TELECOMMUNICATIONS

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PricewaterhouseCoopers is one of the largest and most reputed professional services network in the country. The Telecom Group of PricewaterhouseCoopers in India works with telecom service operators, lenders, policy making authorities, infrastructure vendors, manufacturers and associated services companies to provide industry focused solutions. PricewaterhouseCoopers specialists from the tax and advisory teams connect their thinking, experience and solutions to build public trust and enhance value for clients and their stakeholders. For information, please contact: Deepak Kapoor, Executive Director PricewaterhouseCoopers Pvt. Ltd. PwC Centre, Saidulajab, Opposite D-Block, Saket Mehrauli Badarpur Road, New Delhi – 110 030 Tel: +91 11 5125 0000 E-mail: deepak.kapoor@in.pwc.com

TELECOMMUNICATIONS

TELECOM IN INDIA High on Opportunity POLICY INITIATIVES MARKET Size, Players and Trends OPPORTUNITIES CONTACT FOR INFORMATION

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TELECOM IN INDIA
High on Opportunity
The Indian telecom market has been displaying sustained high growth rates. Riding on expectations of overall high economic growth and consequent rising income levels, it offers an unprecedented opportunity for foreign investment. A combination of factors is driving growth in the telecom market, promising rich returns on investments.

Macro-economic impetus India is currently the fourth largest economy in terms of Purchasing Power Parity India to emerge as the third largest economy in the world by 2050
Over the past 10 years, India has registered the fastest growth among major democracies, having grown at over 7 per cent in four years during the 1990s. It represents the fourth largest economy in terms of “Purchasing Power Parity”. According to a recent Goldman Sachs report, over the next fifty years, Brazil, Russia, India and China - the BRIC economies - could become a much larger force in the world economy. “India could emerge as the world’s third largest economy and of these four countries; India has the potential to show the fastest growth over the next 30 to 50 years”. The report also states that, “Rising incomes may also see these economies move through the ‘sweet spot’ of growth for different kinds of products, as local spending patterns change. This could be an important determinant of demand and pricing patterns for a range of commodities”. The share of the services sector as a percentage of total GDP is also predicted to rise from the current 46 per cent to about 60 per cent by 2020. The boom in the services sector is slated to come from India, emerging as a chosen destination for software and other IT enabled services, tourism etc. According to a Nasscom- McKinsey & Co. Study, by 2008, the Indian IT software and services sector will account for US$ 70-80 billion in revenues; employ 4 million people, and account for 7 per cent of India’s GDP and 30 per cent of India’s foreign exchange inflows.

Shift of focus to services sector with its share to increase to 60 per cent of GDP by 2020; fuelled by India becoming the chosen destination for BPO-ITES services

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Demographic impetus
Population projections from the Planning Commission of India suggest that the share of the working age population (15-64 years) in total population will grow from the current 59 per cent to about 65 per cent, translating into 882 million by year 2020. According to the Vision 2020 document of the Planning Commission of India, the country will witness continued urbanisation. The urban population is expected to rise from 28 per cent to 40 per cent of total population by 2020. Future growth is likely to be concentrated in and around 60 to 70 large cities having a population of one million or more. This profile of concentrated urban population will facilitate customised telecom offerings from operators. Over the years, spending power has steadily increased in India. Between 1995 and 2002, nearly 100 million people became part of the consuming and rich classes. Over the next five years, 180 million people are expected to move into the consuming and very rich classes. On an average, 30-40 million people are joining the middle class every year, representing huge consumption spending in terms of the demand for mobile phones, televisions, scooters, cars, credit goods and a consumption pattern associated with rising incomes.

