Telecom in India

Telecom Industry in India
1. INDUSTRYOVERVIEW 1.1 Background The Indian Telecommunications network is the third largest in the world and the second largest among the emerging economies of Asia. Today, it is the fastest growing market in the world. The telecommunication sector continued to register significant success during the year and has emerged as one of the key sectors responsible for Indias resurgent Indias economic growth. 1.1.1 Growth This rapid growth has been possible due to various proactive and positive decisions of the Government and contribution of both by the public and the private sector. The rapid strides in the telecom sector have been facilitated by liberal policies of the Government that provide easy market access for telecom equipment and a fair regulatory framework for offering telecom services to the Indian consumers at affordable prices. 1.1.2 Wireline Vs Wireless It has also undergone a substantial change in terms of mobile versus fixed phones and public versus private participation. The preference for use of wireless phones has also been predominant in the sector. Participation of the private entities in the telecom sector is rapidly increasing rate there by presenting the enormous growth opportunities. There is a clear distinction between the Global Satellite Mobile Communication (GSM) and Code Division Multiple Access (CDMA) technologies used and the graph below shows the divide between the two. 1.2 Segment wise Status 1.2.1 Wireline Services With increasing penetration of the wireless services, the wireline services in the country is becoming stagnant. On the other hand, Broadband demand has picked up and promises to stabilise fixed line growth. 1.2.2 GSM Sector
In terms of the Global System for Mobile Communication (GSM) subscriber base this now places India third after China and Russia.China had 401.7 million GSM subscribers
1.2.3 CDMA Services CDMA technology was introduced in India as a limited mobility solution. The introduction of CDMA services has created competition, lowered tariffs and offered many citizens access to communication services for the first time 1.2.4 Internet Services Internet services were launched in India on August 15, 1995. In November 1998 the government opened up the sector to private operators. A liberal licensing regime was put in place to increase Internet penetration across the country. The growth of IP telephony or grey market is also a serious concern.
Government loses revenue, while unlicensed operation by certain operators violates the law and depletes licensed operators market share. New services like IP-TV and IP-Telephony are becoming popular with the demand likely to increase in coming years. The scope of services under existing ISP license conditions are unclear. 1.3 Manufacture of Telecom Equipment Rising demand for a wide range of telecom equipment, particularly in the area of mobile telecommunication, has provided excellent opportunities to domestic and foreign investors in the manufacturing sector. The last two years saw many renowned telecom companies setting up their manufacturing base in India. Ericsson has set up GSM Radio Base Station Manufacturing facility in Jaipur. Elcoteq has set up handset manufacturing facilities in Bangalore. Nokia set up its manufacturing plant in Chennai. LG Electronics set up plant of manufacturing GSM mobile phones near Pune. The Government has already set up Telecom Equipment and Services Export Promotion Forum and Telecom Testing and Security Certification Centre (TETC). A large number of companies like Alcatel, Cisco have also shown interest in setting up their R&D centers in India. With above initiatives India is expected to be a manufacturing hub for the telecom equipment. 2 POLICY AND INITIATIVES 2.1 Regulatory Framework The Telecom Regulatory Authority of India (TRAI) was set up in March 1997 as a regulator for Telecom sector. The TRAIs functions are recommendatory, regulatory and tariff setting in telecom sector. Telecom Disputes Settlement and Appellate Tribunal (TDSAT) came into existence in May, 2000. TDSAT has been empowered to adjudicate any dispute
between a licensor and a licensee between two or more service providers between a service provider and a group of consumers hear and dispose of appeal against any direction, decision or order of TRAI
Tariffs for telecommunication services have evolved from a regime where tariffs were determined by Telecom Regulatory Authority of India to a regime where tariffs are largely under forbearance. TRAI intervenes by regulating the tariffs for only those services, the markets of which are not competitive. Universal Service Obligation Fund (USOF) exclusively for meeting the Universal Service Obligation was established in April, 2002. The Universal Service Levy is presently 5 per cent of the Adjusted Gross Revenue (AGR) of all telecom service providers except the pure value added service providers like Internet, Voice Mail, E-Mail service providers etc. Indian Telegraph Act has been amended in October2006 to provide support for all telegraph services including mobile and broadband to bridge the digital divide. With the introduction of the Unified Access Licensing Regime, operators can offer telecom access services to consumers in a technology neutral manner, subject to fulfilling certain conditions. Introduction of this regime has also broken the legal/regulatory impasse between the cellular and basic service providers. Issuance of Intra-Circle Merger and Acquisition Guidelines provide investors an opportunity to take stakes in existing telecom operations. 2.2 Government Initiatives The Government has taken the following main initiatives for the growth of the Telecom Sector:
All telecom services have been opened up for free competition for unprecedented growth 217 (Information Technology Agreement) ITA-I items are at zero Customs Duty. Specified capital goods and all inputs required to manufacture ITA-I, items are at zero Customs Duty Availability of low cost mobile handsets The international Long Distance Services (ILDS) opened with effect from April 2002. Calling Party Pays (CPP) regime was implemented with effect from 1st May Guidelines for Unified Access Service License regime were issued in November 2003, 27 licenses out of 31 Basic Service Licenses were converted to Unified Access Service Licenses In April 2004, license fee for Unified Access Service Providers (UAS) was reduced by 2 per cent License fee for infrastructure Provider-II reduced from 15 per cent to 6 per cent of the Adjusted Gross Revenue and spectrum charges between 2 to 4 per cent in June 2004 Entry fee for NLD licenses was reduced to Rs. 2.5 Crore from Rs. 100 Crore. Entry fee for ILD reduced to Rs. 2.5 Crore from Rs. 25 Crore Lease line charges have been reduced to make the bandwidth available at competitive prices to facilitate growth in IT enabled services One India plan i.e. single tariff of Re. 1/-per minute to anywhere in India was introduced from 1st March 2006 by the Public Sector Undertakings. This tariff was emulated by most of the private service providers also. This scheme has led to death of distance in telecommunication and is going to be instrumental in promoting National Integration further The robust telecom network has also facilitated the expansion of BPO industry that is having 500,000 employees now and adding 400 employees per day. Annual license fee for National Long Distance (NLD), International Long Distance (ILD), Infrastructure Provider-II, VSAT commercial and Internet Service Provider (ISP) with internet telephony (restricted) licenses was reduced to 6 per cent of Adjusted Gross Revenue (AGR) with effort from Jan 2006. The Governments policy is neutral on use of technology by telecom service providers subject to availability of scarce resources such as spectrum etc. Licence Fees 6-10 per cent of Adjusted Gross Revenue (AGR) 2.3 Foreign Direct Investment Policy Foreign Direct Investment (FDI) was permitted in the telecom sector beginning with the telecom manufacturing segment in 1991 - when India embarked on economic liberalisation. FDI is defined as investment made by non-residents in the equity capital of a company. For the telecom sector, FDI includes investment made by Non-Resident Indians (NRIs), Overseas Corporate Bodies (OCBs), foreign entities, Foreign Institutional Investors (FIIs), American Depository Receipts (ADRs)/Global Depository Receipts (GDRs) etc. Present FDI Policy for the Telecom sector: In Basic, Cellular Mobile, National Long Distance, International Long Distance, Value Added Services and Global Mobile Personal Communications by Satellite, FDI is limited to 49 per cent (under automatic route) subject to grant of licence from the Department of Telecommunications and adherence by the companies (who are investing and the companies in which investment is being made) to the licence
conditions for foreign equity cap and lock-in period for transfer and addition of equity and other license provisions. Foreign Direct Investment up to 74 per cent permitted, subject to licensing and security requirements for the following: - Internet Service (with gateways) - Infrastructure Providers (Category II) - Radio Paging Service FDI up to 100 per cent permitted in respect to the following telecom services: - ISPs not providing gateways (Both for satellite and submarine cables) - Infrastructure Providers providing dark fibre (IP Category I) - Electronic Mail - Voice Mail The above is subject to the following conditions: - FDI up to 100 per cent is allowed subject to the condition that such companies would divest 26 per cent of their equity in favour of Indian public within 5 years, if these companies are listed in other parts of the world. - The above services would be subject to licensing and security requirements, wherever required. - Proposals for FDI beyond 49 per cent shall be considered by Foreign Investment Promotion Board (FIPB) on a case-to-case basis. In the manufacturing sector 100 per cent FDI is permitted under the automatic route. In Basic, Cellular Mobile, paging and Value Added service, and Global Mobile Personal Communications by Satellite, FDI is permitted up to 49 per cent (under automatic route) subject to grant of license from Department of Telecommunications Foreign direct investment up to 74 per cent permitted, subject to licensing and security requirements for the Internet Service (with gateways), Infrastructure Providers (category-II), Radio Paging Service FDI up to 100 per cent permitted in respect of - ISPs not providing gateways (both for satellite and submarine cables), - Infrastructure Providers providing dark fibre (IP Category I); - Electronic Mail; and - Voice Mail FDI up to 49 per cent is also permitted in an investment company, set up for making investment in the telecom companies licensed to operate telecom services. Investment by these 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 per cent FDI is permitted under automatic route. FDI is subject to the following conditions FDI up to 100 per cent is allowed subject to the conditions that such companies would divest 26 per cent of their equity in favour of Indian public in 5 years, if these companies are listed in other parts of the world. The above services would be subject to licensing and security requirements, Wherever required. Proposals for FDI beyond 49 per cent shall be considered by FIPB on case to case basis
3. COMPETITION OVERVIEW 3.1 Major Players There are three types of players in telecom services: State owned companies (BSNL and MTNL) Private Indian owned companies (Reliance Infocomm, Tata Teleservices,) Foreign invested companies (Hutchison-Essar, Bharti Tele-Ventures, Escotel, Idea Cellular, BPL Mobile, Spice Communications) Bharat Sanchar Nigam Limited (BSNL) Name Bharat Sanchar Nigam Limited (BSNL) Year of Establishment 2000 Company Profile Bharat Sanchar Nigam Ltd. is World's 7th largest Telecommunications Company providing comprehensive range of telecom services in India: Wireline, CDMA mobile, GSM Mobile, Internet, Broadband, Carrier service, MPLS-VPN, VSAT, VoIP services, IN Services etc. Within a span of five years it has become one of the largest public sector unit in India. Global Presence/ Marketing It has a network of over 45 million lines covering 5000 Network towns with over 35 million telephone connections. Acquisitions / Strategic Alliances Future Prospect BSNL plans to expand its customer base from present 47 millions lines to 125 million lines and infrastructure investment plan to the tune of Rs. 733 crores (US$ 16.67 million) in the next three years. Mahanagar Telephone Nigam Limited (MTNL) Name Mahanagar Telephone Nigam Limited (MTNL) Year of Establishment 1986 Company Profile MTNL was set up by the Government of India to upgrade the quality of telecom services, expand the telecom network, introduce new services and to raise revenue for telecom development needs of India.s key metros. MTNL with a market share of about 13% of the National telecom Network has a customer base of 5.92 million. The Govt. of India currently holds 56.25% stake in the company. Acquisitions / Strategic Alliances MTNL has formed a Joint Venture company in
Nepal by the name of United Telecom Ltd. (UTL) in collaboration with Telecom Consultants India Limited (TCIL) in 2001 for providing WLL based basic services in Nepal. MTNL has set up its 100% subsidiary .Mahanagar Telephone Mauritius Limited. (MTML) in Mauritius, for providing basic, mobile and international long distance . Videsh Sanchar Nigam Limited (VSNL) Name Videsh Sanchar Nigam Limited (VSNL) Year of Establishment 1986 Company Profile The Videsh Sanchar Nigam Limited (VSNL) - a wholly Government owned corporation. The company operates a network of earth stations, switches, submarine cable systems, and value added service nodes to provide a range of basic and value added services and has a dedicated work force of about 2000 employees. VSNL's main gateway centers are located at Mumbai, New Delhi, Kolkata and Chennai. Global Presence/ Marketing Network The company has 52 subsidiaries in 21 countries as well as operations across four continents. Acquisitions / Strategic Alliances VSNL acquired Nasdaq-listed Teleglobe International Holdings Ltd for $239 million in 2005 Videsh Sanchar Nigam Ltd acquired Tyco Global Network, submarine cable system, for USD 130 million in 2005 Future Prospect The company plans to expand its wholesale voices services across the EU, to effectively enable enterprise customers and retail voice carriers to connect to India. VSNL is adding its capacity to meet the overwhelming demand for connectivity to India in the wholesale voice services domain. The company is also offering flexible agreements and charging methods to meet the growing demands of the wholesale voice market Bharti Company Profile Bharti Tele-Ventures Limited was incorporated on July 7, 1995 for promoting investments in telecommunications services. Its subsidiaries operate telecom services across India. Bhartis
operations are broadly handled by two companies: the Mobility group and the Infotel group. Global Presence/ Marketing Network The mobile business provides mobile & fixed wireless services using GSM technology across 23 telecom circles while the Airtel Telemedia Services business offers broadband & telephone services in 94 cities. Acquisitions / Strategic Alliances Bharti Telecom and British Telecom formed a 51%:49% joint venture, Bharti BT Internet for providing Internet services, in 1998 Bharti Tele-Ventures acquired an effective 32.36% equity interest in Bharti Mobile (formerly JT Mobiles), the cellular services provider in Karnataka and Andhra Pradesh circles in 1999 Bharti Telesonic entered into a joint venture, Bharti Aquanet, With SingTel for establishing a submarine cable landing station at Chennai in 2001 A 50:50 joint venture between Bharti and SingTel, to undertake the largest infrastructure project between Singapore and Indian companies in 2001 Future Prospect Bharti Airtel company is planning to set up 3000 more towers as part of enhancing their rural coverage and will now focus on rural and semi-urban areas. Reliance Communication Name Reliance Communications Year of Establishment 1999 Company Profile Reliance Telecom's cellular services are available in 340 towns within its eight-circle footprint. Reliance Infocomm also offered for the first time in India, mobile data services though its RWorld mobile portal. This portal leverages the data capability of the CDMA 1X network. 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 aimed at enhancing
productivity of enterprises and individuals. Global Presence/ Marketing Network Reliance Communications has IP-enabled connectivity infrastructure comprising over 150,000 kilometers of fiber-optic cable systems in India, the US, Europe, Middle East, and the Asia Pacific region. Acquisitions / Strategic Alliances International wholesale telecommunications service provider, FLAG Telecom amalgamates with Reliance Gateway, a wholly owned subsidiary of Reliance Infocomm in 2004 Tata Teleservices Name Tata Teleservices Year of Establishment 1996 Company Profile 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 bouquet of telephony services includes Mobile services, Wireless Desktop Phones, Public Booth Telephony and Wireline services. Other services include value added services like voice portal, roaming, post-paid Internet services, 3-way conferencing, group calling, Wi-Fi Internet, USB Modem, data cards, calling card services and enterprise services. Global Presence/ Marketing Network Tata Teleservices has presence in across 19 circles that includes Andhra Pradesh, Chennai, Gujarat, Karnataka, Delhi, Maharashtra, Mumbai, Tamil Nadu, Orissa, Bihar, Rajasthan, Punjab, Haryana, Himachal Pradesh, Uttar Pradesh (E), Uttar Pradesh (W), Kerala, Kolkata, Madhya Pradesh and West Bengal. Acquisitions / Strategic Alliances Tata Teleservices has acquired Hughes Tele.com (India) Limited [now renamed Tata Teleservices (Maharashtra) Limited] in 2002 Future Prospect The company is also expanding its footprint, and has paid Rs. 4.17 billion ($90 million) to DoT for 11 new licenses under the IUC
