of interventions: National Telecom Policy 99(NTP 99), Introduction of newer cellular licensees, introduction of Calling Party Pays (CPP) regime and reduction of Access Deficit Charges (ADC) on the cellular tariffs which have fallen by an unprecedented 90% in the last seven years and have been the driver for the mobile boom in the country.

The increase in foreign direct investment (FDI) limit to 74% up from the previous cap of 49% in the sector coupled with the simplification of the long distance license conditions resulted in a significant increase in foreign investments, wherein the share of telecom in India’s FDI rose from 3-4% to 12-15% in the past 12 months.

Going forward, more initiatives in form of reduced regulatory and tax levies and faster resolution to pending critical issues such as spectrum and interconnection is required to keep the telecom growth on course for India and for it to maintain its distinction of having the fastest growing Telecom sector in the world .

Economical: The inflation rate in India is stable and fair. Moreover the exchange rates are stable. Here is regular and continuous economic growth. The GDP and GNP figures are increasing. So, country depicts a good opportunity for the companies to invest. Economic factors are one of the most critical factors for this industry. Repurchasing power of Indian consumer is considerably high and the need is also increasing with growth and thus the demand for the service.

Social: Telecommunication in India is playing a vital role in strengthening the social bonds. They are connecting people. These companies are also undergoing CSR programs where in they are showing their responsibility towards society. There are various factors that companies consider while tackling with the social responsibility. These companies are socially acceptable as they are directly serving people.

The market size of India is considerably high and still there is a lot of untapped market. Moreover double income families are coming more into picture. So, the demand is rising. The demography of Indian market makes it an attractive location for the investors to invest.

Technological: Technological environment for Indian telecom sector is evolving at a very fast pace. There are continuous and regular technological up gradations that are making the sector more intense for business. Some of the recent technological developments in the sector are:

1. 3G (Third generation technology): The Indian government plans to auction the spectrum for 3G services by inviting bids from domestic as well as foreign players, and creating a competitive environment that offers better services to consumers. Therefore, the 3G spectrum is among the major investment opportunities and growth drivers of the telecom industry.

• The immense potential for 3G is reflected by the 30â€"40 percent annual growth in Value- Added Services.

• Cell phone manufacturers are striving to develop USD 100 priced 3G handsets for the Indian market.

2. WiMAX (World-wide Interoperability for micro-wave Access): It has been one of the most significant developments in wireless communication in the recent past Since this mode of communication provides network access in inaccessible locations at a speed of more than 4 Mbps, it is expected to be a major factor in driving telecom services in India, especially wireless services. Thus, it will lead to the increased use of telecom services, Internet, value-added services and enterprise services. WiMAX is expected to accelerate economic growth and assist in providing better education, healthcare and entertainment services.

• It is estimated that India will have 13 million WiMAX subscribers by 2012.• Aircel is the pioneer in WiMAX technology in India.

• The state-owned player, BSNL, aims to connect 74,000 villages through WiMAX.

3. Mobile number portability: It is a standard where a customer wishing to port his/her number is required to contact the Donor to obtain a Port Authorisation Code (PAC) which he/she then has to give to the Recipient. Once having received the PAC the Recipient continues the port process by contacting the Donor. This form of porting is also known as ô€€€Donor-Led ô€€€ and has been criticised by some industry analysts as being inefficient. It has also been observed that it may act asa customer deterrent as well as allowing the Donor an opportunity of ô€€€winning-back ô€€€ the customer. This might lead to distortion of competition, especially in the markets with new entrants that are yet to achieve scalability of operation.

4. Infrastructure sharing: To reduce their network deployment costs, many service providers are considering infrastructure sharing offers the following advantages:• Improved service quality

• Increased affordability for customers

• Faster roll out of services in rural and remote areas

• Significant reduction in initial set up costs

• Lower operating costs for service providers

• Increased environmental aesthetics

5. Value Added Services (VAS): The VAS industry was worth USD 632 million in 2006â€"07. The industry is estimated to grow by 60 percent in 2007â€"08 and become an USD 1,011 million opportunity. The VAS industry is currently focussing on the entertainment sector, such as the Indian film industry and cricket; however, there is scope for growth in other avenues as utility-based services, such as location information and mobile transactions.