Working age population of India set to increase to 882 million by 2020

India’s urban population expected to rise to 40 per cent from the current 28 per cent by 2020

30-40 million people joining the middle class every year with consumption spendings associated with rising incomes

POLICY INITIATIVES
Landmark National Telecom Policy 1999 followed with concrete steps to achieve the stated objectives
In 1999, the Government of India authored a very forward looking National Telecom Policy 1999 (NTP-1999), which acknowledged that access to telecommunications is of utmost importance for the achievement of the country’s social and economic goals. Availability of affordable and effective communication for the citizens was the core vision and goal of this telecom policy. Since the announcement of the Policy, the Government has undertaken various concrete steps to achieve the policy objectives.
Impact of NTP-99 on mobile subscriber uptake

in million

Source: COAI, PwC Analysis

“In our view, the Government of India has virtually deregulated every segment of the Indian Telecom industry over the past two years” - Morgan Stanley, December 2003

The migration from a fixed to a revenue share licence regime provided the desired relief to the private operators - earlier burdened by huge debts that they had to service owing to their licence fee commitments. This was the starting point of the cellular revolution being witnessed in the country today, wherein almost 2 million lines are getting added to the network every month.

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Liberalisation of the national and international long distance sector by the Government led to the setting up of private companies in both service segments, and the consequent competition that has emerged has led to reduction in tariffs, which are lower than 80 per cent of the pre-liberalisation days. The reduced tariffs are now almost at par with world benchmarks. Recognising the convergence of markets and technologies, the Government, in December 2003, came out with the Unified Access Licence allowing both basic and cellular service providers to provide access, using any technology in a specified service area. The Government also announced the Interconnection Usage Charge (IUC) regime in January 2003, implemented from May 2003, to facilitate cost-oriented interconnection in the Indian telecom market with multiple operators - both public and private, with multiple service offerings. In tax related announcements made in January 2004, the Government has further rationalised the customs duty structure on imports related to telecom and specified infrastructure equipment for basic/cellular/Internet, V-SAT, radio paging and public mobile radio trunk services. Parts of such equipment are being exempted from basic customs duty. Later in the year, the Government announced reduction in performance bank guarantees for Internet service providers, national long distance providers and domestic call centres; thus, reducing their cost of operations to enable them to offer more affordable pricing.
Regulatory structure

In 2003, the Government announced two significant initiatives

In 2004, specified imports related to telecom infrastructure were exempted from basic customs duty and performance bank guarantees for certain service providers were reduced

* TDSAT: Telecom Disputes Settlement Appellate Tribunal

Foreign Direct Investment (FDI) policy in the telecom sector
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 licence 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)

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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.

MARKET Size, Players and Trends
India currently has 43 million fixed lines and 36 million wireless connections
Today, India has the eighth largest telecom network in the world, which is growing at an overall rate of over 20 per cent. As of May 2004, India had about 43 million fixed lines and 36 million wireless subscribers contributing to the total tele-density of about 7 per cent.
Tele-density & telephone subscribers in India

Source: Indian Telecommunications Statistics 2002, Ministry of Communications, Government of India The Indian Telecommunication Industry Performance Indicators 2002-03, TRAI; Statistics on Cellular Subscriber Numbers from COAI website

According to Morgan Stanley, the total revenue from the Indian telecom market in financial year 2003 was estimated to be about US$ 9.2 billion. Presently, wireline services contribute about half of the total service revenues. Over the next 5-8 years, however, their contribution is expected to fall to about 30 per cent and wireless services are expected to contribute half the industry revenue. Data revenue is expected to increase from 2 per cent to 8 per cent of total revenues.

Telecom in India : way forward
Estimates for total wireless market in India

in million

*E: Estimates for year ending March; Source: Cellular Operators Association of India (COAI)

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% Contribution to telecom service revenue, fiscal year 2003

Source: Morgan Stanley estimates

Equipped switching capacity

Source: TRAI Indian Telecom Service Performance Indicators, November 2003
*

BSNL: Bharat Sanchar Nigam Limited; MTNL: Mahanagar Telephone Nigam Limited. Both BSNL & MTNL are government controlled operators.

Most of the telecom infrastructure till now has been deployed in the urban areas, raising urban tele-density to about 18.2 per cent compared to a rural tele-density of about 1.5 per cent. According to the latest Telecommunication Industry Performance Indicators issued by the Telecom Regulatory Authority of India (TRAI), the equipped switching capacity of the fixed network is about 60 million with the ownership distribution as provided in the diagram above. There also exists about 0.5 million route kms of optical fibre-based and 0.15 million of microwave-based transmission network infrastructure. The ownership pattern of the transmission network infrastructure is as provided in the diagram, on the following page.

