Catalyst for Telecom Growth - Policy and regulatory changes during the decade

Trends and Developments , January 15, 2010

The period 2000-10 has seen the country's telecom sector take giant strides, transforming from a fledgling industry into one of the world's fastest growing markets. At the close of 2009, the sector was witnessing monthly additions of over 15 million mobile subscribers. Not only has the industry achieved its target of 500 million telecom users by 2010 months before the target, the stage is now being set for the next level of growth in the country's hinterland.

These achievements would not have been possible without the proactive policies of the government through the Department of Telecommunications (DoT) and the timely intervention of the Telecom Regulatory Authority of India (TRAI), be it in the restructuring of the state-owned service providers or in encouraging private participation and competition. No doubt, several issues still remain, but the government and TRAI have succeeded in addressing most of the key issues and dissipating the initial regulatory uncertainty.

The introduction of the calling party pays (CPP) regime in May 2003 was key to propelling the growth of the sector. The migration to a unified access service (UAS) licence regime in November 2003 put an end to a bitter three-year dispute between GSM and CDMA operators and increased competition. The hike in foreign direct investment (FDI) from 49 per cent to 74 per cent in 2005 allowed considerable overseas funds to flow into this capital-intensive sector and contributed to its growth.

The reform process is still on. The aim is to remove the remaining hurdles and limitations. tele.net takes a look at the key regulatory and policy developments in the past 10 years...

In the early years of telephony, the caller as well as the receiver paid tariffs. In 1999, however, the CPP regime was introduced, whereby only the caller had to pay for the call. Initially applicable to only landline users, it was later felt that a CPP regime for mobile users would contribute significantly towards the government's objective of increasing teledensity. As a result, CPP was implemented for mobile services in May 2003, making incoming mobile calls free.

During 2000-01, the government liberalised the basic telecom services market. The basic service operators (BSOs) were allowed to offer limited mobility services based on CDMA technology in the short distance charging areas (SDCAs) on the same licence. The GSM operators opposed limited mobility, alleging that it was a backdoor entry into the cellular business. After a protracted legal battle, a compromise was reached in November 2003. TRAI proposed the introduction of UAS licences which brought cellular and basic telephony services under a single licence.

Under the UAS licence regime, existing operators had the option to continue with the original licensing regime or migrate to a UAS regime in existing service areas with the existing allocated/contracted spectrum. While erstwhile cellular service providers could migrate to the UAS licence regime without any additional entry fee, BSOs were required to pay an entry fee equivalent to the difference between the amount paid by the fourth cellular operator and the entry fee paid for the basic licence. Companies like Reliance Communications (RCOM) and Tata Teleservices Limited (TTSL) took advantage of this and converted their existing licences to UAS licences. While RCOM paid Rs 15.81 billion (including a penalty of Rs 4.85 billion for violating licence norms), TTSL paid Rs 5.45 billion for migrating to the new licence regime.

In October 2007, the government allowed dual technology on the UAS licences whereby service providers could offer both GSM and CDMA services under the same licence, subject to an entry fee of Rs 16.51 billion for pan-Indian operations. Both CDMA players, RCOM and TTSL, obtained pan-Indian GSM licences along with the requisite spectrum.

The same year, the government decided to give away the last set of 2G licences, inviting applications from all companies interested in entering the telecom sector. The government received over 573 applications from companies in diverse verticals. In January 2008, DoT issued 121 letters of intent for UAS licences. These included eight subsidiaries of Unitech Limited for 22 telecom circles, Swan Telecom (13 circles), S Tel (6 circles), the Ruias-owned Loop Telecom (22 circles), Datacom Solutions (22 circles), Idea Cellular (9 circles) and Sistema Shyam TeleServices (22 circles). All these companies have been allocated the requisite initial spectrum for starting services.

DoT released the broadband policy in October 2004. The salient features of the policy included technology neutrality and permission to all companies, including Mahanagar Telephone Nigam Limited (MTNL) and Bharat Sanchar Nigam Limited's (BSNL) , to have franchisees to sell their broadband services. Service providers were also permitted to enter into franchisee agreements with cable TV network operators. The policy also de-licensed certain frequency bands and simplified some of the mandatory governmental clearances.

The government increased the FDI limit in the telecom sector from 49 per cent to 74 per cent in October 2005. The remaining 26 per cent equity had to be held by Indian citizens or an Indian company.