(interconnect usage charges) regime. Vodafone Name Vodafone Year of Establishment Acquired majority stake in Hutch Essar in India, by buying out complete stake of Hutch in 2007, Essar is still minority stakeholder in company Company Profile Vodafone Essar in India is a subsidiary of Vodafone Group Plc and commenced operations in 1994 when its predecessor Hutchison Telecom acquired the cellular licence for Mumbai. Vodafone Essar now has operations in 16 circles covering 86% of India's mobile customer base, with over 45.78 million customers. Vodafone Essar, under the Hutch brand, has been named the 'Most Respected Telecom Company', the 'Best Mobile Service in the country' and the 'Most Creative and Most Effective Advertiser of the Year'. Global Presence/ Marketing It has operations in 25 countries across 5 continents and 40 Network partner networks with over 200 million customers worldwide. Acquisitions / Strategic Alliances Future Prospect Vodafone Essar is expecting to touch over 35 million customers across 400,000 shops and thousand of hutchs own employees along with employees of its business associates. Idea Name Idea Year of Establishment 1995 Company Profile Idea Cellular is part of the Aditya Birla Group, which is India's first truly multinational corporation. Aditya Birla Nuvo Ltd. holds 35.7 per cent, Birla TMT Holdings Ltd. 44.9 per cent, Grasim 7.5 per cent, and Hindalco 10.1 per cent in Idea. Global Presence/ Marketing Network Has a customer base of over 17 million, IDEA Cellular has operations in Delhi, Maharashtra, Goa, Gujarat, Andhra Pradesh, Madhya
Pradesh, Chattisgarh, Uttaranchal, Haryana, UPWest, Himachal Pradesh and Kerala. Acquisitions / Strategic Alliances Merged with Tata Cellular Limited in 2001, thereby acquiring original license for the Andhra Pradesh Circle Acquired RPG Cellular Limited and consequently the license for the Madhya Pradesh (including Chattisgarh) Circlein 2001 In 2004 acquired Escotel, incumbent cellular service provider in Haryana, UP(W) & Kerala and new licensee in HP Acquired Escorts Telecommunications Limited (subsequently renamed as Idea Telecommunications Limited) in 2006 Merger of seven subsidiaries with Idea Cellular Limited in 2007 Future Prospect Idea also plans to enter rural and neglected circles as a strategy to gain subscribers. Other advancements in the telecom industry will help it cut costs - use of e-mail to send bills to customers; sharing cell sites; smaller base transmission stations that will mean lesser infrastructure requirements and expenses and independent tower operators. Along with its plan to go for a national long distance licence, it will also look at international long distance in the near future. 4. CHALLENGES AND OPPORTUNITIES 4.1 Opportunities The telecom sector has been one of the fastest growing sectors in the Indian economy in the past 4 years. This has been witnessed due to strong competition that has brought down tariffs as well as simplification of policy environment that has promoted healthy competition among various players.. The mobile sector alone has been growing rapidly and has emerged as the fastest growing market in the whole worlds. Currently of a size nearing 70 million (GSM and CDMA), this sector is expected to reach a size of nearly 200 million subscribers by financial year 2008. The government has eased the rules regarding inter circle and intra circle mergers. This has led to a slew of mergers and acquisitions in the recent past. Also as the sector is moving closer to maturity, further consolidation is a reality and this will lead to the survival of more profitable players in this segment In order to further promote the use of Internet in the country the government is taking proactive steps to develop this sector with the help of the various players in this segment. For this purpose, the use of broadband technology is being mooted and this will go a long way in improving the productivity of the Indian economy as well as turn out to be the next big opportunity for telecom companies after the mobile communications segment Non-voice services and VAS are the gold mines. The big takeoff is expected with the rollout of 3G services in early 2007, once the spectrum issues are sorted out.
Internet users base fast reaching near the English speaking population base. Local language and content required for further growth Infrastructure equipment cost is down to a fraction of what prevailed just a few years ago. Operators can plan better expansion plan now Increased viability for the operators to expand to semi-urban and rural markets, hence, accelerate growth further Its not without reason that India is tipped to be the worlds third-larges economy by 2050! No wonder if it happens much earlier Investors can look to capture the gains of the Indian telecom boom and diversify their operations outside developed economies that are marked by saturated telecom markets and lower GDP growth rates. At a time when global telecom majors are struggling to cope with their losses and the rollout of 3G networks, which has been a non-starter for close to a year now; India, with its telecom success story, represents an attractList of top 30 Telecom companies in India : Company Name Bharti Airtel Reliance Communications Idea Cellular Tata Communications Tata Teleservices Spice Communications MTNL GTL GTL Infrastructure OnMobile Global HFCL Infotel ITI Him.Fut.Comm Astra Microwave Gemini Communications Avaya Global Shyam Telecom Nelco XL Telecom & Energy Limited Goldstone Infratech Ltd Nu Tek Kavveri Telecom Krone Communications Mobile Telecommunications Ltd Valiant Communications Pun.Communi. Nettlinx Market Cap in Crores 108066.23 32683.44 14368.92 13181.25 4393.06 4136.13 4044.6 2475.12 2210.49 1403.52 457.73 413.28 386.99 241.88 125.71 118.54 64.58 63.55 55.96 52.6 48.16 26.51 24.52 17.37 16.58 16.19 12.68
Aishwarya Telecom Ltd Interg.Digit Vital Communications Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Brand Vodafone AT&T Verizon Orange China Mobile Telecom Italia T-Mobile Movistar NTT DoCoMo BT Sprint Telefonica Alcatel-Lucent America Movil Telstra O2 China Unicom Qwest SoftBank KDDI Telenor Swisscom MTS CNC Airtel Parent Company Vodafone Group AT&T Verizon Comm France Telecom China Mobile Telecom Italia Deutsche Telekom Telefonica NTTC BT Group Sprint Nextel Corp. Telefonica Alcatel-Lucent America Movil Telstra Corp. Telefonica China Unicom Qwest Comm Intl Softbank Corp. KDDI Corp. Telenor Swisscom Mobil TeleSystems China Netcom Group Bharti Airtel Ltd
9.86 3.15 2.81 Brand Value ($bn) 26.59 24.6 24.38 18.35 13.87 9.43 8.96 7.95 7.54 7.29 7.07 6.33 5.16 5.08 4.64 4.62 3.45 3.06 3.02 3.01 2.97 2.96 2.79 2.55 2.48
ive and lucrative destination for
History of telecom industry in India The history of telephone services in India found its beginning when a 50-line manual telephone exchange was commissioned in Kolkata in the year 1882 in less than five years after Alexander Graham Bell invented the telephone. While India became independent in the year 1947, the country had about 82,000 telephone connections, which slowly rose up to 3.05 million by the year 1984. The telecom sector in India was a government monopoly until the year 1994 when liberalization was gradually unrolled. For the first time, cellular services were launched in India in Kolkata in the year 1995. An Overview of the Telecommunication Industry in India
Talking of telecommunications sector in India today, we can primarily identify two segments namely Fixed Service Provider (FSPs) and Cellular Services. Some of the essential and basic telecom services forming part of Indian telecom industry include telephone, radio, television and Internet. Telecom industry in the country lays a special emphasis on some of the advanced and the latest technical innovations like GSM( Global System for Mobile Communications), CDMA(Code Division Multiple Access), PMRTS(Public Mobile Radio Trunking Services), Fixed Line and WLL(Wireless Local Loop ). Especially, India has a flourishing market in GSM mobile service, while the number of subscribers is on rapid and dramatic increase. The Indian telecommunications industry boasts as being one among the most rapidly growing chunks on the globe. Experts around the world estimate that India holds the promise of emerging as the second largest telecom market of the world. Figures published by the Telecom Regulatory Authority of India (TRAI), reveal that the number of telecom connection subscribers in India reached 562.21 million in December 2009, marking a 3.5 percent increase over the number 543.20 million reported in November 2009. This figure indicates that the average teledensity (number of telephones per 100 persons) has gone up to 47.89. On account of a dramatic increase in the earnings from mobile and landline connections, the telecom industry in India made revenue of US$ 8.56 billion during the quarter ending on December 31, 2009 thereby witnessing a recovery from the economic downturn. Business Monitor International has stated that at present, India is adding up about 8-10 million mobile subscribers every succeeding month. Estimates have revealed that by June2012, almost half Indias population will be in possession of a mobile phone. This will result in about 612 million mobile subscribers, making up a teledensity of about 51 per cent by the year 2012. Over and above, a study undertaken by Nokia has brought out that the communications sector will grow as the single largest chunk of the Indias GDP making up about 15.4 per cent by the year 2014.
Estimates made in February 2009 show that the Indian equipment market valued at US$ 24 billion, while Nokia was glowing as the market leader reporting more than US$ 3.4 billion revenues in 2008-09. Ericsson followed Nokia with revenue of about US$ 2.11 billion. The latest reports published by Evalueserve state that the availability of the 3G spectrum has given hopes of finding about 275 million Indian subscribers using 3G-enabled services. This will take up the number of 3G-enabled handsets to reach near to 395 million by the end of 2013. A Frost & Sullivan industry analyst has predicted that by the year 2012, revenues from fixed line subscriptions in India will reach up to US$ 12.2 billion, while the revenue from mobile connections will reach up to US$ 39.8 billion. In a significant step taken to boost up the auction of 3G spectrum, the Indian Government has permitted prospective bidders to call for short-term funds from the domestic market in the country, while allowing refinancing out of external commercial borrowings (ECBs) within a period of 12 months. Estimates show that the government can mop up US$ 7.53 billion from the auction of 3G spectrum to be completed shortly. The reserve price has been fixed at US$ 753.74 million. BSNL, the state-managed telecom operator has introduced 3G services in more than 318 cities benefitting 856,000 subscribers. BSNL has been venturing to cross more than 400 cities in the near future eventually rolling this service across 760 cities by September 2010. While the debate on 3G is seen continuing, TRAI has already started consulting on the next higher level of telecom services. 4G or the fourth generation enables downloads faster than all the earlier versions. Today, India is the largest market in the world adding up a dramatic number of about 20 million mobile subsc Higher standards............making a difference for you
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INDIAN TELECOMMUNICATION SECTOR I Introduction Indian telecom industry is growing at a great pace & India is expected to become a manufacturing hub for telecom equipment. Indian telecom equipment manufacturing sector is set to become one of the largest sectors globally by 2010. Due to rising demand for a wide range of telecom equipment, particularly in the area of mobile telecommunications, has provided excellent opportunities to domestic and foreign investors in the manufacturing sector. II Opportunities The Indian telecom market is expected to grow three fold by 2012 & market size over US $ 8 billion. Moreover the government has set a target of 20 million broadband connections by 2010. The National Telecom Policy 1999 targets tele-density at 15 per cent by 2010. This will entail an investment of US $ 40- 50 billion over the next 6-8 years. There is an immense opportunity for DTH in the Indian market which is almost 10 times compared to the developed countries like the US and Europe. For every channel there is a scope for broadcasting it in at least ten different languages. So every channel
multiplied by ten that is the kind of scope for DTH in the country. Indias media players have all the ingredients to develop a successful DTH industry. So currently there is a lot of pent-up demand in the Indian market for DTH. It is expected that by the year 2010 there will be over 500 million subscribers in the Indian telecom market. Cellular subscriber base is projected to grow at a CAGR (Compounded Annual Growth Rate) of 48 per cent & expected to reach 88 million in 2012. Over 150% growth in telecom services is projected in 5 years. India will require large investments in network infrastructure & India expected to be fasted growing telecom market in the world. Since the project expected to reach 30-40% per year 250 subscribers by 2009- 2010.Total estimate of investment opportunity of USS 22 billion expected over the next five years. Investment opportunity of $22 billion across many areas: Telecom Devices and Software for Internet Broadband and Direct To Home Services
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Gateway exchange Set top box Modem Mobile handsets and consumer premise equipments Gaming devices EPABX Telecom Software Telecom Services for voice and data via a range of technologies. With the rapid growth of the telecom network, there are further opportunities to expand the telecom infrastructure and research and development. III Regulatory policy The Department of Telecommunications (DOT) under the Ministry of Communications and Information Technology is the concerned authority for all matters relating to telecom. The department is responsible for formulating the developmental policies; granting licenses for various telecom services; promoting standardization, research and development as well as private investment in the sector. An independent regulatory body called as the Telecom Regulatory Authority of India (TRAI) was established in 1997, under the Telecom Regulatory Authority of India Act, 1997.The Telecom Regulatory Authority of India Act, 1997 was amended by the Telecom Regulatory Authority of India (Amendment) Act, 2000. By the Amendment Act, an Appellate Tribunal known as the Telecom Disputes Settlement and Appellate Tribunal (TDSAT) has been set up to protect the interests of service providers and consumers of the telecom sector. 74% to 100% FDI permitted for various telecom services. FIPB approval required for foreign investment exceeding 49% in all telecom services. 100% FDI permitted in telecom equipment manufacturing on automatic approval basis.
Indian has a telecom policy viz. Telecom Policy of 1994 aims to encourage private and foreign investment. Which has opened the doors of the sector for private players and the
process was given a further boost by the telecom policy announced in 1999 viz. New Telecom Policy 1999. Other enactments which govern the telecom sector are as follows: Indian Telegraph Act, 1885 Indian Telegraph (Amendment) Rules, 2000 Indian Wireless Act, 1933 Cable Television Networks (Regulations) Act,1995. Information Technology Act, 2000 Broadband Policy 2004 IV Incentives to invest Tax incentives under the current Budget Customs duty on convergence products to be reduced from 10% to 5%. Exemption from excise duty for specified inputs and raw materials for manufacture of specified electronics/ IT hardware to lower the network cost for telecom service providers. Specified parts of set top boxes and specified raw materials for use in the IT/electronic hardware industry to be exempted from customs duty. Internet telecommunication service brought under the service tax net. And countervailing duty on wireless data modem cards with exempted by way of excise duty exemption. V Projections in the current Budget Budget has proposed a Bharat Nirman project wherein 52 villagesare targeted to provide telephones. And center has proposed to 170 crore ruppes for OFC based Network for Defence Services and 158 for C-DoT (including Telecom testing and security certification Centre). VI Conclusion
Indian telecom is worlds fastest growing telecom expected grow three fold by 2012.Tremendous strides in this industry have been facilitated by the supportive and liberal policies of the Government. Especially the Telecom Policy of 1994 which opened the doors of the sector for private players. Rising demand for a wide range of telecom equipment has provided excellent opportunities for investors in the manufacturing sector. Provision of telecom services to the rural areas in India has been recognized as another thrust area by govt.which also helps for the enormous opportunities in this sector. Therefore telecom sector in India is one of the fastest growing sectors in the country and has been zooming up the growth curve at a feverish pace in the past few years. And even the Indian Wireless Market is booming which has plenty of room for growth. Manisha Maheshwari (roll no 26, A1)
Indian Telecommunication Industry