With urban tele-density at 18.2 and rural tele-density at less than 2, there is enormous scope for addition to telecom infrastructure

OFC (in RKms)

Source: TRAI Indian Telecom Service Performance Indicators, November 2003

M/W Link (in RKms)

Source: TRAI Indian Telecom Service Performance Indicators, November 2003

GSM in India a burgeoning market

The GSM subscriber base in India is expected to reach about 35 million by the end of 2004. Indian GSM service providers are presently operating in over 70 networks covering almost 2000 cities and towns and thousands of villages, serving over 26 million subscribers.

GSM service providers No. Name of Total Sub Company Figures 1 Bharti 7,343,763 % Market Share 26.10 Players and Trends

Integrated telco, with presence in all sectors - Cellular, Basic, National Long Distance (NLD) & International Long Distance (ILD). Currently offering only GSM based cellular services. No CDMA based cellular services being offered. Incumbent operator, virtual monopoly in the basic services. Very strong NLD operator; and, has been able to quickly ramp up GSM subscribers due to nationwide network reach. Pan country presence in both basic (except Mumbai and Delhi) and cellular services. Pure play GSM mobility player offering cellular services in 11 circles. Has been working on a model of being associated with the high ARPU subscribers. A 3 way GSM mobility joint venture between Tatas, Birlas and AT&T Wireless offering cellular services in 8 circles. IDEA has recently taken over Escotel that was operating in 3 circles. Pure play cellular operator along with Spice, Escotel and Aircel. Pure play GSM based mobility player offering services in 2 circles – Punjab and Karnataka. Recently acquired the contiguous metro circle of Chennai, while already operating in the state circle of Tamil Nadu. Operating GSM wireless services in 6 circles and subsequently acquired Madhya Pradesh circle from RPG. Reliance is currently focusing on rollout of CDMA based wireless services. Integrated incumbent operator also offering GSM based mobility in Delhi and Mumbai.

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BSNL

5,549,285

19.70

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HUTCH IDEA BPL SPICE AIRCEL

5,591,892 3,961,442 2,087,740 1,270,904 1,123,314

19.80 14.10 7.4 4.5 4.0 3.0 1.4

RELIANCE 850,831 MTNL 396,281

ALL INDIA 28,175,452
Source: Cellular Operator Association of India, May 2004

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Fixed service providers Wireline BSNL MTNL Private Operators 34,862,000 4,475,000 1,113,197 WLL 800,000 130,000 1,109,986 Total 35,662,000 4,605,000 2,223,183

Source: isourceupdates.com (as per media & other sources), March 2004

CDMA mobile has a subscriber base of 7 million in the country. It is expected that the mobile-fixed crossover in India will take place in 2004 itself. The global mobile subscriber base is expected to cross 1.5 billion in 2004 and reach 2.3 billion by 2010, with India expected to contribute significantly to the above growth.
CDMA service providers Tatas Reliance HFCL Shyam Total 652,735 7,010,258 34,114 27,141 7,724,248
Source: isourceupdates.com (as per media & other sources), May 2004

Trends
The Indian telecom market was liberalised in the 1990s and the service licences were given on the basis of services to be offered in specified areas of operation. The country was demarcated into “circles” - categories based on their economic potential, and these demarcations were mostly contiguous with the states of India. As a result, the Indian telecom market today is characterised by the existence of various regional players in the fixed and cellular segments.

With multiplying opportunities, the number of regional players is growing

Consolidation is underway in the industry

Over the past few years, consolidation has been happening in the industry, which has created about four large integrated players who have a presence in all the segments like wireline, wireless, national and international long distance and data services. These four players are BSNL (incumbent), Bharti Televentures, Reliance Infocomm and Tatas. Hutchison, another significant player with more than five million subscribers, has restricted itself to the mobile services space. The industry is expecting to see more consolidation following issuance of the Unified Access Licence by the Government in December 2003 and clarity in intra-circle merger and acquisition norms relating to both spectrum and dominance issues.