Thus, analysis of P.E.S.T. factors depicts the charm of India as being a favourable location for the FDIs in telecom sectors. Almost all the factors are favourable and further improvements are taking place with the advent of time.

2: SWOT analysis:

Strengths:

1. Enormous customer base in the wireless segment: The Telecom subscription data as on 31st August 2009 is as follows:

• The number of telephone subscribers in India increased to 494.07 Million at the end of August 2009 from 479.07 Million in July 2009

• 15.08 Million new additions in the wireless segment

• Growth rate of 3.13%

2. Decline in Tariffs: There has been a substantial decline in tariffs over the years.

Local call tariff for mobile @ Rs 15.00 is now less than Re 1.00

One minute STD call between Delhi and Mumbai at the rate of Rs.37.00 now cost Re 1.00 i.e. at the rate of local call

ISD call to American continent @ Rs. 75.00 now costs less than Rs 7.00

3. The adoption of new technology has been a major factor that has helped service providers Reduce the tariffs considerably.

4. Rural Public Telephony: Rural India had 76.65 million fixed and Wireless in Local Loop (WLL) connections and 551,064 Village Public Telephones (VPT) as on September 2008. Therefore, 92 per cent of the villages in India have been covered by the VPTs. Universal Service Obligation (USO) subsidy support scheme is also being used for sharing wireless infrastructure in rural areas with around 18,000 towers by 2010. It is believed that of the next 250 million people expected to go mobile; at least 100 million will come from rural areas.

5. India is the fastest growing free market democracy in the world. India’s emergence as a leading destination for foreign investment is a result of:

• Stable Economic Outlook

• Large Market Potential

• Large talent pool

• Low Labour Cost

Weaknesses:

1.Weak Infrastructure - Huge initial fixed cost for service providers

2. Limited spectrum availability: With private initiatives increasing in telecom and broadcast service provision, demand for spectrum has increased. Digital technology has increased the scope of applications and created new areas of service provision. Cellular telephony and wireless Internet are examples of such services. Despite technological changes that reduce the demand for spectrum, availability of spectrum continues to be a constraint. In order to allocate spectrum amongst competing service providers, regulatory agencies often use auctions. From the regulatory and policy perspective, spectrum auctions ensure efficient usage by allocating it to those entities that value it most, while also generating revenues for governments. But auctions may lead to unexpected outcomes as, for example, when regulatory agencies have inadequate market information, there may be a mismatch between expected and actual bidder behaviour, or auctions may be poorly designed. The key challenge before regulatory agencies is to design auctions in such a way as to meet the objective of fostering competition while at the same time ensuring that bidders can effectively use the spectrum for their business.

3. Huge costs for advanced technologies like Mobile Number Portability (MNP)

4. Indian companies do not have the expertise in running multi-country operations

Opportunities:

1. Emerging Technologies: 3G,WiMax

2. Rural telephony: It is believed that of the next 250 million people expected to go mobile; at least 100 million will come from rural areas. The rural mobile penetration is highest in Punjab (20.69 per cent), followed by Himachal Pradesh (17.09 per cent), Kerala (10.63 per cent) and Haryana (10.20 per cent).

3. World’s largest untapped mobile market: Although the telecom sector in India is growing strong as compared to other sectors, on a worldwide perspective India seems to be the largest untapped mobile market as can be seen below.

4. Enormous potential in VAS: There is enormous growth potential in the value added services (VAS) as can be seen below in the case of penetration of GPRS (General Packet Radio Service). The penetration of GPRS enabled handsets are close to26% in India as against 99% in South Korea and 76% in Japan. Consumers today engage more in text based services than the web based applications. Therefore for MVAS to grow to its full potential the handset manufacturers will have to look at ways to manufacture GPRS enabled phones which are affordable and user friendly. They also need to increase its awareness and educate the consumers on how to use GPRS.

5. New players and services bring in huge investments

6. Tier-2, tier-3 cities can accommodate more players

Threats:

1. Conflict between DoT and TRAI: The absence of clear separations in DoT’s responsibilities for policy, regulation and operations led to several delays and lowered the credibility of the government. TRAI had earlier told DoT that 3G auction should be restricted to existing operators on the grounds that new players would find it difficult to roll out services quickly. TRAI had argued that the existing players were best placed to roll out 3G services at affordable rates given that they already had a full-fledged operations running.