Last Updated: July-September 2008
The Indian telecommunications has been zooming up the growth curve at a feverish pace, emerging as one of the key sectors responsible for India's resurgent economic growth. India is has surpassed US to become the second largest wireless network in the world with a subscriber base of over 300 million in April, according to the the Telecom Regulatory Authority of India (Trai). The year 2007 saw India achieving significant distinctions: 1 2 3 4 5 6 having the world's lowest call rates the fastest growth in the number of subscribers the fastest sale of million mobile phones the world's cheapest mobile handset the world's most affordable color phone largest sale of mobile handsets 2-3 US cents 15.31 million in 4 months in a week US$ 17.2 US$ 27.42 in the third quarter
Segment-wise growth Wireless segment has emerged as the preferred mode of telephone service by the consumers, reflected in the rising share of mobile phone connections to total connections. 1. The share of mobile phones has increased from 71.69 per cent at the end of March 2006 to 87.68 per cent at the end of May 2008. 2. While total mobile subscriber base was 277.92 million, wire line subscriber base was 39.05 million. 3. Consequently, overall tele-density has increased to 27.59 per cent at the end of May 2008. India is likely to be second largest mobile market in the BRIC nations, with 560 million mobile users representing the next great growth curve for both mobile and interactive marketing industries, according to a report by eMarketers.
Investment The booming domestic telecom market has been attracting accelerating amount of investment. During April 2000 to March 2008, cumulative FDI inflows into the Indian telecommunications sector amounted to US$ 3.84 billion, accounting for 6.81 per cent of the total FDI inflows into the country. In fact, the surge in mobile services market is likely to see huge amount of investment implying a mobile in the hands of every second person in the country.
Buoyed by the rapid surge in the subscriber base, huge investments are being made into this industry by companies like Maxis Communications-owned mobile service provider Aircel Srei Group's Quippo Telecom Infrastructure Ltd (QTIL) The Central public sector enterprises(CPSEs) have lined up investments for infrastructure sectors like telecom energy and power for 2008-09. Vodafone Essar will invest US$ 6 billion over the next three years in a bid to increase its mobile subscriber base from 40 million at present to over 100 million. Manufacturing India is emerging as a handset super-power as more manufacturers set up base in the country, it is not only the world's fastest-growing telecom market but it is also making remarkable progress in the telecom manufacturing space. The Indian telecom equipment manufacturing sector is set to become one of the largest globally by 2010. Simultaneously, India's surging domestic market is also providing excellent investment opportunities in other segments of telecom equipment industry. Nokia Siemens Networks (NSN) is shifting its global services business unit headquarters from Munich to India. Nokia set up its manufacturing plant in Chennai. Samsung has set up its GSM mobile manufacturing base in Manesar. Motorola has established a manufacturing plant in Sriperumbedur. Sony Ericsson has set up GSM Radio Base Station Manufacturing facility in Jaipur and R&D centre in Chennai. LG Electronics set up plant of manufacturing GSM mobile phones near pune. Elcoteq has set up handset manufacturing facilities in Bangalore Elextronics has set up an SEZ in Chennai.
Value Added Services Market India's runaway success in mobile telephony has also given a boost to the mobile value added services (MVAS) market. According to a study by Stanford University and consulting firm BDA, the Indian MVAS is likely to grow at a CAGR of 44 per cent 2010. Government Initiatives The Government has taken many proactive initiatives which has provided a framework for the rapid growth of the telecom industry. Opening the industry for private sector participation. 100 per cent FDI is permitted in telecom equipment manufacturing through the automatic route. FDI ceiling in telecom services has been raised to 74 per cent.
Establishment of an independent regulator - the Telecom Regulatory Authority of India (TRAI)-for the telecom sector. Introduction of a Unified access licensing regime for telecom services on a pan-India basis. Implementation of New Telecom Policy (NTP'99). Introduction of Calling Party Pay (CPP) regime and lowering of access deficit coupled with introduction of revenue share regime in ADC. Introduction of Mobile Number Portability in a phased manner, starting with the fourth quarter of 2008. Allowing service providers to share active infrastructure. Road Ahead According to a report by Boston Consulting Group, while only one in 20 of the world's first two billion mobile subscribers live in India, as many as one in every four of the next billion subscribers will be an Indian. The department of telecommunication estimates the total subscriber base to total 500 million by 2010, out of which 80 million are expected to be from rural areas. The Indian telecom industry's revenue, likewise, is estimated to increase, which according to Ernst & Young is expected to total US$ 35 billion, accounting for 3.6 per cent of the total GDP of the country.
With such growth projection, this industry is likely to see increased investments. In fact, total investment is projected at US$ 76.6 billion during the eleventh plan period (2007-12). Private sector is estimated to continue its dominant share, accounting for 67 per cent of the total projected investment while public sector accounts for the rest.
Top players
The top players based on cellular subscriber (in millions) base were
Idea cellular , 24
Bharti, 62 BSNL, 41 Vodafone, 44 Reliance, 46
Cellular services can be divided into two categories: Global System for Mobile Communications (GSM) and Code Division Multiple Access (CDMA). The GSM sector is dominated by Airtel, Vodafone-Hutch, and Idea Cellular, while the CDMA sector is dominated by Reliance and Tata Indicom. Surprisingly, CDMA market has increased its market share up to 30% thanks to Reliance Communication. However, across the globe, CDMA has been losing out numbers to popular GSM technology, contrary to the scenario in India
Reasons for growth

