1. The Indian telecommunications industry is one of the fastest growing in the world. The industry has witnessed consistent growth during the last year on the back of rollout of newer circles by operators, successful auction of third-generation (3G) and broadband wireless access (BWA) spectrum, network rollout in semi-rural areas and increased focus on the value added services (VAS) market.<br />According to the Telecom Regulatory Authority of India (TRAI), the number of telephone subscriber base in the country reached 742.12 million as on October 31, 2010, an increase of 2.61 per cent from 723.28 million in September 2010. With this the overall tele-density (telephones per 100 people) has touched 62.51. The wireless subscriber base has increased to 706.69 million at the end of October 2010 from 687.71 million in September 2010, registering a growth of 2.76 per cent.<br />Meanwhile, Indian Global System of Mobile Communication (GSM) telecom operators added 17.45 million new subscribers in November 2010, taking the all-India GSM cellular subscriber base to 526.18 million, according to the Cellular Operators Association of India (COAI). The GSM subscriber base stood at 508.72 million at the end of October 2010.<br />Value-Added Services (VAS) Market<br />Mobile value added services (VAS) include text or SMS, menu-based services, downloading of music or ring tones, mobile TV, videos and sophisticated m-commerce applications. As per a report, ‘India Telecom 2010’ released by KPMG in December 2010, currently, the VAS market is worth US$ 2.45 billion-US$ 2.67 billion, which is around 10 per cent of the total revenue of the wireless industry. The share of VAS in wireless revenue is likely to increase to 12-13 per cent by 2011, on the back of increased operator focus on VAS due to continuous fall in voice tariffs, increasing penetration of feature rich handsets, availability of vernacular content and increased user adoption of VAS applications.<br />Major Investments<br />The booming domestic telecom market has been attracting huge amounts of investment which is likely to accelerate with the entry of new players and launch of new services. According to the Department of Industrial Policy and Promotion (DIPP), the telecommunications sector which includes radio paging, mobile services and basic telephone services attracted foreign direct investment (FDI) worth US$ 1,062 million during April-October 2010-11. The cumulative flow of FDI in the sector during April 2000 and October 2010 is US$ 9,993 million.<br />As per an industry report the telecom industry witnessed merger and acquisition (M&A) deals worth US$ 16.60 billion during April-December 2010, which represented 28.26 per cent of the total valuation of the deals across all the sectors during the period analysed. There were 10 inbound, outbound and domestic M&A deals in the telecom sector during the first nine months of the current fiscal. The biggest M&A deal in the sector was made by telecommunications service provider Bharti Airtel through the acquisition of Zain’s African mobile services operations in 15 countries. The deal involved a transaction of US$ 10.7 billion. In another deal, Bharti Airtel acquired 100 per cent stake of Telecom Seychelles Ltd for US$ 62 million.<br />Other major M&A deals included the acquisition of 95 per cent stake in Infotel Broadband for US$ 1,032.26 million by Reliance Industries and 26 per cent stake of US-based mobile chipmaker Qualcomm’s Indian arm for US$ 57.72 million by India’s Tulip Telecom and Global Holding. Further, India-based GTL Infrastructure Ltd has bought 17,500 telecom towers of Aircel Ltd. for US$ 1,702.95 million.<br />Going Global<br />In March 2010, Bharti Airtel bought the African operations of Kuwait-based Zain Telecom for US$ 10.7 billion, driving the Indian player into the league of top ten telecom players globally.<br />The Reserve Bank of India (RBI) has liberalised the investment norms for Indian telecom companies by allowing them to invest in international submarine cable consortia through the automatic route. In April 2010, RBI issued a notification stating “As a measure of further liberalisation, it has now been decided… to allow Indian companies to participate in a consortium with other international operators to construct and maintain submarine cable systems on co-ownership basis under the automatic route.” The notification further added, “Accordingly, banks may allow remittances by Indian companies for overseas direct investment.”<br />Tele-medicine<br />With increase in cell phone users to around 700 million and introduction of 3G services soon in the country, remote treatment and diagnosis of patients through mobile phones would become a reality in the near future. In fact, a few telecom operators and value-added service developers are planning to use mobile phones for diagnostic and treatment support, remote disease monitoring, health awareness and communication.