2. Wire line subscriber base declined (37.41 m in July2009 - 37.33 m August2009)

3. Integration during Mergers is challenging

4. Unhealthy Competition: MTNL had refused to allow its spectrum to be usedby other service providers for about 2-3 years and finally came to a compromisin 2001.

5. Number of operators per circle, are increasing, hence more competition.

6. ARPU is going down.

7. Cost per customer is very high in rural areas.

8. Spectrum a scare commodity.

9. Infrastructure readiness in rural.

10. PC prices are high.

11. Availability of content in local language.

12. Availability of content for rural population.

13. International Bandwidth is costly.

5: Recent Trends in Indian Market:

1. License allotment: There were many licenses that were allotted to service providers in 2008.

a. Unitech : license to operate in all 22 circles

b. Etisalat DB (Swan Telecom) : license to operate in 15 circles

c. Sistema Shyam Tele Services Ltd (SSTL) : license to operate in 21 circles

2. The Bharti â€" MTN deal was a failure. The positive aspect of this is that it ruled away the possibility of the uncertainty involved in the merger. But the negative aspect is that we lost an opportunity to make an impact in the global arena because MTN is the second largest telecom provider in South Africa and it plays a substantial role in the global arena.

3. The revenue statement misappropriation by RComm: RComm had overstated its profits to the shareholders and understated the profits to TRAI. By doing this they were able to evade a license fee of about 315 crores (the license fee and the spectrum charges paid to TRAI is a percent of the profits made by the telecom provider).

4. TRAI’s announcement of ‘Per second billing’ caused much anxiety and the stock prices of telecom companies plummeted. Then the TRAI chairman JS Sharma announced that the ‘Per second billing’ strategy was optional. Currently TTSL under the brand name Tata DoCoMo and SSTL under the brand name MTS, are the service providers operating with the per second billing strategy In September, TTSL has emerged as the top operator for the second consecutive month beating Bharti. TTSL has added 4.1 million subscribers in September ‘09 and Bharti added 2.5 million subscribers. One disadvantage that the telecom service providers face is that more than 90% of the subscribers are on a prepaid connection and hence there is no loyalty to any operator. About 40% of mobile users change their operator every year as they move to new offerings just to try them out.

Scope for FDIs in India:

1: Industry Attractiveness:

Telecom is one of the most favourable and high growth industries in India. The Industry contributes to about 7-8% in the GDP of the country. The attractiveness of this industry can be well explained by Porter’s 5 forces model.fig: 7.1

• Rivalry among Competitors: In the telecom industry, rivalry among competitors is very fierce. There are scarce customers because the industry is highly saturated and the competitors try to snatch their share of market. They use all sorts of tactics from intensive advertisement campaigns to promotional stuff and price wars etc. so overall the intensity of rivalry is very high. This rivalry takes customers on a profitable situation wherein they have more room for bargaining.

Competition is "cut throat". The wave of industry deregulation together with the receptive capital markets of the late 1990s paved the way for a rush of new entrants. New technology is prompting a raft of substitute services. Nearly everybody already pays for phone services, so all competitors now must lure customers with lower prices and more exciting services. This tends to drive industry profitability down. In addition to low profits, the telecom industry suffers from high exit barriers, mainly due to its specialized equipment. Networks and billing systems cannot really be used for much else, and their swift obsolescence makes liquidation pretty difficult.

• Threat of New Entrants: The entry barriers in the industry are high as companies need to invest loads of money on setting infrastructure for the operations. But industry as such does not have any measures with which it can control the entry of new firms. The resistance is very low and the structure of the industry is not so complex that new firms can easily enter and also offer tough competition to the established players. Thus, potential entry of new firms is Low. The players entering in the industry should have strong backup. Then only they can

Make a significant entry in the sector.

It comes as no surprise that in the capital-intensive telecom industry the biggest barrier to entry is access to finance. To cover high fixed costs, serious contenders typically require a lot of cash. When capital markets are generous, the threat of competitive entrants escalates. When financing opportunities are lessreadily available, the pace of entry slows. Meanwhile, ownership of a telecom license can represent a huge barrier to entry. In the U.S., for instance, fledgling telecom operators must still apply to the Federal Communications Commission (FCC) to receive regulatory approval and licensing. There is also a finite amount of "good" radio spectrum that lends itself to mobile voice and data applications. In addition, it is important to remember that solid operating skills and management experience is fairly scarce, making entry even more difficult.