The two major reasons that have fuelled this growth are 1. low tariffs 2. falling handset prices.
Problems faced
The bottlenecks for ' Indian Telecom Industry ' are: Slow reform process. Low penetration. Service providers bears huge initial cost to make inroads and achieving break-even is difficult.
Lack of infrastructure in semi-rural and rural areas, which makes it difficult to make inroads into this market segment as service providers have to incur a huge initial fixed cost. Huge initial investments. Limited spectrum availability and interconnection charges between the private and state operators.
Rural Telecom Market an emerging market
According to numbers compiled by the Telecom Regulatory Authority of India, nearly 21 per cent of the mobile user base now reside in the villages of India, where a few years ago none of the operators wanted to venture. As on September 2007, out of the 209 million mobile users in the entire country, 43 million were in rural areas. Rural India will wrest 40 percent of new telecom market Indias rural telecom connectivity is poised for explosive growth in the next five to 10 years, grabbing a 40 percent share of the new market, a study released Wednesday said. Of the estimated new 250 million Indian wireless users, in next 5-10 years approximately 100 million will be from rural areas, said the study by the Federation of Indian Chambers of Commerce and Industry (Ficci) and Ernst and Young. Operators have demonstrated they can achieve profitability by reducing fixed costs, controlling variable costs and carefully tailoring services to the requirements of their customers. A similar model with minor customization could be emulated in the rural areas. The government will roll out new incentives for mobile networks in rural India. Its also planned that the ultra-low cost handset of approximately Rs.840 ($20) to the market with built-in subsidies, lifetime validity and minimal maintenance costs have promoted mobile usage in remote areas. Moreover, operators could learn from business models that have been experimented across the developing world for expanding rural connectivity.
Reasons for rural inclination Far from being considered as a social obligation, offering telecom services in rural areas has now become the hot spot for private telecom operators.
Nearly 75 per cent of the mobile users in the villages are now owned by private operators as cellular phones catch the imagination of rural consumers. Until now, state-owned Bharat Sanchar Nigam Ltd was known to be the only significant rural telecom operator in the country. Analysts said that the share of rural telecom consumers will continue to increase as operators have initiated an aggressive roll-out plan to cover remote areas of the country. This is primarily driven by a slump in the growth rate of mobile user base in the metro and urban areas. According to the data released by the Cellular Operators Association of India Circle C and Circle B States such as Bihar, Kerala, Madhya Pradesh and Punjab are showing better growth rates compared to the metros. Therefore, most of the mobile operators are investing heavily in setting up infrastructure in these circles. The telecom regulator has suggested a number of initiatives to make mobile connection attractive, including lower entry cost to make it more affordable.
In a hi-tech market like telecom, Schumpeter's view that competition through innovation is more important than price holds significance. Technology advancements, lower costs and competition translate this into benefits for the consumer. Moreover, competition drives innovation." - Poonam Madan Sarmah, Head of Research, Genesis PR. "We are looking at making the phone a more useful product than just an instrument to exchange voices. We want to be identified as a great value-added service provider." - Harit Nagpal, Vice President (Corporate Marketing), Vodafone
Talented persons are like frogs in a wheelbarrow, which can jump at any point of time when they sense opportunities
HUMAN RESOURCE MANAGEMENT
The goal of human resource management is to help an organization to meet strategic goals by attracting, and maintaining employees and also to manage them effectively. The process involves carrying out a skills analysis of the existing workforce, carrying out manpower forecasting, and taking action to ensure that supply meets demand. This may include the development of training and retraining strategies. Through HRP an organization strives to have the right number & the right kind of people at the right place at the right time.
RECRUITMENT
According to Edwin B. Flippo, Recruitment is the process of searching the candidates for employment and stimulating them to apply for jobs in the organization. Recruitment is the activity that links the employers and the job seekers. Usually, the recruitment process starts when a manger initiates an employee requisition for a specific vacancy or an anticipated vacancy. However, Recruitment is a continuous process whereby the firm attempts to develop a pool of qualified applicants for the future human resources needs even though specific vacancies do not exist.
RECRUITMENT Process
Identify vacancy
Prepare job description and person specification
Advertising the vacancy
Arrange interviews
Short-listing
Managing the response
Conducting interview and decision making
SOURCES OF RECRUITMENT
INTERNAL
1. 2. 3. 4. 5. 6. Transfers. Promotions. Upgrading. Retired Employees. Retrenched Employees. Dependants and Relatives of Deceased Employees. 7. Acquisitions and Mergers
EXTERNAL
1. Press Advertisements. 2. Educational Institutes. 3. Placement Agencies / Outsourcing. 4. Employment Exchanges. 5. Labor Contractors. 6. Unsolicited Applicants. 7. Employee Referrals. 8. Job Portals 9. Factory Recruits 10. Walk-ins, Write-ins and Consultants Talk-ins
Some Top
Latest Trends in Recruitment

1. OUTSOURCING The outsourcing firms help the organization by the initial screening of the candidates according to the needs of the organization and creating a suitable pool of talent for the final selection by the organization. Outsourcing firms develop their human resource pool by employing people for them and make available personnel to various companies as per their needs. In turn, the outsourcing firms or the intermediaries charge the organizations for their services. 2. POACHING/RAIDING Buying talent (rather than developing it) is the latest mantra being followed by the organizations today. Poaching means employing a competent and experienced person already working with another reputed company in the same or different industry; the organization might be a competitor in the industry. A company can attract talent from another firm by offering attractive pay packages and other terms and conditions, better than the current employer of the candidate. But it is seen as an unethical practice and not openly talked about. It has become a challenge for human resource managers to face and tackle poaching, as it weakens the competitive strength of the firm. 3. E- Recruitment Many big organizations use Internet as a source of recruitment. E- recruitment is the use of
technology to assist the recruitment process. They advertise job vacancies through worldwide web. The job seekers send their applications or curriculum vitae i.e. CV through e mail using the Internet. Alternatively job seekers place their CVs in worldwide web, which can be drawn by prospective employees depending upon their requirements.
9 Recruitment Trends for '08

1) Bigger paychecks, say 80 percent of the survey respondents. Of those expecting to increase wages, 64 percent say it will be at least 3 percent, and 17 percent say 5 percent or more. 2) Flexible work arrangements are on the rise. Sixty percent of employers offer flexible work plans now usually alternative schedules (shifted start and quit times), condensed work weeks or telecommuting, while 39 percent expect to offer some form of flex-time in 08. 3) Online candidate screening will grow, and not only the use of qualifying pre-application questions, but full-blown searching of social networking sites and search engine checks. 4) Video & audio Resume will be preferred as is a way for job seekers to showcase their abilities beyond the capabilities of a traditional paper resume. The video resume allows prospective employers to see, hear and get a feel for how the applicant presents themselves. 5) Retiree rehiring will increase as companies remain pressured from the loss of more experienced workers. Twenty-one percent say they are likely to rehire retirees from other companies in 2008; another 14 percent plan to provide incentives for workers at or approaching retirement age to stay on with the company longer. The numbers here arent large, but this trend wont go away. 6) Recruiting diversity workers, especially workers bilingual, will continue to be an important focus of recruiters. Survey respondents particularly noted mature workers. 7) Freelance or contract hiring will continue to be a key part of the workforce mix, with 31 percent of employers anticipating a working relationship with freelancers or contractors this year. 8) Perks and benefits will receive more attention from companies wanting to remain competitive in attracting and keeping workers. In light of rising healthcare costs, nearly onein-five employers (19 percent) report their companies plan to offer more comprehensive or better health benefits to employees in 2008. Ten percent plan to enhance or add perks such as bonuses, discounts, company cars, stock options, free childcare, educational reimbursement, transit passes and wellness programs. 9) One in four (26 percent) of the surveyed companies are likely to provide more promotions and career advancement opportunities in 2008. More than half of workers stated that a
companys ability to offer career advancement is more important than salary, so employers are taking action to carve out career paths for employees. Twenty-seven percent of workers say they are dissatisfied with pay, but 67 percent of workers reported they received a raise in 2007. A quarter of the surveyed workers plan to change jobs within the next two years: 41 percent are leaving their jobs to find a position with better pay and/or career advancement opportunities; 8 percent are changing careers; 7 percent say they want to find a company where they would feel appreciated; 7 percent are retiring; and 5 percent plan to start their own business. This survey was released by CareerBuilder.com conducted by Harris Interactive, tracking projected hiring trends for 2008. The 2008 Job Forecast survey is based on the responses of 3,016 hiring managers and human resource professionals in private-sector companies.
Telecom tops in employment growth

According to estimates of the World Bank, employment in the telecommunications sector has grown by 33 per cent since 1994, the highest growth among all the sectors in the services industry. While the Word Bank numbers, released in its recent report on `India's Services Revolution,' head-hunters and recruiters say that telecom is still the favorite among higher level professionals. Thanks to the aggressive rollout of a countrywide network, operators like Reliance Infocom, Tata Teleservices and Bharti have gone on a hiring overdrive. From a career point of view, telecom sector continues to offer growth and new learning as the sector matures and the business opportunities expand. And, with new networks and businesses being rolled out, this number is expected to grow exponentially in the coming months. The growth can also be attributed to the large number of telecom equipment manufacturers and applications developers from Korea, China and Europe foraying into the Indian market in their bid to take a share of the pie in the booming telecom industry. These Telecom companies require large number of telecom engineers, telecom software engineers and Telecom test engineers in the functional areas of Embedded software development, Analog Digital engineering technology, Telecom networking, Protocol, Chip
Design Engineering, VLSI Software Testing. In the Mumbai Telecom companies there are Software Engineer jobs, Telecom software Engineers jobs, Quality / Test Engineer jobs, Product Manager job openings, Network Security Systems Specialist vacancies, NMS Engineer jobs, Network Management specialists, Managers, UNIX Network Systems Operations Engineers, NMS Administrator jobs, Cisco Specialist Software Engineer etc. Taking a cue from the demand for telecom professionals, top educational institutions have begun specialized courses in telecommunication management. Symbiosis in Pune and Amity in Delhi are examples of such institutions. Even state-owned Mahanagar Telephone Nigam Ltd (MTNL) has set up a training facility for telecom engineers in Mumbai. HR (employment) in telecom industry: With more and more players entering the industry, the competition in the industry in terms of attracting and retaining the best talent is also increasing. The employment scenario in the telecom sector is very promising. The sector is creating employment opportunities and adding around 1 lakh people in its workforce. The telecom sector has a huge demand for the trained and qualified engineers and other professionals specializing in telecommunications. Compensation: According to various studies in recent times, the telecom sector offers the best salary packages at the entry level i.e. an average of 20k. The average hike in salaries across the various levels in the telecom sector ranges from 15 to 20 percent. Incentives also form a part of the compensation till the middle levels. Attrition and retention: Although the sector faces the moderate attrition rates of 20 to 25 percent, the HRs prime strategic function in the sector is retaining the talent and employee engagement. The only functional area which faces the high attrition rate is the sales people in the telecom industry.
TOP 10 Recruiters in Telecom Sector

