Operationalizing FDI Reforms And Easing Market Entry Conditions In The Telecom Sector

Arjun Sinha and Mriganki Nagpal

30 May 2022 7:15 AM GMT

  • Operationalizing FDI Reforms And Easing Market Entry Conditions In The Telecom Sector

    The Indian telecom sector has seen significant reform in recent times to improve sectoral health and increase ease of doing business. To attract investment, foreign investors can now invest up to 100% in any local Indian company without government approval. This marks a significant shift from the era of government approval for any investments above the 49% threshold. Licensing conditions have also recently been amended to enable use of private satellite systems (including foreign satellite systems), further encouraging the entry of foreign investors.

    However, to truly facilitate foreign investment in the sector, there is a need to improve entry conditions, simplify rollout costs and timelines, provide greater clarity on the consequences of violations of telecom regulation and ensure speedier dispute resolution in the sector.

    Easier entry conditions for a new telecom business in India

    Applicants must be permitted to rely on the net worth of their parent entities (especially for wholly owned subsidiaries), instead of demonstrating net worth on a standalone basis. The Department of Telecommunications (DoT) already permits a similar framework for spectrum allocation. This would allow companies to conserve capital in the initial stages of their market entry cycle.

    Foreign citizens should be permitted to occupy senior managerial roles without the need for prior security clearance. Ideally, security clearance should only be required for individuals with ties to selected countries of concern. However, if this framework is not acceptable, new entrants could be permitted to appoint foreign nationals by giving an undertaking that they would appoint Indian citizens or pre-cleared foreign citizens within 2 to 3 years of rollout. This would allow foreign companies to exercise greater control and oversight over their local telecom subsidiaries, which can then be handed over to local talent after rollout.

    Simplifying rollout of a telecom business

    Administrative fees and expenses for starting a telecom business have been rationalized significantly in the recent past. The DoT has done away with payment of space segment charges to the Department of Space as well as the requirement for license holders to pay INR 21 lakhs for each satellite connection transponder used by them. Since these fees are not relevant when companies intend to use foreign satellite services, the recent regulatory change has led to a marked reduction in rollout costs for foreign investors.

    Continuing this trend further, the rollout process post grant of license can, in our view, be made more cost and time efficient. For example, charges for authorizing use of certain carrier frequencies, or pre rollout mandatory verification of receiving equipment are extremely high and can be rationalized. Indian regulatory authorities could also expand the list of foreign testing labs that can accredit telecom equipment.

    Telecom equipment imported from related parties should be permitted without further special valuation by the customs department as long as the equipment is meant for self-use and is undertaken to be returned or destroyed post use. Since special valuation processes are aimed at preventing evasion of customs duties through artificially deflated prices, they may not be highly relevant when the equipment is imported in small quantities for non-commercial uses.

    Greater flexibility and certainty in running a telecom business in India post rollout

    The regulatory framework should also look to grant greater operational flexibility to foreign players conducting businesses through their subsidiaries.

    Data localization of customer data should be revisited, as it effectively pushes telcos to silo their Indian data from global operations. Not only does this impose additional costs on operations, it is also likely to impact India's position as a global center of innovation. Instead of restricting data transfers, license terms can create extra territorial jurisdiction and impose limits on sharing of such data with third parties and impose notice obligations on such transfers.

    Similarly, to increase operational efficiency and allow centralized operations, overseas in house teams of telecom companies should be granted greater flexibility to access certain telecom infrastructure remotely. To protect security interests of the state, the list of individuals with remote access can be shared with the government on a periodic basis, and access logs reviewed by authorities from time to time.

    Simplifying the dispute resolution structure for the telecom sector

    The penalty and dispute resolution structure needs significant overhaul. The telecom license agreement should differentiate between serious and minor offences and set out graded penalties based on the severity of offence. The Telegraph Act, 1885 should also be amended to allow compounding of offences.

    Regulatory orders levying penalties should be made publicly available to facilitate standard-setting and enable market participants to make decisions accordingly. The telecom regulatory authorities should also operate local courts outside New Delhi and enable conduct of virtual proceedings for telecom disputes.

    Taken together, these changes will create certainty in the market, and businesses will not be weighed down by heavy costs and lengthy proceedings for minor violations.

    As things currently stand, foreign players face additional expenses and delays while operationalizing their Indian operations due to a mismatch between the licensing framework and underlying regulations. Having enabled the entry of foreign telcos, the focus should now be on easing market entry conditions for them.

    Authors: Arjun Sinha (Partner) & Mriganki Nagpal (Associate) at AP & Partners. Views are personal.

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