• Threat of Substitute products: Though there are complex and never ending consumer needs and no firm can satisfy all sorts of needs alone. But substitutes are very rare for this service. Especially in a country like India, majority of population lives in the rural areas and are not exposed to the Internet etc. So companies enjoy a very less threat of substitutes. Moreover with the advent of technology and introduction of innovations this service is becoming unique of its own.

Products and services from non-traditional telecom industries pose serious substitution threats. Cable TV and satellite operators now compete for buyers. The cable guys, with their own direct lines into homes, offer broadband internet services, and satellite links can substitute for high-speed business networking needs. Railways and energy utility companies are laying miles of high-capacity telecom network alongside their own track and pipeline assets. Just as worrying for telecom operators is the internet: it is becoming a viable vehicle for cut-rate voice calls. Delivered by ISPs - not telecom operators - "internet telephony" coul

d take a big bite out of telecom companies ô€€€ core voice revenues.

• Bargaining power of suppliers: The bargaining power of suppliers of raw materials and intermediaries is not very high. There is ample number of substitute suppliers available and the raw materials are also readily available. There is no monopoly situation in the supplier side because the suppliers are also competing among themselves.

At first glance, it might look like telecom equipment suppliers have considerable bargaining power over telecom operators. Indeed, without high-tech broadband switching equipment, fibre-optic cables, Mobile handsets and billing software, telecom operators would not be able to do the job of transmitting voice and data from place to place. But there are actually a number of large equipment makers around. There are enough vendors, arguably, to dilute bargaining power. The limited pool of talented managers and engineers, especially those well versed in the latest technologies, places companies in a weak position in terms of hiring and salaries.

• Bargaining power of buyers: With increased choice of telecom products and services, the bargaining power of buyers is rising. Let 􀀀s face it; telephone and data services do not vary much, regardless of which companies are selling them. For the most part, basic services are treated as a commodity. This translates into customers seeking low prices from companies that offer reliable service. At the same time, buyer power can vary somewhat between market segments. While switching costs are relatively low for residential telecom customers, they can get higher for larger business customers, especially those that rely more on customized products and services.

. Bargaining power of consumers very high .This is because in telecom industry the switching costs of most of the goods is low and there is no threat of buying product from different service providers. So, the cost of switching is low. Moreover with the advent of technology it is increasing day by day. There are various schemes like ‘Number Portability’ which levy Customers with very high bargaining power. Now customers would never feel reluctant to buy or try new service providers from time to time.

What does the future holds for FDIs:

1. Managed services: Completely or partially outsource infrastructure or network management operations.

2. Infrastructure sharing: Reduce their network deployment costs

3. Enterprise Telecom Services:

a. Voice over Internet protocol (VoIP)

b. Dedicated telecom communication systems

c. IT infrastructure enabled unified communication services

d. Virtual Private Network: Private data network that provides connectivity within closed user groups via public telecommunication infrastructure.

4. WiMAX: Worldwide Interoperability for Microwave Access. It provides network access in inaccessible locations at a speed of more than 4 Mbps. It is estimatedthat India will have 13 m WiMAX subscribers by 2012.

5. Value Added Services:

a. Entertainment news (movies, cricket)

b. Location information

c. Mobile transactions

d. 3G, Offers better services to consumers

6. 4G or Fourth Generation Networks (deployment expected : 2010 â€" 2015)

7. Rural Telephony: Government targeting to increase rural Tele density to 25 percent by 2012.

Position of current players:

The Telecom Subscriber base in India is 494 million (August 2009) and the Major players can be segmented into the below three categories:

o State owned companies - BSNL and MTNL

o Private Indian owned companies - Reliance, Tata Teleservices

o Foreign invested companies - Vodafone-Essar, Bharti Tele-Ventures, Idea Cellular, Loop Mobile, Spice Communications

These players can be ranked based on the subscriber base, growth rate and profitability as:

1) Reliance Communications Limited

2) Bharti Airtel Limited

3) BSNL

4) MTNL

5) Hutchison Essar(Vodafone)

6) Ericsson

7) Nokia

8) Siemens Communications

9) Idea Cellular Limited

10) Tata Teleservices

BSNL:

On October 1, 2000 the Department of Telecom Operations, Government of India became a corporation and was renamed Bharat Sanchar Nigam Limited (BSNL). BSNL is now India’s leading telecommunications company and the largest public sector undertaking. It has a network of over 45 million lines covering 5000 towns with over35 million telephone connections.