Recruiters 1 2 Vodafone Essar Reliance communications Total No. Of Vacancies 45 44
3 4 5 6 7 8 9 10
Bharti Airtel Tata teleservices Cable & Wireless IMI mobile VSNL Internet Services Ltd Motorola Worldwide GTL Limited Nokia
43 23 19 14 12 10 4 3
The ranking is based on the number of vacancies notified by the company on different job portals (Till 29th January 2008)
Here rankings of the ten companies in the Indian Telecom sector are given on the basis of their workforce relationship factors. Ten companies were selected on random basis from the sector. The companies were given a consolidated rank on a scale of 1-10 on the basis of sum of their individual ranks on various HR practices, procedures, policies and parameters like recruitment practices, compensation policies, work culture, recognition for good work, retention, training and development, performance appraisals et al. The scores are consolidated on the basis of data collected through recent surveys and studies by renowned names like Business Today, Hewitt, IDC Data Quest, NASSCOM and naukrihub.com
hR CHALLENGES IN RECRUITMENT
In the last few years, the job market has undergone some fundamental changes in terms of technologies, sources of recruitment, competition in the market etc. In an already saturated job market, where the practices like poaching and raiding are gaining momentum, HR professionals are constantly facing new challenges in one of their most important function- recruitment. They have to face and conquer various challenges to find the best candidates for their organizations. The major challenges faced by the HR in recruitment are: 1. Adaptability to globalization The HR professionals are expected and required to keep in tune with the changing times, i.e. the changes taking place across the globe. HR should maintain the timeliness of the process
2. Lack of motivation Recruitment is considered to be a thankless job. Even if the organization is achieving results, HR department or professionals are not thanked for recruiting the right employees and performers. 3. Process analysis The immediacy and speed of the recruitment process are the main concerns of the HR in recruitment. The process should be flexible, adaptive and responsive to the immediate requirements. The recruitment process should also be cost effective. 4. Strategic prioritization The emerging new systems are both an opportunity as well as a challenge for the HR professionals. Therefore, reviewing staffing needs and prioritizing the tasks to meet the changes in the market has become a challenge for the recruitment professionals. 5. Attracting highly talented ones - The number of highly talented professionals is less. All the big MNC's are trying to attract these people with high salaries, perks, incentives etc. There is a tough competition among these companies to get these candidates on their roles. These days, its not just salaries which will pull the candidate in but various factors like brand, culture, location ,job security, reputation of the company etc play a major role in recruiting a talented professional.
1. Organizing market survey of salaries, job opportunities etc.
December 2006 The Chartered Accountant 927
Banking and f inance
MERGERS & ACQUISITIONS (M&A) IN INDIAN TELECOM INDUSTRY- A STUDY
ndia has become a hotbed of telecom mergers
and acquisitions in the last decade. Foreign investors and telecom majors look at India as one of the fastest growing telecom markets in the world. Sweeping reforms introduced by successive Governments over the last decade have dramatically changed the face of the telecommunication industry. The mobile sector has achieved a teledensity of 14% by July 2006 which has been aided by a bouquet of factors like aggressive foreign investment, regulatory support, lower tariffs and falling network cost and handset prices. M&A have also been driven by the development of new telecommunication technologies. The deregulation of the industry tempts telecom firms (telcos) to provide bundled products and services, especially with the ongoing convergence of the telecom and cable industries. The acquisition of additional products and services has thus become a profitable move for telecom providers. REGULATORY FRAMEWORK M&A in telecom Industry are subject to various statutory guidelines and Industry specific provisions e.g. Companies Act, 1956; Income Tax Act, 1961; Competition Act, 2002; MRTP Act; Indian Telegraph Act; FEMA Act; FEMA regulations; SEBI Takeover regulation; etc. We
will cover some of these regulations hereunder which are unique to the telecom industry. TRAI Recommendations Telecom Regulatory Authority of India (TRAI) is of the view that while on one hand mergers encourage efficiencies of scope and scale and hence are desirable, care has to be taken that monopolies do not emerge as a consequence. TRAI had issued its recommendation to DoT in January 2004 regarding intra circle Mergers & Acquisitions which were accepted by DoT and stated below. DoT Guidelines Department of Telecommunications (DoT) can be credited with issuing a series of liberalising initiatives in telecom sector which has led to phenomenal growth of the Industry. Based on recommendations of TRAI, DoT issued guidelines on merger of licences in February 2004. The important provisions are state below: l Prior approval of the Department of Telecommunications will be necessary for merger of the licence. l The findings of the Department of Telecommunications would normally be given in a period of about four weeks from the date of submission of application. l Merger of licences shall be restricted to the same service area. l There should be minimum 3 operators in a service area for that service, consequent upon such merger. l Any merger, acquisition or restructuring, leading to a monopoly market situation in
Mergers and Acquisitions (M&A) are strategic tools in the hands of management to achieve greater efficiency by exploiting synergies and growth opportunities. Mergers are motivated by desire to grow inorganically at a fast pace, quickly grab market share and achieve economies of scale.
The author is a member of the Institute and working with Bharti Airtel Limited as Principal Finance Officer (Corporate and National Accounting). He can be reached at sanjoybanka@rediffmail.com.
Sanjoy Banka
928 The Chartered Accountant December 2006
the given service area, shall not be permitted.
Monopoly market situation is defined as market share of 67% or above of total subscriber base within a given service area, as on the last day of previous month. For this purpose, the market will be classified as fixed and mobile separately. The category of fixed subscribers shall include wire-line subscribers and fixed wireless subscribers. l Consequent upon the merger of licences, the merged entity shall be entitled to the total amount of spectrum held by the merging entities, subject to the condition that after merger, the amount of spectrum shall not exceed 15 MHz per operator per service area for Metros and category A service areas, and 12.4 MHz per operator per service area in category B and category C service areas. l In case the merged entity becomes a Significant Market Power (SMP) post merger, then the extant rules & regulations applicable to SMPs would also apply to the merged entity. TRAI has already classified SMP as an operator having market share greater or equal to 30% of the relevant market. In addition to M&A guidelines, DoT has also issued guidelines on foreign equity participations and management control of telecom companies. The National Telecom Policy, 1994 (NTP 94) provided guidelines on foreign equity participation and as revised by NTP 99 permitted maximum 49% cap on foreign investment. Recently by its order no. - 842-585/2005-VAS/9 dated 1st February, 2006 DoT has enhanced the FDI limit in telecom sector to 74%. The key provisions of these guidelines are as follows: l The total composite foreign holding including but not limited to investments by Foreign Institutional Investors (FIIs), Nonresident Indians (NRIs), Foreign Currency Convertible Bonds (FCCBs), American Depository Receipts (ADRs), Global Depository Receipts (GDRs), convertible preference shares, proportionate foreign investment in Indian promoters/investment companies including their holding companies, etc., referred as FDI, should not exceed 74%. The 74% investment
can be made directly or indirectly in the operating company or through a holding company and the remaining 26 per cent will be owned by resident Indian citizens or an Indian Company (i.e. foreign direct investment does not exceed 49 percent and the management is with the Indian owners). It is also clarified that proportionate foreign component of such an Indian Company will also be counted towards the ceiling of 74%. However, foreign component in the total holding of Indian public sector banks and Indian public sector financial institutions will be treated as Indian holding. l The licencee will be required to disclose the status of such foreign holding and certify that the foreign investment is within the ceiling of 74% on a half yearly basis. l The majority Directors on the Board including Chairman, Managing Director and Chief Executive Officer (CEO) shall be resident Indian citizens. The appointment to these positions from among resident Indian citizens shall be made in consultation with serious Indian investors. l The merger of Indian companies may be permitted as long as competition is not compromised as defined below: No single company/legal person, either directly or through its associates, shall have substantial equity holding in more than one licencee Company in the same service area for the Access Services namely; Basic, Cellular and Unified Access Service. Substantial equity herein will mean equity of 10% or more. A promoter company/Legal person cannot have stakes in more than one LICENCEE Company for the same service area Some exceptions have been provided to this guideline. l The Licencee shall also ensure that any change in shareholding shall be subject to
all necessary statutory requirements. As per recent news reports, the Government wants to arm itself with power to block FDI in case the investment from companies or countries deemed undesirable, even if it is within the approved limit. This is a positive step due to
increasing security concern India is facing but has led to apprehension that the new law will be used to block investment from certain parts of the world. FEMA Guidelines The foreign exchange laws relating to issuance and allotment of shares to foreign entities are contained in The Foreign Exchange Management (Transfer or Issue of Security by a person residing out of India) Regulation, 2000 issued by RBI vide GSR no. 406(E) dated 3rd May, 2000. These regulations provide general guidelines on issuance of shares or securities by an Indian entity to a person residing outside India or recording in its books any transfer of security from or to such person. RBI has issued detailed guidelines on foreign investment in India vide Foreign Direct Investment Scheme contained in Schedule 1 of said regulation. As per the FDI scheme, investment in telecom sector by foreign investors is permitted under the automatic route within the overall sectoral cap of 74% without RBI approval. The salient features of FDI scheme as applicable to telecom sector is as follows: l Industries which do not fall within the ambit of Annexure A can issue shares under automatic route to foreign companies (Para 2). Since telecom sector is not listed in Annexure A hence foreign investment can be made in telecom sector upto 74% cap without prior approval of RBI. l In case, investment by foreign investor(s) in an Indian telco is likely to exceed sectoral cap of 74%, then they should seek approval of (FIPB) Foreign Investment Proposal Board. (Para 3) l FDI scheme permits automatic approval of transfer of shares from one foreign shareholder to another, so long as the transfer is in compliance of FDI scheme and the regulation. (Regulation 9) l However, if the shares are being transferred by a person residing outside India to a person resident in India, it shall be subject to adherence to pricing guidelines, documentation and reporting requirements of RBI. Application seeking RBI approval is
to be made in Form TS 1. (Regulation 10 B) l The issue price of share should be worked out as per SEBI guidelines in case of listed companies. In case of unlisted companies, fair valuation method as prescribed by erstwhile Controller of Capital Issues should be adopted and should be certified by a Chartered Accountant. (Para 5) l FDI scheme also stipulates the norms on dividend balancing, whereby the cumulative amount of outflow on account of dividend for a period of 7 years from commencement of production or services should not exceed cumulative amount of export earning during those years. The dividend balancing guidelines are applicable to companies included in Annexure E of FDI scheme and telecom industry is not included in said annexure. (Para 6) l In case preference shares are issued to a foreign investor, the rate of dividend shall not exceed 300 basis points over the Prime lending rate of SBI, prevailing on the date of Board meeting where such issuance is recommended. (Para 7) l The reporting requirement are contained in regulation 9 viz. a) The Indian company should report the details of receipt of consideration to RBI within 30 days of receipt and b) The Indian company should submit report of issuance and allotment of shares in Form FCGPR along with necessary certificates from the Company Secretary and the Statutory Auditor of the Company. l An Indian Company may also issue shares on Rights basis or issue bonus shares
the regulations. Further, if a target company was unlisted, but has obtained listing of 10% of issue size, then the limit of 75% will be increased to 90%. - Regulation 11(2A) l The minimum size of public offer to be made under Regulation 11(2A) shall be lesser of a) 20% of the voting capital of the company; or b) such other lesser percentage of voting capital as would enable the acquirer to increase his holding to the maximum possible level, while ensuring
