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Foreign Direct Investment In Telecommunications Sector

Author: Dipesh Sinha - Vth Year, Symbiosis Law School, Pune
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Foreign Direct Investment In Telecommunications Sector In India

One of the most significant contributors to India’s booming economy is the development of the services sector and the focus of Foreign Direct Investment in the Telecommunication sector. Over the past two decades, the service sector has expanded rapidly and has come to play an increasingly important role in national economies and in the international economy. Services account for large shares of production and employment in most Economies around the world. The share of services in world trade and investment too has been increasing. The reason why India was one of the fastest growing economies in the 1990’s was due the rapid growth of the service sector. The structure of Foreign Direct Investment (FDI) worldwide has also shifted towards services. In the early 1970s, service sector accounted for only one quarter of the world FDI stock. In 1990 this shares was less than one half and by 2003, it has risen to about 67 per cent. Now service sectors like telecommunication, IT enabled services, electricity insurance, air transport are becoming prominent. “As many services are neither tradable nor storable, but must be produced where they are consumed FDI is the dominant means of delivering them to foreign markets”, states United Nation Conference on Trade, Aid and Development (UNCTAD). As another sectors, FDI in services can provide capital, technology and managerial knowledge, enhance skills.

Since the introduction of `Manmohanomics’ during PV Narasimha Rao’s government in 1991, Foreign Direct Investment (FDI) has been looked upon as a tool to transform under developed countries into advanced nations. Since then every government has encouraged the expansion of foreign direct investment.

The liberalization measures post-1990 has changed with foreign investments radically, now portfolio as well as Foreign Direct Investment are not only allowed but also actively encouraged. Initially Foreign Direct investment was introduced only in a few sectors but since then it has been introduced in a variety of sectors including the sector of Telecommunications. There are multi-faceted advantages of encouraging foreign direct investment in telecom sector. Apart from ensuring telecom services at subsidized prices, it can satisfy the dire need of infrastructural reforms in rural areas. The inflows will allow multiple benefits such as technology transfer, market access, improvement in voice and data quality and organizational skills. It increases the flow of foreign currency and helps in maintaining harmonious relationship with the country from which the investment is made. Moreover, India offers an unprecedented opportunity for telecom service operators, infrastructure vendors, manufacturers and associated services companies.

When the Indian government opened up cellular telephony to private industry, several foreign investors were ready to enter India’s telecom sector. However beating other manufacturing and services sectors, Indian telecom had attracted major inflow of FDI since August 1991. According to the numbers published by Investindiatelecom (an online agency which tracks developments in the Indian telecom sector), Indian telecom has grossed actual FDI worth Rs 9576.40 crore during the period starting from late 1991 to early 2003. Of the total FDI inflow in Indian telecom sector, the major share has gone towards investment in holding companies followed by cellular network and manufacturing and consultancy.

While Hutchison Whampoa has a 49 per cent stake in Hutchison telecom, Vodafone has 21 per cent in RPG cellular and Verizon has ten percent stake in Reliance telecom. Other foreign companies with similar stake in Indian companies include AT&T Wireless, Cellnet and First Pacific.

There are two possible channels for Foreign Direct Investment to enter into India: Firstly, the automatic route under which companies receiving Foreign Direct Investment need to inform the Reserve Bank of India within 30 days of receipt of funds and issuance of shares to the foreign investor and secondly, for sectors that are not covered under the automatic route, prior approval is needed from the Foreign Investment Promotion Board (FIPB).

Recently, there has been a hike in the Foreign Direct Investment in the telecom sector and it has been increased from 49% to 74 %. This move seems to be positive for the sector, as it requires investments of Rs 700 –900 million over the next 5 years. FDI inflow by 2004 was 9950.94 cores in telecom. Countries like Europe, Korea, and Japan telecom are likely to enter India, as India is seen as fastest growing telecom market in world. The increase in the FDI limit is expected to usher in a 20 per cent jump in foreign investments in the telecom sector within the next two years from the current Rs10, 000 crore.