<br />The Gujarat health department plans to connect all villages through its telemedicine network. The state government has so far expanded the reach of telemedicine services from 53 villages in 2008 to 453, and hopes to cross 500 villages soon. Jay Narayan Vyas, state health minister, said “First thing we plan to do is to start the 104 service over the phone. People can call up and talk to paramedics in call centers who can suggest the primary action to be taken in case of any health emergency. Also, they would be able to suggest generic and over the counter drugs.”<br />3G Services<br />The Department of Telecom has taken the pioneering decision of launching of 3G services by BSNL and MTNL and initiation of process for auction of spectrum for 3G services to private operators. Allocation of spectrum for 3G and BWA services was done through a controlled simultaneous, ascending e-auction process.<br />All the 71 blocks that were put up for auction across the 22 service areas in the country were sold, leaving no unsold lots. Auction for 3G spectrum ended on May 19, 2010 after 183 rounds of intense bidding over a span of 34 days. The Government is expected to morph revenue worth US$ 14.6 billion. All the available slots across 22 circles have been sold to seven different operators.<br />A pan-India bid for third generation spectrum stood at US$ 3.6 billion. The Anil Ambani-led Reliance Communication bagged the highest number of 13 circles at a cost of US$ 1.9 billion, followed by Bharti Airtel in 12, Idea in 11 and Vodafone and the Tatas in nine circles each, according to the Department of Telecommunications. MTNL and BSNL will have to pay US$ 1.42 billion and US$ 2.2 billion respectively.<br />3G spectra have already been allotted to successful bidders for commercial use on September 1, 2010 as per the timelines indicated in the Notice Inviting Application (NIA) and in the Letter of Intent issued after the bid amounts were deposited. The 3G spectrum has been allotted to AirTel, Aircel, Vodafone, S Tel, Reliance, Idea Cellular and Tata Cellular Services who won the bids through the electronic auction spread over a period of 34 days in respect of 3G and 16 days in respect of BWA. The BWA spectra have also been assigned to the successful bidders which are Aircel, Augere, Tikona, Qualcomm, Infotel and Bharti. 3G & BWA spectrum would enable users to have value added services like video streaming, mobile internet access, higher & faster data downloads.<br />Manufacturing<br />The Indian telecom industry manufactures a vast range of telecom equipment using state-of-the-art technology.<br />As per a press release by the Ministry of Communications & Information Technology, the production of telecom equipments in value terms is expected to increase from US$ 10.87 billion during 2008-09 to US$ 11.87 billion in 2010-2011. Favourable factors such as policy moves taken by the Government, incentives offered, large talent pool in R&D and low labour cost can provide an impetus to the industry. Exports increased from US$ 89.24 million in 2002-03 to US$ 3 billion in 2009-10 accounting for 26 per cent of the total equipment produced in the country and it is expected to increase to US$ 3.33 billion in 2010-11.<br />Meanwhile, telecom regulator TRAI has released a consultation paper on ‘Encouraging Telecom Equipment Manufacturing in India’ seeking views of stakeholders for promoting research and development (R&D) and manufacturing of telecom equipment in the country. The consultation paper issued on December 28, 2010 aims at discussing, debating and finalising measures for promotion of R&D and creation of intellectual property as well as manufacture of telecom equipment and electronic components in India.<br />Further, the Indian mobile handsets market continued to grow in the third quarter 2010 as well to record a quarter-on-quarter growth of 3.6 per cent to touch 40.08 million units in the quarter, according to market intelligence firm IDC’s India Quarterly Mobile Handsets Tracker. The year 2010 is expected to end with total mobile handset sales of 155.9 million units.<br />The study further showed that the Finnish handset maker Nokia had the largest share of 31.5 per cent in terms of units shipped during the third quarter of 2010. Nokia was followed by the Chinese brand G’Five in terms of unit shipments market share and Korean handset manufacturer Samsung occupied the third slot.<br />According to a report by technology researcher Gartner Inc, India ranks fourth in manufacturing telecom equipment in the Asia-Pacific (Apac) region. The country has a 5.7 per cent share of the region’s total telecom equipment production revenue of US$ 180 billion in 2009.