Thursday, November 18, 2010

CAG Report on the Telecom Sector

Comptroller and Auditor General (CAG) of India presented report that was tabled in Parliament. The same day Supreme Court questioned the Indian Prime Minister for not answering the request for permission to prosecute the Telecom Minister Mr. A Raja. The petition was filed by Janta Party leader Subramanyam Swamy.

The CAG report that mentioned the anomalies in the license allocation of 2G spectrum by Department of Telecommunications (DoT) had remarked against the license granted to some of the companies under unified access service license. These companies were Uninor, Loop Telecom, S-Tel, Datacom (now Videocon), Allianz Infratech (which has merged with DB-Etisalat) and Swan Telecom. The report also commented on lack of transparency by DoT in issuing licenses to Reliance Communications, Tata Teleservices and Shyam Telelink under the dual-technology route. This resulted in potential loss to the exchequer of Rs 1,76,645 crores as the price paid by the operators for 3G spectrum while the licenses were granted for 2G spectrum.

As per the CAG report the DoT also issued licenses to new operators despite their failure to meet the requirements. Six companies of Unitech group, Allianz Infratech, Loop Telecom, STel and Datacom made false and fictitious claims of higher paid-up capital for which DoT did not verify before issuance. The companies failed to obtain clearance from the Registrar of Companies to change their articles of association to include telecom. The unitech group submitted their applications for grant of 20 licenses to DoT on 24 September 2007. The information was presented as truncated version in front of Registrar of Companies on 20 September 2007. The anomalies were found only later after verification. These companies later increased their paid up capital to meet the requirement only after obtaining the licence in January 2008.

National Telecom Policy

India adopted its first independent national policy on telecom sector in 1994 that marked the era of privatization. A new policy was enacted in 1999 that suited the fast changing communication widespread with the usage of mobile operators increasing rapidly. Later with the TRAI Act in 2000 the purview was expanded further. The policy has been changed based on the changing conditions. There were a number of supplementary policies to make wider aspect of telecommunication. Time to time these have taken the form of Unified Access Services licensing regulation, Internet Service Providers (ISPs) and Broadband Policy of 2004. Later FDI policy was also announced opening the sector to foreign investment.

Highlights of National Telecom Policy 1999 - key features

• Empowering Regulators.

• Distance calling services opened to private operators.

• Private telecom operators licensed on a revenue sharing basis, plus a one-time entry fee.

• Direct interconnectivity and sharing of network with other telecom operators within the service area was


• Department of Telecommunication Services (DTS) corporatised in 2000.

• Spectrum Management made transparent and more efficient.

Unified Access Services

Unified access license regime was introduced in November, 2003. Unified Access Services operators are free to provide, within their area of operation, services, which cover collection, carriage, transmission and delivery of voice and/or non-voice messages over Licensee’s network by deploying circuit, and/or packet switched equipment. Further, the Licensee can also provide Voice Mail, Audiotex services, Video Conferencing, Videotex, E-Mail, Closed User Group (CUG) as Value Added Services over its network to the subscribers falling within its service area on non-discriminatory basis.

The country is divided into 23 Service Areas consisting of 19 Telecom Circles and 4 Metro Service Areas for providing Unified Access Services (UAS). The license for Unified Access Services is issued on non-exclusive basis, for a period of 20 years, extendable by 10 years at one time within the territorial jurisdiction of a licensed Service Area. The license fee is 10 percent, 8 percent and 6 percent of Adjusted Gross Revenue (AGR) for Metro and Category `A’, Category `B’ and Category `C’ Service Areas, respectively. Revenue and the fee or royalty for the use of spectrum and possession of wireless telegraphy equipment were separated from the regular fee. The frequencies are assigned by WPC wing of the Department of Telecommunications from the frequency bands earmarked in the applicable National Frequency Allocation Plan and in coordination with various users subject to availability of scarce spectrum.

Internet Service Providers (ISPs)

Government in the public interest in general, and consumer interest in particular, and for proper conduct of telegraph and telecom services has decided to issue the new guidelines for grant of license of Internet services on non-exclusive basis. Any Indian company with a maximum foreign equity of 74 percent is eligible for grant of license.

Broadband Policy 2004

Government has announced Broadband Policy in October 2004. The main emphasis is on the creation of infrastructure through various technologies that can contribute to the growth of broadband services. These technologies include optical fibre, Asymmetric Digital Subscriber Lines (ADSL), cable TV network; DTH etc. Broadband connectivity has been defined as “ Always On” with the minimum speed of 256 kbps. It is estimated that the number of broadband subscribers would be 20 million by 2010. With a view to encourage Broadband Connectivity, both outdoor and indoor usage of low power Wi-Fi and Wi-Max systems in 2.4 GHz-2.4835 GHz band has been delicensed. The use of low power indoor systems in 5.15-5.35 GHz and 5.725-5.875 GHz bands has also been delicensed in January 05. The SACFA/WPC clearance has been simplified. The setting up of National Internet Exchange of India (NIXI) would enable bringing down the international bandwidth cost substantially, thus making the broadband connectivity more affordable.

Current Account Deficit Inflates

As per the recent reports released by the Goldman Sachs Group the biggest risk posed to India’s growth by the deterioration in its external balances. The current account deficit estimates is to rise to four per cent of gross domestic product (GDP) in the year to March 2011, and up by 4.3 percent by March 2012. The deficit was 2.9 per cent last year. India is increasingly financing its deficit by short-term capital, that is, increasing its short-term debt and raising its external vulnerability. Almost 80 per cent of capital flows are not related to foreign direct investment.

On the policy advice the Goldman Sachs advised on adopting tight fiscal policy and monetary policy that would help maintain the value of Rupee against appreciation in currency. Goldman projection shows that the rupee to reach 44 per dollar and 43 per dollar, respectively, in the next three months and 12 months, respectively, driven mainly on the dollar’s global weakness. The Reserve Bank of India to raise the key policy rates up to 75 basis points by June 2011. As per the reports the external debt with maturity of less than a year rose to $115 billion, or about 42 per cent of the gross reserves. The trade credit and the short term portion of the deposits of non-resident Indians that are due to mature over the next one year would further create a lag in funds and thus increasing the deficits.

On merchandise trade the report commented on the strong outlook for growth in Financial Year 2011-12 with robust demand for imports, the large infrastructure import needs, such as road and power equipment, and India’s increasing reliance on commodity imports of oil and coal. The increase in imports is across the board and not just limited to oil and gold but to other sector products and assets as well. Increasing institutional investment from abroad as the rising volume of foreign capital seeks growth and yield could push up India’s commodity prices. High asset prices would lead to strengthened rupee and possible loss of export competitiveness, in addition to widening the current account deficit. Exports to the US and European Union, are likely to remain weak because of subdued demand affecting 30 per cent of India’s total merchandise exports and a larger proportion of services exports.