To address possible security concerns, foreign firms needed to obtain approval from the Foreign Investment Promotion Board to raise their holdings beyond 49 per cent; the majority of the board directors had to be Indians; and the key Indian shareholder needed to hold a minimum of 10 per cent. The company would also have to disclose the status of its foreign holdings and certify that this was within the ceiling of 74 per cent on a half-yearly basis. While earlier the chief technology officer, chief executive officer and chief financial officer had to be Indian, in the revised guidelines issued in April 2007, they are allowed to be foreign nationals but require security clearance from the Ministry of Home Affairs.

TRAI notified the access deficit charge (ADC) for the first time in January 2003 to compensate BSNL for the losses incurred by it in providing fixed line services in rural areas. The overall ADC was originally estimated at Rs 130 billion. In December 2003, TRAI's ADC regime was imposed on all calls, cellular as well as basic. While the ADC was previously calculated on a percall basis, in March 2006, TRAI implemented the new ADC regime which was on a revenue sharing basis.

The ADC was subsequently gradually lowered and completely phased out in September 2009. With effect from April 2009, the levy on all domestic calls was removed. The ADC paid by international long distance (ILD) operators, at the rate of Re 1 per minute on all incoming calls, was also halved to Re 0.50 per minute. This too was subsequently removed by September 2009. BSNL is currently contesting this move and a final decision on the issue is pending with the Supreme Court.

The national long distance (NLD) segment was opened to the private sector from August 13, 2000, enabling NLD operators to carry intercircle traffic in India. The licence for NLD operators is issued on a non-exclusive basis, for a period of 20 years and is extendable by 10 years at one time. There is no restriction on the number of NLD operators.

The government opened up the ILD sector from April 1, 2002 to private operators. There was no restriction on the number of operators and the licence was valid for 20 years from the date of the licence agreement.

In a major policy change in the long distance segment, in November 2005, the annual licence fee payable by operators for providing ILD and NLD services was reduced from 15 per cent to 6 per cent of the gross revenue. The entry fee for NLD and ILD operators was reduced from Rs 1 billion and Rs 250 million, respectively to Rs 25 million. The response was tremendous with DoT receiving more than 20 applications from both global as well as domestic players seeking long distance licences.

In 2008, DoT scrapped the Rs 4 billion guarantee that operators were required to furnish and allowed entrants three years to set up their long distance infrastructure. The objective was to allow faster rollouts as new licensees could ride on the infrastructure of the existing players.

Over the years, the government has been taking steps to frame policies to ensure efficient utilisation of spectrum, which is a scarce resource. However, efforts of DoT and TRAI have resulted in controversies.

In 2002, the government introduced a subscriber-linked spectrum allocation process, referred to as subscriber-based norms. This drew up the road map for allotment of 2x12.5 MHz of spectrum per operator in each service area. The telecom licences awarded by the government to operators entitled them to spectrum of up to 6.2 MHz. For additional spectrum, they had to meet the subscriber-linked criterion laid down by DoT.

In 2008, DoT revised the criteria for additional spectrum allocation. According to this, the subscriber base required for additional spectrum allocation was hiked by two to six times for different circles.

Till 2008, spectrum allocation of 4.4 MHz for GSM operators and 2.5 MHz for CDMA operators was bundled along with the mobile licences. This could be further scaled up to 6.2 MHz for GSM and 5 MHz for CDMA operators, depending on availability and the operator's ability to justify the need for it.

However, given the deluge of over 570 UAS licence applications, in December 2007, DoT delinked spectrum from the telecom licence and implemented a policy of first come, first served for spectrum allocation. It depended entirely on submission of licence fees to DoT's WPC wing for a spectrum licence.

A large amount of spectrum is currently with the defence services. Hence, to ensure adequate spectrum availability, the government, in May 2006, announced a Rs 10 billion project to convert a part of the defence services' wireless operations to optic fibre cables. This project, when implemented, is expected to release 45 MHz of spectrum which will be allocated for both 2G and 3G services.

After two years of delay, the government finally announced the road map for 3G services in 2008. It was decided that 3G licences would be granted through an eauction process which would be executed by a specialised agency to ensure transparency in the selection process. The panIndian reserve price for 3G spectrum was pegged at Rs 35 billion and that for wireless broadband access at Rs 17.5 billion.