<br />“We expect India to move up to the third spot (after China and South Korea) with a share of 8.5 per cent of the total (estimated) Apac telecom equipment production revenue of US$ 277 billion by 2014,” Gartner said. The firm estimates India’s telecom equipment production revenue to grow at a CAGR of 17.1 per cent to reach US$ 22.6 billion in fiscal 2014. India will be the fastest growing telecom equipment production market in the Apac region over the next five years, it predicts.<br />Rural Telephony<br />The rural Telephone connections have gone up from 3.6 million in 1999 to 12.3 million in March 2004 and further to 200.77 million in March 2010. Their share in the total telephones has constantly increased from around 14 per cent in 2005 to 32.75 per cent at the end of October 2010. The rural subscribers have grown to 243.04 million at the end of October 2010. The wireless connections have contributed substantially to total rural telephone connections; it stands at 233.95 million in October 2010. During 2010-11, the growth rate of rural telephones was 21.05 per cent as against 18.69 per cent of urban telephones.<br />The private sector has contributed to the growth of rural telephones as it provided about 84.27 per cent of rural telephones during October 2010.<br />The government plans to connect all revenue villages in India either through landline, mobile or WLL by February 2011. “We have already connected about 96 per cent of the revenue villages. The remaining 25,000 villages will have connectivity by February 2011,” stated Mr Sachin Pilot, Minister of State for Communications and IT.<br />Further, the Government, under Bharat Nirman II Programme, has envisaged providing broadband coverage to all 250,000 Gram Panchayats by 2012.<br />Policy Initiatives<br />The government plans to formulate a comprehensive ‘National Telecom Policy 2011’ including the recognition of Telecom as infrastructure and as an essential service, encouraging Green Telecom, steps to accelerate migration from IPv4 to IPv6 at the earliest, release of IPv6 standards by Telecom Engineering Centre for implementation in the country, etc., as per a press release by the Ministry of Communications & Information Technology.<br />Further, the government plans to take concrete steps towards finalisation of ‘National Broadband Plan’ including strategy for implementation and initiation of steps for roll out of optical fibre.<br />The government has taken many proactive initiatives to facilitate the rapid growth of the Indian telecom industry.<br />In the area of telecom equipment manufacturing and provision of IT-enabled services, 100 per cent FDI is permitted<br />No cap on the number of access providers in any service area. In 2008, 122 new Unified Access Service (UAS) licences were granted to 17 companies in 22 services areas of the country<br />Revised subscriber based criteria for allocation of Global System of Mobile Communication (GSM) and Code Division Multiple Access (CDMA) spectra were issued in January 2008<br />To provide infrastructure support for mobile services a scheme has been launched to provide support for setting up and managing 7,436 infrastructure sites spread over 500 districts in 27 states. As on December 31, 2009, about 6,956 towers had been set up under the scheme<br />According to the Consolidated Foreign Direct Investment (FDI) Policy document, the FDI limit in telecom services is 74 per cent subject to the following conditions:<br />This is applicable in case of Basic, Cellular, Unified Access Services, National/ International Long Distance, V-Sat, Public Mobile Radio Trunked Services (PMRTS), Global Mobile Personal Communications Services (GMPCS) and other value added Services<br />Both direct and indirect foreign investment in the licensee company shall be counted for the purpose of FDI ceiling. Foreign Investment shall include investment by Foreign Institutional Investors (FIIs), Non-resident Indians (NRIs), Foreign Currency Convertible Bonds (FCCBs), American Depository Receipts (ADRs), Global Depository Receipts (GDRs) and convertible preference shares held by foreign entity. In any case, the ‘Indian’ shareholding will not be less than 26 per cent<br />FDI up to 49 per cent is on the automatic route and beyond that on the government route. FDI in the licensee company/Indian promoters/investment companies including their holding companies shall require approval of the Foreign Investment Promotion Board (FIPB) if it has a bearing on the overall ceiling of 74 per cent. While approving the investment proposals, FIPB shall take note that investment is not coming from countries of concern and/or unfriendly entities<br />The investment approval by FIPB shall envisage the conditionality that the Company would adhere to licence Agreement<br />FDI shall be subject to laws of India and not the laws of the foreign country/countries<br />