the requirement of minimum public shareholding as per listing agreement. Competition Laws Competition Commission of India (CCI), established in 2003, holds statutory responsibility for ensuring free and fair competition in all sectors of the economy. The Competition Act, 2002 has provided for a liberal regime for mergers, whereby combinations exceeding the threshold limits fall within the jurisdiction of CCI. The threshold limits are quite high. Most competition laws in the world require mandatory prior notification of every merger to the competition authority but under Indian law it is voluntary. However CCI can also take suo motu cognisance of a merger perceived as potentially anti competitive and it can also enquire until one year after the merger has taken place. Once CCI has been notified, it must decide within 90 days of publication of details of the merger or else it is deemed approved. The CCI can allow or disallow a merger or can allow it with certain modification. Most of the operative provisions of Competition Act have still not been notified. THE CONTOURS OF M&A IN TELECOM M&A are also referred as Corporate Marriages and Alliances. Mergers can be across same or similar product lines. In many cases mergers are initiated to acquire a competing or complementary product. A reverse merger is another scenario in taxation parlance where a profit making company merges with a loss incurring company to take advantage of tax (Regulation 6A); subject to compliance of conditions of FDI scheme and sectoral cap. l FDI scheme prohibits investments by citizen or entities of Pakistan and Bangladesh (regulation 5) primarily on security concerns. In the recent past, DoT has also delayed its approval to an Egyptian companys investment in Hutch India on similar grounds. SEBI Takeover Guidelines SEBI takeover guidelines called Securities and Exchange Board of India (Substantial acquisition of shares and takeover) Regulations, 1997 are applicable to listed Public companies and hence would be applicable in case of M&A
in listed telecom companies like Bharti, Reliance Communication, Shyam Telecom, VSNL, Tata Teleservices (Maharashtra) Limited, etc. These guidelines have been recently amended by SEBI and notified vide SO No. 807(E) dated 26.05.2006. The highlights of the amendment are as follows: l No acquirer who together with persons acting in concert with him, who holds 55% or more but less than 75% of the shares or voting rights of the target company shall acquire by himself or through persons acting in concert unless he makes a public announcement as per the regulations. Further, if a target company was unlisted, but has obtained listing of 10% of issue size, then the limit of 75% will be increased to 90%. Regulation 11(2) l If an acquirer who together with persons acting in concert with him, who holds 55% or more but less than 75% of the shares or voting rights of the target company is desirous of consolidating his holding while ensuring that Public Holding in the target company does not fall below the permitted level of listing agreement he may do so only by making a public announcement as per
shelter. A horizontal merger (mergers across same product profile) adds to size but the chances for attainment of profit efficiency are not very high. On the other hand a vertical merger (entities with different product profiles) may help in optimal achievement of profit efficiency. Say a mobile operator acquires a national long distance company and thus saves IUC charges. In telecom Industry, most of the acquisitions were horizontal which helped the acquirers to expand the area of their operation and customer base quickly. These provided economies of scale with phenomenal benefit to the acquirers in terms of higher profitability, and better valuations. Takeovers generally have three typical patterns: a) In the first model, the investor acquires a controlling stake in the acquired company and retains it as a separate entity. This is
the simplest model with the intent to avoid the legal hurdle for merging the company into the parent company. This route also gives the acquirer a flexibility to sell off the operation on a stand alone basis later on, in case the merger is not successful. This mode has been followed by Hutchison, which has retained most of the acquired companies (Usha Martin- Kolkata, Fascel- Gujarat, Aircel Digilink Haryana, Rajasthan and UP East, Sterling Cellular- Delhi, Escotel - Punjab) as separate legal entities. b) In the second model, the acquirer merges the acquired company with the parent after acquiring controlling stake. This model requires completion of merger formalities with due approval of High courts and also from DoT. It has the advantage of avoiding statutory compliance for several entities and integrate all operations seamlessly into a single legal entity. This model has been followed by Bharti, which has merged most of the acquired entities with the parent in due course of time. c) The third model entails purchase of assets of the target company on stand alone basis without purchasing the company as a whole. In some cases, where the licences were cancelled by DoT due to default, such companies sold the telecom assets and customer database to the acquirer, who could easily integrate the same into his existing licence and strengthened his network and customer base at a nominal cost. The seller company which was stripped of licence as well as telecom network was ultimately wound off. THE ALLURE OF M&A IN TELECOM Indias telecom liberalisation was noticed by Global investors in 1995 when the Government permitted entry of foreign telecom operators through Joint venture route. Some of these global giants included Vodaphone, AT&T, Hutchison Whampoa, Telekom Malaysia, and Telestra Australia. We now need to understand some of the predominant objective of takeovers in telecom sector, which can be summarised as follows:
l Acquisition
of licences or geographical territory; l Acquisition of spectrum; l Acquisition of telecom infrastructure and network; l Acquisition of customer base to achieve an economic base; l Acquisition of brand value; l Higher operating profit (EBITDA) margin; l A combination of above. Market access: There has been almost saturation of demand in the home market of majority of foreign investors where teledensity ranges from 40% to 100%. On the other hand, the teledensity in Indian market is currently hovering at 14% like a low hanging fruit. The rural teledensity is almost negligible at about 3%. Indias young and middle class market offers tremendous scope for market expansion and new business. For example, even after 15 years
of economic reforms, sale of most consumer durable goods has not exceeded Rs. 60 million, whereas telephone penetration has already crossed the Rs. 120 million mark and is all set to cross 150 million mark by December 2006 and Rs. 250 million mark by 2010. This huge expansion is possible only with higher focus on rural telephony, bridging the digital divide and higher allocation of network and funds to rural areas which are not so rewarding in terms of ARPU. Spectrum: Spectrum is turning out to be the biggest bottleneck for Indian mobile operators as they face network problems, poor voice quality and call dropping. GSM operators initially get 4.4 MHz of spectrum while CDMA operators get 2.5 MHz spectrum. In case of GSM operators with 10 lakh or more subscribers, they are eligible for 10 MHz spectrum, while CDMA operators get 5 MHz for 10 lakh subscribers. Since CDMA technology carries the voice in small packets, it can carry about five times more traffic and hence has a lower spectrum allocation. However, as the number of mobile users is growing at an amazing rate of 4 million per month), spectrum is falling short of requirements. Thus, the foreign investors prefer to acquire an existing operation to ensure ready availability of
spectrum, instead of applying for a new licence where spectrum allocation from DoT is really a challenging task. The Government is also taking effective steps to get approx 40 MHz spectrum vacated from Indian defense services which will give a fresh lease of life to spectrum starved market. This will be a key driver for all future M&A in India. Network roll out: Network roll out is a nightmare for telecom operators. It is more complex for a foreign operator who may not be conversant with local conditions. Network roll out involves Right of way (ROW) approvals, coordination with local government departments, acquiring BTS and BSC sites on rentals, acquiring municipal and local approvals to set up tower and antenna, obtaining electrical connection for the sites, import of equipment, installation of tower, equipment and shelter, SACFA and TEC approvals, integration of various sites and final launch of services in a geographical area etc. Generally the time to roll out a network in a circle takes minimum 6 months to 1-year time. The industry is also resorting to site and infrastructure sharing with other operators to reduce its capital expenses and operating expenses cost and optimise profitability. Human Resource: The dovetailing of human resources of the acquired company into the culture of parent company has significant importance in any M&A deal and can even spoil a deal if not properly managed. It is now an established principle that local leaders decide the success or failure of a cross boarder deal. The savvy acquirer retains competent local leaders and dangles incentives and awards to align their personal interest with that of the merged entity. Premium is placed for target companies which have strong management team in place, lower manpower base and higher employee productivity. Some benchmarks used in this regard are Number of customers per employee, Revenue per employee per month etc. Majority of the telecom companies resort to outsourcing of routine and non core activities and reduce number of on roll employee to attract better valuations. Hence, it is essential to make an assessment of the off roll and outsourced staff involved in a telecom operation to ascertain the true operational efficiency and real manpower
cost. Brand value: In most cases, where the acquisition is for majority control, the foreign investor is likely to introduce its own brand in India instead of local brand. Hence, generally no value is placed on brand related expenditure amortised or any goodwill. However, where the investor takes minority stake and the brand stabilised by the controlling local partners has become popular, brand value plays an important role in valuation. Better margin possibility: Across Asia-Pacific, be it China, Indonesia, Philippines, Thailand or Australia, operating margins (EBITDA) average 40% - 60%, which are considerably higher than the mid-30% for Indian telecom operators. The EBITDA margin of Bharti Airtel at 37% is the highest among all telecom operators whereas for other operators it ranges from 11% to 25%. Thus, the scope for enhancing margins is fairly
significant in Indian market since Government levies, licence fees, etc. are likely to come down to give further fillip to teledensity. The Government is also providing Universal Service Obligation (USO) support to operators to expand their network in rural areas. The foreign investors continue to look at India to spread their market. In the initial years, the number of operators in each circle were limited to four which was a major entry barrier. Further the entry fee for acquiring a licence was also high. But over the years, the DoT has been consistently liberalising entry norms and making market access easier for foreign investors with the ultimate objective of benefiting consumers. THE VALUATION OF A TELECOM LICENCE George Bernard Shaw had once said, Economists know the price of everything, but the value of nothing. This saying is aptly reflected in case of telecom valuation also. The acquirer pays hefty valuation to acquire an entity and the Business value placed is much higher than Accounting value. The local promoters strive hard to enhance the enterprise value of their project by adopting a multi pronged strategy. This involves a careful incubation of network across the entire circle,
hiring a strong management team, installing robust billing system, well oiled channel partner network and above all, an aggressive selling strategy to build a critical mass of customer base. In their aggression to inflate enterprise value, some operators end up creating phantom subscribers to attract better valuation. Phantom subscribers refer to low value prepaid cards, which are sold by channel partners to unwilling end users. These cards are not likely to yield much revenue to the operator, but just retained as customers to show an inflated subscriber base and fetch higher valuations. The Investment banker has to decide what is being valued a) Whether its a valuation of companys equity or its assets; b) Whether the company is being valued as a going concern with all its assets and liabilities or is under liquidation; or c) Is it a valuation of minority interest or a Controlling stake; d) Whether the valuation of entity on per sub base is appropriate; e) Whether the EV/EBITDA ratio is in line with Industry trend. The list of these factors is endless. Enterprise value (EV) refers to the market capitalisation of a company plus debts. When an investor acquires a company, it takes over not only the assets of the company, but also assumes the liability to pay the existing debts and liabilities of the company. Thus, Enterprise value is the sum total of all fair value of assets and the liabilities of the acquired entity. The key performance metrics to evaluate the EV are: a) EV / EBITDA ratio: This ratio reflects number of years the unit has to yield operating profit (EBITDA) to return the basic investment made by the Investor. This ratio is in the nature of PE ratio from the viewpoint of a retail investor and varies from Industry to industry. In telecom Industry, most of the deals struck in the past couple of years have been at EV/EDITDA ratio of 6-10 times. b) EV/Revenue Ratio: This ratio indicates number of years required to generate revenue to return the investment price paid by the acquirer. In one way it can be likened to pay-back period. EV/Revenue ratio is on an average five or less. c) Per subscriber EV (EV/number of acquired subscribers): This ratio represents value
placed by the acquirer on subscribers acquired along with complete network and infrastructure. Smart acquirers on the lookout prefer to pay a premium for taking over an existing operation say US$ 450 per subscriber as against network rollout which costs even less than 1/3rd cost @ US$ 100. As we would see later, the per subscriber rate varies from US$ 400 to US$ 1000. A company earning higher Average Revenue Per User (ARPU) is likely to command better per subscriber rate. A better rate is also dependent on other factors like Churn ratio, VAS revenue, type of circle, average life cycle of customer, subscriber acquisition cost, quality of customers etc. An indicative
Enterprise value can also be computed by multiplying the subscriber base of the company with the per subscriber rate. For example, if the subscriber base of a telecom operator is 1,00,000 customers and the applicable per subscriber rate for this category of operator is US$ 400, then the indicative enterprise value will be US$ 40,000,000 (US$ Forty million). M&A CASE STUDIES The first M&A deal in India was the sale of Mumbai licence by Max group to Hutchison Whampoa group of Hong Kong. The deal fetched over half a billion dollars for Max group and was touted as a major success for Indian entrepreneur in telecom venture. This followed a series of M&A in subsequent years as stated hereunder. Some of the other high profile deals were Vodaphones acquisition of 10% equity in Bharti in 2006 for US$ 1 billion, Maxis acquisition of Aircel at enterprise value of US$ 1 Billion, Birla Groups acquisition of Tatas stake in Idea Cellular. Interestingly some of the high profile investors who had sold their stake around year 2000 are now reentering India like Telekom Malaysia (exited India in 2000 from Kolkata licence and recently acquired 49% stake in Spice Telecom) and Vodafone (exited India in 2003 from RPG Cellular Chennai and recently acquired stake in Bharti). The author also closely followed the sell-off, acquisition,