The guidelines allow any player with a UAS licence or previous experience in running 3G telecom services to bid for 3G spectrum. GSM spectrum is to be auctioned in blocks of 2x5 MHz in 2.1 GHz band (1920-1980 MHz paired with 2110-2170 MHz). However, instead of the original plan of auctioning four 3G licences per circle, bundled with 5 MHz of spectrum per licence, the schedule has been revised and now only three slots per circle will be auctioned. This will, however, depend on the availability of spectrum in each circle. BSNL and MTNL have already received spectrum and have started offering 3G services.

Spectrum in the 450 MHz band, in the 800 MHz band for EVDO services, and in the 1900 MHz band (1900-1910 MHz paired with 1980-1990 MHz) will be auctioned if and when it becomes available. This will be notified separately.

The auctions are to be carried out in four stages: an invitation stage, a prequalification stage, an auction stage and a grant stage. The auction was scheduled to take place on January 14, 2010 but the date has been postponed.

In November 2007, the government cleared the deck for mobile number portability (MNP), which would allow users to change service providers without changing their mobile number. The government was keen to introduce MNP as it would increase competition significantly. This, in turn, would act as a catalyst for service providers to improve their quality of service.

The timeline for implementing MNP was earlier slated for end-2009. However, it has been pushed forward to early 2010.

DoT has selected two global majors, Telcordia Technologies (formerly Bell Communications) and Syniverse Technologies, to provide solutions for the implementation of MNP in the country. Meanwhile, TRAI, in its recent recommendations for fixing MNP charges, has asked the telecom companies to bear a large part of the cost of MNP. It has fixed a per-port transaction charge and has set the ceiling limit for porting charges to be paid by a subscriber at Rs 19.

DoT cleared the way for the entry of mobile virtual network operators (MVNOs) in 2008. There are, however, no policy guidelines on it yet, as DoT and the regulator have not come to any consensus on several key issues.

DoT intends to impose an entry fee on virtual operators that is equivalent to 10 per cent of what the unified access licensee pays, which is subject to a ceiling and floor price for each service area. The maximum entry fee has been pegged at Rs 50 million for metro and Category A circles, Rs 30 million for Category B circles and Rs 10 million for Category C circles. The floor price has been set at Rs 10 million for metro and Category A circles, Rs 5 million for Category B circles and Rs 2.5 million for Category C circles. MVNOs will also have to pay spectrum charges similar to what existing operators pay. In addition, they will have to give a performance bank guarantee equivalent to 5 per cent of what the existing mobile players have paid.

MTNL and BSNL have introduced the service in select areas. Private players like Bharti Airtel and RCOM have also launched it recently in 2009. The policy and regulatory scenario for IPTV services is still evolving. IPTV services can be provided by UAS licensees, cellular mobile telephony service licensees or ISP licensees without payment of additional fees. However, ISP licence holders must have a net worth of over Rs 1 billion (a provision opposed by Internet Service Providers' Association of India on the ground that only 5 out of 250 operators can meet it) to offer the service. TRAI has also recommended that IPTV content be regulated by the Ministry of Information and Broadcasting and the information technology ministry.

According to the current guidelines, a merger of licences is permitted in the following categories of licences: cellular licences with cellular licences; basic service licences with basic service licences; UAS licences with UAS licences; basic service licences with UAS licences; and cellular licences with UAS licences.

Intra-circle merger of licences is not allowed if the number of operators for a particular service reduces to less than three in a circle. The UAS licence is treated as a basic as well as a cellular service separately while deciding the number of operators in a given service area. Also, if the market share (calculated on the basis of the number of subscribers) of the merged entity is 67 per cent or more, the merger is not allowed.

In 2007, the M&A guidelines were revised to include a three-year lock-in period to keep out non-serious players, ready to sell stake for quick profits. The motive was to ensure that the new players fully rolled out their networks.

Even though TRAI and DoT have cleared several operational glitches, a few issues continue to demand attention. Key among these are the spectrum issue and the high rate of taxes imposed on the telecom industry. The other outstanding issues are the lack of coordination between DoT and Department of Information Technology over internet and broadband policies, and the inefficient utilisation of the USO Fund.

To conclude, the government recognises the need for a forward-looking approach that incorporates technology advances and structural changes in the sector. After all, the overall objective of DoT and TRAI is to provide accelerated growth in infrastructure and services, improve customer services, provide autonomy and flexibility within the sector, help raise finances and provide an effective regulatory and policy environment.