Table of Contents

Table of Contents....................................................................................................... 1 EXECUTIVE SUMMARY................................................................................................. 3 A Report on FDI in Telecom sector in India....................................4 Pre reform period and Telecommunication in India....................................................6 Controls:.................................................................................................................. 7 Foreign Direct Investments and there Importance.....................................................8 Regulations for FDI:................................................................................................ 8 Regulations and Initiatives by government:..............................................................9 Policies....................................................................................................................... 9 Targets Set By the Government .............................................................................. 10 1. Network expansion............................................................................................ 10 2. Rural telephony ................................................................................................ 10 3. Broadband ........................................................................................................ 10 4. Infrastructure Sharing ...................................................................................... 10 5. Introduction of Spread of IPTV and Mobile TV ...................................................10 Strengths:.............................................................................................................. 11 Weaknesses:......................................................................................................... 11 Opportunities:........................................................................................................ 12 Threats:................................................................................................................. 12 What does the future holds for FDIs:........................................................................13 Position of current players:....................................................................................... 13 RELIANCE INFOCOM:.............................................................................................. 14 TATA TELE SERVICES:............................................................................................ 14 HUTCH (VODAFONE):............................................................................................. 15

IDEA:...................................................................................................................... 15 Conclusion................................................................................................................ 16

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.

A Report on FDI in Telecom sector in India

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.

Foreign Participation 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 crosssubsidization and introduced inefficient decision-making by both consumers and serviceproviders. 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, rebalancing 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 regulatorthe 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

Controls:
Amendments in the policy also introduce a new concept of controls and ownership in the sector. An Indian company that is backed by foreign investments but ultimately controlled and owned by Indians can invest without being under the FDI cap. Thomas K. Thomas a member of the United States Telecommunications Sub-committee, an advocacy body which looks into telecom regulations around the world, has suggested a slew of reforms for India to implement in the communications sector. This includes increasing the FDI limit from 74 per cent to 100 per cent, making the upcoming 3G auction rules more conducive for foreign players and allowing unrestricted Net telephony. The sub-committee is part of a joint Indo-US working group, set up to exchange best regulatory practices in the ICT sectors. .

Foreign Direct Investments and there Importance.

Regulations for FDI:

In basic, cellular mobile, paging and value addition service and global mobile personal communication by satellite FDI is permitted upto 49% (under automatic route). Subject to grant of license from the Department of Telecom. FDI 74% permitted subject to licensing and security requerement for the internet service (with gateways), infrastructure providers(category II), radio paging service. FDI upto 100% permitted in respect of( i) ISPs not providing gateways(both for satellite and submarine cables), (ii) Infrastucture providers providing dark fibre(IP category), (iii) Electronic mail, (iv) Voice mail. FDI upto 49% is also permitted in an investment company, setup for making investment in the telecom company licensed to operate telecom service. Investment by there investment companies in a telecom service company is treated as part of domestic equity and is not set of against the foreign equity cap. Manufacturing 100% FDI is permitted under automatic route FDI is subject to following conditions: i) FDI upto 100% is allowed subject to the conditions that such companies would divest 26% of their equity in favour of Indian public in 5years, if these companies are listed in other part of the world. ii) Revenues ~ USD 19.5 bn(FY 2006) -CAGR (FY 2002-2006)-21%- have doubled in last 3years. iii) Subscribers ~160 million (Aug 2006)-CAGR (FY 2002-2006)-38% -nearly quadrupled since FY2002-5-6 million being added every month iv) Tele-Density -14.8 (Aug 2006)-Had doubled in 3 years -Target set for 2007 under NTP 1999 achieved during FY 2005.

Regulations and Initiatives by government:

The government has taken many practical initiatives to facilitate the rapid growth of the Indian telecom industry. 1. FDI in telecom services has been raised to 74% 2. Introduction of unified access licensing for telecom services on a pan-India basis 3. The government is implementing a program of connecting 66,822 uncovered villages under the Bharat Nirman programme. The government will invest US$ 2 billion to set up 112,000 community service centres in rural India to provide broadband connectivity in 2008-09 4. The Department of Telecommunications (DoT) has stated that foreign telecom companies can bid for 3G spectrum without partnering with Indian companies. Only after winning a bid, would they need to apply for unified access service licence (UASL) and partner with an Indian company in accordance with the FDI regulations .

Policies
1. National Telecom Policy 1994 : The new economic policy adopted by the
government aims at improving India s competitiveness in the global market and rapid growth of exports. Another element of the new economic policy is attracting foreign direct investment and stimulating domestic investment. Telecommunication services of world class quality are necessary for the success of this policy. It is,therefore, necessary to give the highest priority to the development of telecom services in the country.

2. New Telecom Policy - 1999 : This focused on the balance between universal
service to all uncovered areas, including the rural areas, and high-level services capable of meeting the needs of the countrys economy, Strengthen research and development efforts in the country and provide an impetus to build world-class manufacturing capabilities, Achieve efficiency and transparency in spectrum management, Protect the defense and security interests of the country Enable Indian Telecom Companies to become truly global players.

3. Addendum to NTP 1999: Government has decided that there shall also be the
following categories of licenses for telecommunication services:(i) Unified License for Telecommunication Services permitting Licensee to provide all telecommunication/telegraph services covering various geographical areas using any technology (ii) (ii) License for Unified Access (Basic and Cellular) Services permitting Licensee to provide Basic and /or Cellular Services using any technology in a defined service area.

4. Broadband Policy - 2004 : Recognizing the potential of ubiquitous Broadband

service in growth of GDP and enhancement in quality of life through societal applications

including Tele-education, Tele-medicine, e-governance, entertainment as well as employment generation by way of high speed access to information and web-based communication.

5. Telecom Regulatory Authority of India: The Telecom Regulatory

Authority of India (TRAI) established in 1997 is the independent regulator established by the Government of India to regulate the telecommunications business in India.

Targets Set By the Government

1. Network expansion
a. 500 million connections by the year 2010. b. Provision of mobile coverage of 90% geographical area by 2010.

2. Rural telephony
a. 2 One phone per two rural households by 2010 (about 80 million rural connections). b. 200 million rural subscribers by 2012 c. Reduce urban-rural digital divide from present 25:1 to 5:1 by 2010.

3. Broadband
a. 20 million Broadband connections by 2010 b. Broadband with minimum speed of 1 mbps. c. Broadband coverage for all secondary & higher secondary schools and public health care centres by the end of year 2010. d. Broadband coverage for all Grampanchayats by the year 2010 e. Broadband on demand is every village by 2012

4. Infrastructure Sharing
a. USO subsidy support scheme for shared wireless infrastructure in rural areas with about 19,000 towers by 2010. b.Increase sharing in urban areas to 70% by 2010.

5. Introduction of Spread of IPTV and Mobile TV

a. IPTV in 600 towns by 2010.

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.

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 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. Worlds 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.

Threats:
1. Conflict between DoT and TRAI: The absence of clear separations in DoTs 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.

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 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

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 s initiatives was launched on December 28, 2002. This marked the beginning of Reliance 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 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 countrys 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.

HUTCH (VODAFONE):
Hutchs 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
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.