resale and reacquisition by Indian Promoters as a case study. In April 1998, Max group had sold its stake in Mumbai licence to Hutchison Telecom for US$ 560 million. Somewhere along the way Max group again picked up a small stake of 3.16% in Hutch and resold it to Essar Group in October 2005 for US$ 147 million. Max India has staged another comeback in Hutch by acquiring an 8.33% from Kotak Mahindra Bank for Rs. 1,019 crore in 2006. This second return to the telecom business reflects the buoyant conditions in telecom sector. The table on the next page gives a birds eye view of major M&A deals in India and the key indicators like per sub value, enterprise value etc. The valuation of state owned Bharat Sanchar Nigam Limited (BSNL) is estimated to be US$ 30 Billion one of the highest in India. On a global scale, China Mobile has emerged as the worlds most highly valued telco with enterprise value of US$ 131.46 billion, followed by Vodaphone at US$ 123.11 billion as on July 2006. From the table, readers can find that average valuation per subscriber ranges from US$ 400 to US$ 550 which in turn is based on a variety of factors including Average ARPU, type of circle, competition in the circle, Category of operator whether only a Mobile service provider or an integrated telecom player (like Bharti and Reliance) etc. Valuation is generally lower in case the acquirer takes a minority stake as against controlling stake. Similarly, valuation also suffers if the target company is not listed and hence has lower liquidity (as in case of Idea, Hutch etc). As a thumb rule, suggested by one economist, the differential for non liquidity of non listed entity could be as high as 20% -25%. While most of the GSM operators resorted to M&A in order to achieve growth, Reliance Infocomm did not go for inorganic route and instead rolled out a green field project. This was also due to the fact that Reliance had adopted CDMA technology and was able to roll out the network at much lower cost as compared to GSM network. DUE DILIGENCE AND DIAGNOSIS The due diligence exercise gives the investor
a deep insight into financial and operational issues of the target company. If these issues are not properly analysed, it can lead to serious integration issues, while by that time the merchant bankers who have assisted in the acquisition may have left the scene. Some of these due diligence areas are: Strategic and Business due diligence: This includes careful analysis of current market share, planned market share, quality of existing customer base, revenue mix, average ARPU in the service area, per minute revenue (RPM), review of marketing strategy, customer care philosophy, ability of existing channel partners to promote
the services and withstand competition, reason for low performance of the target company, synergies which are likely to be enjoyed on acquisition, likelihood of entry of new competitors in the licenced area, strategic initiatives needed to establish market leadership etc. Technological & Integration issues: The technical due diligence includes review of technical aspects, telecom network technology adopted etc. This helps the investor to find out the quality of network assets, whether the coverage is adequate or not, their maintenance and upgrade status, status of integration of various systems like switch, non compatibility of existing network equipment if any with the current system of acquirer resulting their obsolescence and write offs, value added services, billing system (Whether the billing system can be interfaced with the system of acquirer, the upgrade status of billing system, does it interface with financial systems), customer care system (database structure in customer care system, its interface with switch for seamless flow of data on activation through front end, customer grievance resolution mechanism, ease of customer interaction from call centre, reporting mechanism for pending customer queries and its escalation), IT system, order fulfillment process, etc. Financial & Commercial due diligence: The financial due diligence is likely to give deep insight into operations, which otherwise would not be possible. Some key issues to be analysed under this head would include: accounting
policies on intangibles and deferment, contingent liabilities disclosed and undisclosed, statutory and workmen dues, finance cost and possibility of debt restructuring, capital structure, vendor and other dues and reason for delayed or non payment, list of all contracts and agreements and the review of all rates and terms, possibility of renegotiation of major commercial agreements and quantification of possible saving, details of Major M&A deals in Indian telecom sector
Company/Service Name % Stake sold Buyer Seller Year Deal size (US$) Indicative Enterprise value (US$) Per sub value (US$) Orange, Mumbai 41% Hutchison Group, Hong Kong Max Group, Delhi 1998 560 Mn 1.36 Bln NA Hutch, India 8.33% Max India Kotak Mahindra, India 2006 225 Mn - NA Hutch Essar, India 5.1% Hutchison Group, Hong Kong Hinduja 2006 450 Mn 9 Bln NA Hutch Essar 3.17% Essar Group Max India 2005 146 Mln - 570 Command Cellular, Kolkata 100% Hutchison & Indian Group, Usha Martin & Others 2000 - 138 Mln Idea Cellular 48.14% Aditya Birla Group Tata Group 2005 NA 2 Bln 400 Modi Telestra, Calcutta 100% Bharti Group, India B.K.Modi and Telestra 2000 NA 160 Mln Bharti 9.3% Private Investors Warburg Pincus NA 873 Mn NA 1000 Bharti Airtel 10% Vodaphone Bharti Group 2005 1.5 bln 16 Bln 1000 Aircel, Chennai 79.24% Sterling Group, Chennai RPG Group 2003 210 Cr Aircel, TN, Chennai and NE 74% Maxis, Malaysia Sterling Group 2006 750 Mn 1.07 Bln 496 Spice, (Punjab and Bangalore) 49% Telekom Malaysia, Malaysia NA 2006 178 Mn 363 Mln Reliance CDMA - Qualcomm, San Diego, US Reliance Infocomm 2002 - 10 Bln BPL Mobile and BPL Cellular - Promoters 2005 1.15 Bln NA 936 The Chartered Accountant December 2006
pending export obligations under EPCG rules, details of bank guarantees issued, pending cost saving measures initiated in the company, internal control measures and processes, internal audit reports, fixed assets verification reports, valuation reports if any, etc. Secretarial & Legal due diligence: The acquirer also carries a detailed legal due diligence of the various approvals obtained by the target company to understand possible instances of violations if any and the quality of statutory compliances. This includes a review of statutory approvals required, approvals taken and their renewal status, Minute books of AGM, EGM, Board and committee meetings, review of shareholders agreement, Memorandum and Articles, statutory clearances for all investments made till date, review of all major agreements (with lessors for BTS/BSC/MSC sites, collection and recovery agents, channel partner agreement, roaming agreements, network services providers, VAS services, DoT licence agreement), listing of all legal cases filed by and against the company and current status, list of statutory compliances, list of all statutory liabilities (status of payment of various dues like PF, ESI, licence and spectrum charges, interconnect payments, liquidated damages if any levied by licensor), list of all IPR rights, IPR violation issues etc). Human Resource issues: The investor analyses the average salary of the employees, ratio of outsourced employee to total employees, salary range vis a vis Industry trend and chances of salary increase to be made. The investor also tries to find out whether any Golden Parachute has been issued to senior management which has to be borne by the merged entity. The results of due diligence exercise help to unearth startling facts and assist the investment banker to revise the valuation. From the acquirers perspective, some change management problems can be avoided by solving them before the deal closes. For example, if the due diligence reveals that the workforce of the target company is inflated, then he may insist for its rationalisation as a precondition to deal closure. WHETHER M&A IN INDIAN TELECOM WERE SUCCESSFUL
A merger to be successful should create new capabilities, offer better value proposition to the combined entitys customers and above all enhance shareholders value. Empirical studies prove that M&A brings with it the advantage of synergies to the operators and in majority of cases results in immense increase of shareholders value. M&A in Indian telecom industry has also benefited other stakeholders i.e. customers, Indian economy and society at large. M&A have acted as catalyst to stupendous growth in teledensity to 14% in 10 years (1995 -2006), as against 2% in 48 years (1947-1994) of independence. According to a study conducted by the reputed international agency, OVUM on The economic benefits of mobile services in India on behalf of Cellular Operators Association of India, it was found that mobile sector has generated 3.6 million jobs directly or indirectly and the same will rise by at least 30%. Similarly the Mobile industry contributes over Rs. 145 billion per annum by licence fees, spectrum fees, import duties, taxes, etc. Taking the OVUM findings on the base of 48 million subscribers in January 2005, COAI has estimated that at a mobile subscribers base of 200 million in 2007, the industry would contribute over 10 million jobs and over Rs. 500 billion annual revenue to the Government. From foreign investors perspective, they have immensely gained from investing in India. As per recent news, out of Hutchisons total global revenue of Rs. 13440 crores, over 45% comes from India which is no mean achievement. Indian promoters who commenced their telecom operation on a small scale in few circles, gained immensely on sale of their stake to foreign investors. In fact, some of the worlds largest telecom companies, who have left India with a bitter experience a few years ago like British Telecom, Vodaphone, France Telecom, Telekom Malaysia, Telestra Australia are all set to return even as minority shareholders on witnessing telecom success story.
ACCOUNTING ISSUES The accounting issues arising in any M&A include merger accounting by the acquirer,
treatment of goodwill and reserves of the acquired company, treatment of Goodwill/capital reserve arising on M&A, choice of the method of accounting pooling of interest or purchase method, accounting for share of profits/losses and dividends for investments made in Indian operating company. Accounting Standard 14 classifies amalgamations (also referred as business combination) into two categories for the purpose of accounting a) amalgamation in the nature of merger and b) amalgamation in the nature of purchase. AS 14 provides that in case of amalgamation in the nature of merger, pooling of interest method is to be applied, whereas for other cases purchase method is to be applied. This standard is applicable only if two or more entities are merged to form a new entity. In case of takeover of majority interest which does not yield to formation of a new merged entity, AS 14 is not applicable. In order to apply pooling of interest method (in case of merger scenario) five conditions have to be fulfilled i.e. a) transfer of all assets and liabilities to transferee company b) 90% of shareholders of transferor company should become shareholder of transferee company c) Consideration for purchase should be paid by issue of equity share of transferee company d) Continuation of business of the acquired company and e) No adjustment to be made for assets and liability taken over. Since in most of the telecom acquisitions, conditions No. (B) and (C) are generally not applicable, the purchase method is applied for takeovers. IFRS 3 prohibits pooling of interest method and permits only purchase method of accounting by the acquirer in M&A. With issuance of IFRS 3, IAS 22 stands withdrawn. The significant changes introduced by IFRS 3 are as follows: In June, 2001, the US Financial Accounting
Standards Board (FASB) adopted two new accounting standards: FAS 141 Business Combinations and FAS 142 Goodwill and Other Intangibles which was applicable for business combinations from 1 July 2001. These introduced major changes in US accounting as follows: l a ban on pooling (i.e. merger accounting); all business combinations are to be treated as purchases (i.e. acquisitions); l no amortisation of goodwill and l in most cases, annual testing for goodwill impairment testing rather than amortisation, for acquired intangible assets with indefinite lives. Takeovers in Indian telecom industry have seen following common accounting and financial issues: l In telecom acquisitions, goodwill is stated at cost/book value less accumulated
amortisation and is amortised on straightline basis over the remaining period of service licence of the acquired company from the date of acquisition. For example, say A Limited acquired B Limited at a purchase consideration of US$ 1.5 billion, as against the book value of US$ 1 billion on 1st August 2006. The licence of B Ltd is expiring on 30th July 2016. In this case, US$ 500 million is the goodwill in the books of A Limited and will be amortised over next 10 years being the balance period of licence of B, on SLM basis, l In case of change of brand and launch of superior brand, the existing brand related amortised expenses and goodwill are written off fully. For example, when Hutchison finally decided to introduce Hutch Brand on consolidation of its operations across India, it had to write off all the local brands like Orange, Fascel, Command etc which were amortised earlier. l Major write off of debts is also seen. For example, upon demerger of Reliance Infocomm from Reliance Industries Limited, over US$ 1 billion were written off from the Balance Sheet which included; inter alia, bad debts, receivable etc. l Change in key accounting policies of acquired