There are restrictions related to remote access, transfer of network information outside India and international transit routing of Indian traffic. It has been decided to enchance the FDI in telecom services in areas like basic telecom, cellular unified access services, Nat /intranet, long distance Vast, public mobile, radio service & gmdcs. DOT will have the authority to restrict the license company from operating in any of the sensitive areas of the country. Foreign portfolio investments will be allowed in existing news channels within an existing 26 per cent cap on foreign investment holdings for that sector. This comes in time when there is a boom in the Indian stock markets as well and in the consumers section. This would clearly go on to attract several players in the telecom sector globally to look forward to investing in India. The highlights of the new policy are that Foreign Direct Investment up to 74% is permitted in the telecom sector. Internet service (with gateways); infrastructure providers (category-II); radio paging service etc. have been made subject to licensing and security requirements. FDI up to 100% permitted in respect of the following telecom services: Internet Service Providers not providing gateways, Electronic mail, Voice mail, Infrastructure providers providing dark fibre. FDI up to 100% is allowed subject to the stipulation that all such companies would confirm to divest 26% of their equity in favour of the Indian public within five 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. This increase in the FDI limit would see a sea change of investment flowing into India, and have a magnanimous effect on the telecom sector by way of economic reforms and also would affect the economy as a whole, and would have a chain effect on various other sectors.
Due to the increase in the foreign direct investment in the telecommunication market in India companies like Bharti Tele-Ventures and Hutchison Essar will be able to modulate the foreign stakes in their companies that have already acquired a range between 67-69 percent of their assets. With respect to the unnerving growth in the telecom industry in India which accounted for nearly 30 percent every year, the Union Cabinet decided for the hike in foreign direct investment as it will benefit the country by facilitating the capital inflows in the industry. As of now acquires the largest share in the Indian telecom market has been acquired by the mobile segment as it has been estimated to witness a double rise in the past 2 years.

It has been proclaimed by the Finance Minister of India, Mr. P. Chidambaram has that the decision about increasing the foreign direct investiture in the Indian telecom market have been decided as this sector is viewed as the capital intensive telecom sector and thus the aim is to draw more and more capital investments in this sector. Moreover the aim was also to make the whole system in the telecom market lucid and methodical. This proclamation has also notified that more than 49 percent of foreign direct investment has already been experienced by 2 companies in the telecom sector in India. The majority directors on the board that comprise of the Chairman, the Managing Director and the Chief Executive Officer should be non-migratory Indian citizens according to this proclamation on FDI in Indian Telecommunications Industry.

The 74 shares occupied by the Indian telecommunication industry would involve all the foreign direct investments that have mainly come from the non-residential Indians, foreign currency convertible bonds, foreign institutional investors, convertible preference shares, and depository receipts on a direct and indirect basis. The companies that are receiving or will receive the foreign direct investment in the years to come are prohibited from transferring any sort of information or data apropos foreign direct investments or things related to that to the contributors or any destinations outside India. The step taken for the increase in the FDI in Indian telecom industry will boost up the country's economic condition. Post 1991 one of the major contributors in the accretion of India's economy is Foreign Direct Investment and thereby it has been highly needed by each sector in Indian telecommunications industry. As of now the telecom sector requires 1, 60,000 crores for development purposes among which 30,000 is coming from the local markets.

FDI in services responds well to openness especially when it comes to the telecommunications sector. This is quite evident looking at the recent boom in the Indian Telecommunication sector. Further liberalization of services involves potential advantages for Indian economy. Benefits can arise from increased competition, lower prices, and better quality of services. FDI in services like Telecommunications provide key inputs to other productive activities that lead to further investment and competitiveness of an economy. Efforts should be made towards attracting efficiency seeking FDI through a right policy that expands operation, improve local skills, establish linkages and upgrade technology.

However, precautions should be taken to avoid the risk of foreign investors out-competing domestic investors especially in case of infrastructure services like Telecommunications. Services where domestic investors are not able to cater to the growing demand, or where domestic service-providers do not have the ability or capacity to provide the required quality of services, are where the least barriers exist.

To circumvent such spirals it is important for the region to have appropriate domestic regulations in place, which will assure better quality of services at affordable prices. Clear domestic regulations increase transparency in the system and encourage foreign direct investment. To sustain the momentum of growth in services trade in the region, conscious efforts should be made to improve the competitive advantage of the region as a whole. Inclusion of trade in services in SAFTA may help attract FDI in services and lead to greater intra-regional trade. Access to more efficient services could lead to higher growth in productivity in other sectors, which, in turn, could improve the overall competitive strength of the region.

Thus it can be concluded that the recent upward swing in the Telecommunications sector in India is due to the introduction of FDI in this sector by the Indian Government since 1991 but at the same time we must also be careful and not get carried away by this development and should have proper regulations in place to actually utilize this situation to our advantage.

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Added Date:9 Sep 2008

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