The state-controlled BSNL operates basic, cellular (GSM and CDMA) mobile, Internet and long distance services throughout India (except Delhi and Mumbai). BSNL will be expanding the network in line with the Tenth Five-Year Plan (1992-97). The aim is to provide a telephone density of 9.9 per hundred by March 2007. BSNL,Which became the third operator of GSM mobile services in most circles, is now planning to overtake Bharti to become the largest GSM operator in the country. BSNL is also the largest operator in the Internet market, with a share of 21 per cent of the entire subscriber base.

BHARTI:

Established in 1985, Bharti has been a pioneering force in the telecom sector with many firsts and innovations to its credit, ranging from being the first mobile service in Delhi, first private basic telephone service provider in the country, first Indian company to provide comprehensive telecom services outside Indiain Seychelles and first private sector service provider to launch National Long Distance Services in India. Bharti Tele-Ventures Limited was incorporated on July 7, 1995 for promoting investments in telecommunications services. Its subsidiaries operate telecom services across India. Bharti’s operations are broadly handled by two companies: the Mobility group, which handles the mobile services in 16 circles out of a total 23 circles across the country; and the Infotel group, which handles the NLD, ILD, fixed line, broadband, data, and satellite-based services. Together they have so far deployed around 23,000 km of optical fiber cables across the country, coupled with approximately 1,500 nodes, and presence in around 200 locations. The group has a total customer base of 6.45 million, of which 5.86 million are mobile and 588,000 fixed line customers, as of January 31, 2004. In mobile, Bharti’s footprint extends across 15 circles.

Bharti Tele-Ventures 􀀀 strategic objective is “to capitalize on the growth opportunities the company believes are available in the Indian telecommunications market and consolidate its position to be the leading integrated telecommunications services provider in key markets in India, with a focus on providing mobile services”.

MTNL:

MTNL was set up on 1st April 1986 by the Government of India to upgrade the quality of Telecom services, expand the telecom network, introduces new services and to raise revenue for telecom development needs of India’s key metros â€" Delhi, the political capital, and Mumbai, the business capital. In the past 17 years, the company has taken rapid strides to emerge as India’s leading and one of Asia’s largest telecom operating companies. The company has also been in the fore front of 5 technology induction by converting 100% of its telephone exchange network into the state-of-the-art digital mode. The Govt. of India currently holds 56.25%stake in the company. In the year 2003-04, the company ô€€€s focus would be not only consolidating the gains but also to focus on new areas of enterprise such as joint ventures for projects outside India, entering into national long distance operation, widening the cellular and CDMA-based WLL customer base, setting up internet and allied services on an all India basis.

MTNL has over 5 million subscribers and 329,374 mobile subscribers. While the market for Fixed wireline phones is stagnating, MTNL faces intense competition from the private playersâ€"Bharti, Hutchison and Idea Cellular, Reliance Infocommâ€"in mobile services. MTNL recorded sales of Rs. 60.2 billion ($1.38 billion) in theyear 2002-03, a decline of 5.8 per cent over the previous year’s annual turnover

Of Rs. 63.92 billion.

RELIANCE INFOCOM:

Reliance is a $16 billion integrated oil exploration to refinery to power and textiles conglomerate (Source: http://www.ril.com/newsitem2.html). It is also an integrated telecom service provider with licenses for mobile, fixed, domestic long distance and international services. Reliance Infocomm offers a complete range of telecom services, covering mobile and fixed line telephony including broadband, national and international long distance services, data services and a wide range of value added services and applications. Reliance India Mobile, the first of Infocomm ô€€€s initiatives was launched on December 28, 2002. This marked the beginning of Reliance ô€€€s vision of ushering in a digital revolution in India by becoming a major catalyst in improving quality of life and changing the face of India. Reliance Infocomm plans to extend its efforts beyond the traditional value chain to develop and deploy telecom solutions for India ô€€€s farmers, businesses, hospitals, government and public sector organizations.