unit in line with the acquirers accounting policies, like revenue recognition, treatment of licence fee payment, debtors provisioning, treatment of activation revenue. l In many cases, the new operators also junk the existing billing system leading to major write off. l Intelligent network (IN) system is the heart for credit monitoring and management of prepaid services. In some cases, IN system of a preferred vendor is installed leading to junking of existing IN system and its resultant write off. TAXATION Following are the major taxation issues in any M&A deals including telecom sector: 1) Carry forward of losses of the acquired company. 2) Capital gains on sale of shares by Indian shareholders. 3) Capital gains on sale of shares by foreign shareholders. Carry forward of losses: The Income Tax law relating to carry forward of losses are contained in Section 72, 72A and Section 79 of the Income Tax Act, 1961. While Section 72 provides timeline for carry forward of losses, Section 79 stipulated conditions for carrying forward of losses. Section 79 provides that in case of company in which public are not substantially interested, no loss incurred in any prior previous year shall be carried forward and set off against losses of the previous year unless shares carrying 51% or more of voting rights are held beneficially by same set of shareholders on last date of financial year as compared to previous year(s) in which losses were incurred. The exception provided are a) Change in voting power due to death of shareholder or arising out of gift to any relative and b) Change in shareholding of an Indian subsidiary of a foreign company arising due to amalgamation or demerger of foreign company. Majority of M&A in telecom sector were in respect of closely held companies, in which public were not substantially interested and hence 51% beneficial shareholding was attracted. In most cases of telecom acquisitions, the control was
obtained by investing at indirect level and altering direct holding as to a minimum avoidable level. This was achieved by changing shareholding at a level above the direct holding level, so that at least 51% direct beneficial holding continued. Capital gains The capital gains arising from transfer of shares is liable to taxation under the Income Tax Act depending upon the nature of gain, whether it is long term or short term. Section 112 provides for taxation of long-term capital gains (LTCG). However, Section 10 (38) inDecember
2006 The Chartered Accountant 939
troduced in 2004 provides for full exemption from Income Tax for long term capital gains (LTCG) provided a) The capital gain arises on transfer of shares of listed public companies; b) At the time of transfer, the transaction is chargeable to securities transaction tax (STT). In case of short term capital gains on listed securities (arising in less than 12 months), on fulfilling same conditions, Indian investor has to pay tax on STCG @ 10% u/s 111A. Twelve months holding period is applicable only for listed securities, in case of unlisted securities, the minimum holding period has to be 36 months, before it qualifies as long term. However, majority of telecom holdings as discussed in this article are not listed securities. Hence they are subjected to taxation under the regular provisions of Income Tax Act. Thus in case of capital gain arising from sale of shares of unlisted entities, the taxation is as follows: a) In case of short term capital gain, the gain is included as income from other sources/ business Income as the case may be and charged to tax at full rate; and b) In case of LTCG, the gain is liable to tax @ 20% u/s 112. Section 10(23G) This section was introduced in 1995 with an objective of promoting investment in telecom sector by Indian and foreign investors. Telecom operators, whether listed or not were required to get the approval of Ministry of Finance u/s 10(23G) on submission of requisite details. In case a telecom entity was approved under this section, the investors in such entity were entitled, inter alia, tax exemption on long term capital, interest on long term finance and dividend. The
approval was given by Ministry of Finance (MOF) on year-to-year basis or for a block of years based on satisfying eligibility criteria. It is pertinent to note that approval under this section is provided only to the operating company which owns telecom network and infrastructure and hence capital gain exemption was available in respect of capital gain arising on direct shareholding. In case of indirect holding, routed through chain holding, benefit of this section would not be available. Most of the telecom operators had obtained approval u/s 10(23G). However this section has been withdrawn i.e. AY 2007-2008 after a 10year period and henceforth this incentive is not available to the telecom sector. Thus, proper tax planning for Indian and foreign investors to save their tax liability on future capital gains liability pose a great challenge. We will now discuss the Mauritius angle, through which most of the foreign shareholding are routed. The Mauritius connection The scenic Mauritius has emerged as the favourite landing point for foreign investors for FDI in Indian telecom companies. Mauritius accounts for more than a third of the aggregate FDI inflows. Indias tax treaty with Mauritius provides exemption from capital gain arising out of Investment in India made by a Mauritius resident company. A common strategy adopted by foreign investors is to hold the shares of Indian operating company through Mauritius based special purpose vehicle (SPV). In case of exit, these SPVs are sold to foreign investors who land in Mauritius. Board level changes are made in such SPV and new investors take control of the SPV and nominate their representative on the Indian telecom company. In such a case, in accordance with DTAA with Mauritius, no capital gains tax is levied on the foreign investor. No transfer is needed to be recorded in the register of transfer of Indian telecom company as the same Mauritius SPV continues as shareholder. Let us consider sale of direct holding in an Indian telecom company by a foreign investor. Say AB (Mauritius) Limited (an SPV and resident of Mauritius and referred as AB) holds 25% share
capital of CD India Telecom Limited. AB is a 100% subsidiary of J Inc, USA. If J Inc wants to transfer its full stake to another foreign entity say EF (UK) Plc, UK then AB will sell all shares held in CD to EF. EF will lodge shares of AB, to the Indian company for registering them in his favour. The capital gain arising to AB on sale of EF is an offshore transaction and will not attract capital gain taxation in Mauritius or India due to DTAA with Mauritius. The directors nominated by AB are withdrawn and the new directors nominated by EF will take Board
position in CDs Board of Directors. Now we will consider sale of indirect or beneficial holding. Say AB Mauritius Limited (an SPV and resident of Mauritius) holds 40% share capital of CD India Telecom Limited. The shareholders in AB Limited are A, Inc US (51%) and B Limited, Japan (49%). if A Inc and B Limited want to reduce their joint holding to 20% and sell balance 20% to a third investor say EF plc UK. Then A Inc and B Limited, will transfer their holding in AB to EF Plc and EF Plc will be inducted as another shareholder of Mauritius entity. Thus, by investing in AB Mauritius, EF obtains a beneficial holding in CD India equal to 20% and right to nominate 1/5th of number of Directors on the Board of CD India. Since, this transaction does not involve transfer of shares of an Indian company, no Capital Gain Taxation liability arises in India. Indias tax treaty with Mauritius has been an eye sore with Indian revenue authority for long. The controversy started after the Central Board of Direct Taxes (CBDT) issued a circular (No. 789 dated 13/4/2000) clarifying that a certificate of residence issued by Mauritius will constitute sufficient evidence for accepting the status of residence as well as ownership for applying the provisions of the tax treaty. The circular also clarified that the test of residence would also apply to income from capital gains on sale of shares. Thus, FIIs which are resident in Mauritius would not be taxable in India on income from capital gains arising in Mauritius country on sale of shares. The above circular was declared invalid and quashed by the Delhi High Court (Shiv Kant Jha versus Union of India, (2002) 256 ITR 563). But the
Honble Supreme Court reversed the decision of the Delhi HC and declared the circular valid (Union of India versus Azadi Bachao Andolan, (2003) 263 ITR 706). There are moves to bring the Mauritian tax treaty at par with Singapore treaty whereby, a resident of a contracting state (read Mauritius) shall be deemed to be a shell/conduit company and exemption from Capital Gains tax will be denied to such a company, if: (a) Such a company is not listed on a recognised stock exchange of the contracting state; or (b) its total annual expenditure on operations in that contracting state is NOT equal to or more than Rs. 5 million in the respective contracting state as the case may be, in the immediately preceding period of 24 months from the date the gains arise. This amendment once approved is likely to put a spanner in the investment plan of foreign investors who have long utilised the loophole in DTAA with Mauritius without sharing any benefit of capital gain either with Government of India or Mauritius. It is likely that foreign investors, who have used Mauritius as a safe route for Indian FDI, will take necessary steps to ensure compliance of the proposed guidelines by a) offloading the minimum stake required for listing on Mauritius based stock exchanges and listing of their SPV b) Maintaining office infrastructure and incur operational expenditure as per proposed guidelines. Licence fee on sale proceeds of licence: As per current licensing guidelines, telecom operators have to pay licence fee on Adjusted Gross Revenue (AGR) which includes non operating revenue like revenue from handset sale, Interest revenue etc. There is no clarity whether the sale proceeds of a telecom licence Mauritius accounts for more than a third of the aggregate FDI inflows. Indias tax treaty with Mauritius provides exemption from capital gain arising out of Investment in India made by a Mauritius resident company. A common strategy adopted by foreign investors is to
hold the shares of Indian operating company through Mauritius based special purpose vehicle (SPV).
will be included within the levy of AGR and attract licence fee. In this regard, lets review the case of Shyam Telecom Ltd (a DoT licencee itself), Holding company of Hexacom (Rajasthan Licence) who sold its Hexacom operation. The following extract from the Annual report of Public listed company Shyam Telecom (Year 2006, page 53) is self explanatory: The company sold its holding in HIL to Bharti Televenture Limited for a consideration of Rs 1751.87 Million. With respect to Income arising on transaction referred above, the company based on a legal opinion believes that it is not covered under the definition of Adjusted Gross Revenue, as inter alia, such revenue do not accrue out of operation licenced or require to be licenced by DoT The issue is covered under generic petition filed by Association of Basic Telecom operators (ABTO) with TDSAT contesting the inclusion of non telecom related service revenue in the AGR which is pending resolution. In view of the legal opinion obtained by the company and the above petition filed by ABTO with the TDAST, the company is of the opinion that no revenue share is payable from sale of above investments and has accordingly made no provisions in its books of accounts. EMERGING OPPORTUNITY FOR CAs Mergers and Acquisitions in telecom sector have showered a boon for professionals including Chartered Accountants and finance community in general. As per an industry estimate, the telecom industry is likely to provide cumulative employment at various levels to over 4,000 Chartered Accountants to support its growth plans. Some of the emerging area of practice for Chartered Accountant firms in telecom industry include following: l Business Process outsourcing like Financial reconciliations, Bills Processing, Collection, Bill delivery, Payroll outsourcing, Customer refunds and Credits, address and identity verification, Revenue accounting, Back end compliant resolution on financial issues
etc. l Management Audit on telecom Industry process like billing process, Revenue Assurance process, Collection and Credit control process, Bill delivery and returned bills management. l Assignments on Internal Controls and Sixsigma implementation. l Certifications under Income tax law. As the telecom operators consolidate their operation, they are likely to outsource more and more operational and financial activities. Chartered Accountant firms which have attained economies of scale and have knowledge base, operational skills, IT savvy team, cost effective manpower support are likely to see a vista of opportunity ahead of them in Indias telecom Industry. CONCLUSION India needs a whopping US$30 billion to meet 22% teledensity target (250 million telephones) by the end of 2007 as set by DoT. Governments decision to raise the foreign investment limit to 74% is expected to spur fresh round of mergers and takeovers in India. The sector has slimmed from more than 20 carriers to 5-6 major players in 2006 and telecom pundits believe that a final round of consolidation to churn the number of players is in the offing. The possibility of realignment of shareholding structure in existing licences and entry of new investors also cannot be ruled out. The sector thus represents humongous opportunity waiting to be tapped by Indian and foreign conglomerates. Critics claim telecom mergers reduce competition and promote monopoly. In reality, these mergers are part of a healthy competitive process and would foster innovation and bring benefits to consumers. Finally, the success of a merger hinges on how well the post-merged entity positions itself to achieve cost and profit efficiencies. As Robert C Higgins of University of Washington points out careful valuation and disciplined negotiation are vital to successful acquisition, but in business as in life, it is sometimes more important to be lucky than smart. r

Telecom in India

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Telecom Industry in India

ive and lucrative destination for

Indian Telecommunication Industry

Bharti, 62 BSNL, 41 Vodafone, 44 Reliance, 46

Reasons for growth

Rural Telecom Market an emerging market

HUMAN RESOURCE MANAGEMENT

Prepare job description and person specification

Advertising the vacancy

Managing the response

Conducting interview and decision making

Latest Trends in Recruitment

9 Recruitment Trends for '08

Telecom tops in employment growth

TOP 10 Recruiters in Telecom Sector

1. Organizing market survey of salaries, job opportunities etc.

December 2006 The Chartered Accountant 927

Banking and f inance

MERGERS & ACQUISITIONS (M&A) IN INDIAN TELECOM INDUSTRY- A STUDY

ndia has become a hotbed of telecom mergers

Banking and f inance

the given service area, shall not be permitted.

Banking and f inance

Banking and f inance

Banking and f inance

Banking and f inance

Banking and f inance

Banking and f inance

Banking and f inance

Banking and f inance

Banking and f inance

Banking and f inance

Banking and f inance

Banking and f inance

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