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OPPORTUNITIES
India offers an unprecedented opportunity for telecom service operators, infrastructure vendors, manufacturers and associated services companies. A host of factors are contributing to enlarged opportunities for growth and investment in telecom: • an expanding Indian economy with increased focus on the services sector • population mix moving favourably towards a younger age profile • urbanisation with increasing incomes 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. Till recently, the industry believed that while the hike in Foreign Direct Investment (FDI) limits was necessary, it was not a sufficient condition for growth of the telecom sector. With most of the regulatory uncertainty getting over, there is heightened interest in Indian telecom. Further, 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 attractive and lucrative destination for investment. Inflow of FDI into India’s telecom sector between 1991 and 2003 was about US$ 2 billion. Also, 20 per cent of the approved FDI in the country is related to the telecom sector.

Dynamism in the services sector and changing consumer profile is enhancing growth in telecom

India represents vast untapped potential for global telecom majors

Sectorwise inflow of telecom FDI (1991-2003)

Source: investindiatelecom.com

Lower prevailing tele-density levels compared to Asian economies indicate a huge demand potential

A comparison with countries in the Asian region indicates that India still has some way to go, to reach the levels of tele-density in these countries (data 2002), which brings in its wake a host of opportunities for investment in the Indian market.
India and select markets 2002 Country/Market India (Total) India (Urban) China Malaysia South Korea Total Tele-density % 5.2 15 32 57 116
Source: Industry estimates

Government initiatives facilitating…

Concrete steps taken by the Government of India are key drivers facilitating investment in the sector. It is reported that Department of Telecommunications is considering proposals for reduction in Licence Fee (currently between 6 per cent

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and 10 per cent) and Spectrum Charges (currently between 2 per cent and 4 per cent) for Basic and Cellular Operators to make the services more affordable. 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. Bharti Tele-Ventures, a large private telecom player offering varied telecom services and the largest GSM cellular operator, currently has foreign partners holding a combined stake of 47.3 per cent in the company; these include SingTel (with 28.5 per cent), Warburg Pincus, International Finance Corporation, Asian Infrastructure Fund Group and New York Life Insurance. Hutchison Whampoa has a 49 per cent stake in Hutchison Telecom, the second largest GSM cellular operator in India. Distacom has a 42 per cent stake in Spice Communications. AT&T Wireless has a 33.3 per cent stake in Idea Cellular while France Telecom holds a 26 per cent stake in BPL Mobile.

…expanding bouquet of services to extended to consumers…

...increasing opportunities for investor stakes

The inevitable comparison India outshining China Unanimous view: Wireless is expected to lead the Indian telecom boom
In nine years of existence in China, wireless services, were able to garner about 6.8 million subscribers by 1996. In comparison, India starting late - in 1995, had managed to enroll 28 million wireless subscribers by the end of 2003.

India Vs China - in comparable years of service

“The Elephant is on the dance floor… …and the Band is playing a Mobile Tune… …Get on that dance floor with the Indian Elephant”!!!
NEIL GALLOWAY Head of Asian Telecom ABN AMRO BANK, December 2003

Source: Cellular Operators Association of India (COAI)

CONTACT FOR INFORMATION Explore, invest and partner with India to profit and advantage
The telecom market is regulated by the Telecom Regulatory Authority of India, and the Department of Telecommunications is the licensor. They can be contacted at the following addresses: Telecom Regulatory Authority of India A-2/14 Safdarjung Enclave New Delhi 110 029 India Tel: + 91 11 2610 1934 Fax: + 91 11 2610 3294 Email: trai@del2.vsnl.net.in Website: www.trai.gov.in Department of Telecommunications Ministry of Communications Sanchar Bhawan 20 Ashoka Road New Delhi 110 001 India Tel: + 91 11 2371 6666 Fax: + 91 11 2337 2323 Website: www.dotindia.com

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