Until recently, Reliance was permitted to provide only “limited mobility” services through its basic services license. However, it has now acquired a unified access license for 18 circles that permits it to provide the full range of mobile services. It has rolled out its CDMA mobile network and enrolled more than 6 million subscribers in one year to become the country’s largest mobile operator. It now wants to increase its market share and has recently launched pre-paid services. Having captured the voice market, it intends to attack the broadband market

.

TATA TELE SERVICES:

Tata Teleservices is a part of the $12 billion Tata Group, which has 93 companies, over 200,000 employees and more than 2.3 million shareholders. Tata Teleservices provides basic (fixed line services), using CDMA technology in six circles:

Maharashtra (including Mumbai), New Delhi, Andhra Pradesh, Tamil Nadu, Gujarat,And Karnataka. It has over 800,000 subscribers. It has now migrated to unified access licenses, by paying a Rs. 5.45 billion ($120 million) fee, which enables it to provide fully mobile services as well.

The company is also expanding its footprint, and has paid Rs. 4.17 billion ($90million) to DoT for 11 new licenses under the IUC (interconnect usage charges) regime. The new licenses, coupled with the six circles in which it already operates, virtually gives the CDMA mobile operator a national footprint that is almost on par with BSNL and Reliance Infocomm. The company hopes to start off services in these11 new circles by August 2004. These circles include Bihar, Haryana, Himachal Pradesh, Kerala, Kolkata, Orissa, Punjab, Rajasthan, Uttar Pradesh (East) & West and West Bengal.

VSNL:

On April 1, 1986, the Videsh Sanchar Nigam Limited (VSNL) - a wholly Government owned Corporation - was born as successor to OCS. The company operates a networkof earth stations, switches, submarine cable systems, and value added service nodes to provide a range of basic and value added services and has a dedicated work force of about 2000 employees. VSNL ô€€€s main gateway centers are located at Mumbai, New Delhi, Kolkata and Chennai. The international telecommunication circuits are derived via Intelsat and Inmarsat satellites and wide band submarine cable systems e.g. FLAG, SEA-ME-WE-2 and SEA-ME-WE-3.

The company ô€€€s ADRs are listed on the New York Stock Exchange and its shares arelisted on major Stock Exchanges in India. The Indian Government owns approximately 26 per cent equity, M/s Panatone Finvest Limited as investing vehicle of Tata Group owns 45 per cent equity and the overseas holding (inclusive of FIIs, ADRs, Foreign Banks) is approximately 13 per cent and the rest is owned by Indian institutions and the public. The company provides international and Internet services as well as a host of value-added services. Its revenues have declined from Rs. 70.89 billion ($1.62 billion) in 2001-02 to Rs. 48.12 billion ($1.1 billion) in 2002-03, with voice revenues being the mainstay. To reverse the falling revenue trend, VSNL has also started offering domestic long distance services and is launching broadband services. For this, the company is investing in Tata Tel services and is likely to acquire Tata Broadband.

HUTCH (VODAFONE):

Hutch’s presence in India dates back to late 1992, when they worked with local partners to establish a company licensed to provide mobile telecommunications services in Mumbai. Commercial operations began in November 1995. Between 2000 and March 2004, Hutch acquired further operator equity interests or operating licence. With the completion of the acquisition of BPL Mobile Cellular Limited in January 2006, it now provides mobile services in 16 of the 23 defined licence areas across the country.

Hutch India has benefited from rapid and profitable growth in recent years. It had over 17.5 million customers by the end of June 2006.

IDEA:

Indian regional operator IDEA Cellular Ltd. has a new ownership structure and grand designs to become a national player, but in doing so is likely to become a thorn in the side of Reliance Communications Ltd. IDEA operates in eight telecom “circles,” or regions, in Western India, and has received additional GSM licenses to expand its network into three circles in Eastern India -- the first phase of a major expansion plan that it intends to fund through an IPO, according to parent company Aditya Birla Group .

All these players are using different strategies for gaining profitability and enhancing customer base. These strategies used by the players can be seen by the

Conclusion and Recommendations:

Conclusion:

1. Increase FDI cap in the telecommunication sector.

2. Acquiring new subscribers by expanding in Semi Urban and Rural India.

3. Selling more value added services to existing subscribers at cheaper prices.

4. Tap volume and revenue potential of next generation services.

5. Technological improvement in services by service providers.

6. Technical compatibility and effective inter-connection between different service providers.

7. Efficient Management of available spectrum.