India Telecoms Market

Overview: Telecoms market in India is second largest in the world in terms of subscribers, second only to China. The market is characterized by fastest growing mobile subscriber base in the world, highest level of competition with about 12-14 operators in each telecoms circle, amongst tariffs in the world, falling APRU, comparatively low teledensity and huge untapped rural mobile and broadband potential. Market is divided in 22 regions, called 'Telecom Circles' or 'Telecom Service Areas' - These are further classified as Metros, A, B or C depending upon the revenue potential for the circle with Metros & A circles expected to have the highest potential, while C circles have lowest potential. - The country was divided into 23 circles when the mobile telephony was introduced however, later in October 2005 Chennai Telecoms circle was merged with Tamil Nadu Telecoms services license in the country is awarded on per circle basis, while government maintains a policy of technology neutrality leaving choice of technology to the licensee. There is only one type of license called Universal Services Access License that is awarded to operators which covers Fixed, Mobile and ISP services. Spectrum is bundled with mobile license in India, however spectrum is allocated on first come first serve basis. However, government is currently reviewing spectrum allocation process and there are chances of delinking the same from license and adopting auction for all future allocations.

Brief History: 1994: First telecom licenses were issues using auction Licenses awarded using fixed license fee led to very high service prices and limited demand. Two Cellular Mobile Telephone Service (CMTS) licenses were awarded in November 1994 to Aircel, Bharti Airtel, Loop Mobile and Vodafone in the four metro cities of Delhi, Mumbai, Kolkata and Chennai using Beauty contest auction method. Although, license fee for the above two licenses was predetermined, Spectrum charges and royalty for use of Spectrum were payable separately 1999: Nation Telecom Policy 1999 was introduced - One of the most important features of the NTP 1999 was that the Government would invariably seek the recommendations of the Telecom Regulatory Authority of India (TRAI) on the number and timing of new licenses before taking any decision on the issue of new licenses in future. A new methodology for calculating license free that is revenues share based on AGR. AGR is defined as Gross revenue minus pass thru revenues. Some examples of pass thru revenue include Income from dividend, Revenue from discernible and standalone sale of handsets or telecom equipment not bundled with telecom service WHILE Sale of handsets or telecom 1

equipment if bundled with telecom service, Revenue from rent of towers and dark fibers, Discounts and rebates given to customers are included in AGR In 1999-2000, MTNL and BSNL were awarded CMTS licenses as the third mobile operator. In September-October 2001, 17 new CMTS licenses were issued on a competitive bidding process. The allotment of Spectrum was assured under the license and no separate upfront fee was charged for Spectrum. In 2003 the Unified Access Service (UAS) Licensing regime was introduced which envisaged the provision of wire line, fixed and limited mobile wireless, full mobile wireless and cellular mobile telephone services under one license on payment of the prescribed entry fee. As per the condition of the UAS license, initial Spectrum of 4.4 MHz + 4.4 MHz was to be allotted for GSM based systems and a maximum of 2.5 MHz + 2.5 MHz Spectrum to be allotted for CDMA based systems, on case by case basis and subject to availability. Incremental Spectrum beyond the initial allotment was linked to be subscriber base achieved by an operator. Between 2004 and 2007 51 new UAS licenses were issued after the introduction of the UAS licensing regime on 11th November, 2003. Based on a reference made to the TRAI in April 2007 and TRAIs consequent recommendations of 'no cap' on the number of players in a service area and introduction of dual technology licenses, the DoT issued 35 dual technology licenses and 122 UAS Licenses in 2007-08. The procedure followed by DoT for issue of these 157 licenses smacked of serious irregularities leading to staggering loss to the exchequer. Recently in 2010, DoT auctioned 3G spectrum in India however there was very limited spots of 5MHz + 5Mhz were available which caused artificial rise in the spectrum prices, while none of the operator could acquire spectrum in all 22 telecoms circle. However, BSNL and MTNL have also been awarded 3G spectrum. DoT has also auctioned BWA spectrum 20MHz + 20 MHz which can be used to offer wireless broadband services using technologies like LTE and WiMAX. However, offering voice is not possible as both these technologies are packet switched and hence an only offer voice using VoIP and in India voip termination to PSTN and PLMN is not allowed.

Spectrum and policy Issues Allocation of spectrum in India beyond start-up limit is based on subscriber linked criteria, wherein an operator is awarded additional spectrum after he reaches a minimum subscriber threshold limit. One mayor issue is allocation of spectrum beyond 6.2 Mhz. It has been debated time and again that UASL license only stipulate spectrum allocation only upto 6.2 Mhz. However, many operators like Bharti Airtel, Idea, Vodfone, BSNL hold spectrum in excess of 6.2 MHz in many circles. Dual technology operators as well as many new operators are of the opinion that excess spectrum should either be returned or operators should be made to pay suitable amount to holding spectrum in excess of permissible limit. However, operators holding excess spectrum

view that their allocation are valid and in line with policies that were prevalent at the time of allocation of the spectrum. In May 2010, TRAI made its recommendation on Spectrum management and Licensing Framework, which are currently being reviewed by the licensor Department of Telecommunications. - Spectrum in 800 and 900 MHz bands should be refarmed at the time of renewal of the licenses. For holders of spectrum in 900 MHz band, substitute spectrum should only be assigned in 1800 MHz band and for license holders of 800 MHz band, spectrum should be assigned in 450 /1900 MHz bands. - The contracted spectrum for all the access licenses issued in or after 2001, is 6.2 MHz / 5 MHz in respect of GSM/CDMA respectively - Keeping in view the scarcity of spectrum and the need to provide the contracted spectrum to the existing licensees, the Authority recommends that no more UAS license linked with spectrum should be awarded. - The limit on spectrum to be assigned to a service provider will be 2X8MHz for all service areas other than in Delhi and Mumbai where it will be 2X10MHz. Similarly for CDMA spectrum the Authority recommends that the limit on spectrum will be 2X5MHz for all service areas and 2X6.25 MHz in the Metro areas of Delhi and Mumbai. - Even though the service provider will be assigned spectrum upto the prescribed limit, Spectrum assigned beyond contracted amount will be paid for at the Current price. This will be equally applicable to the service providers who are already holding the excess spectrum and those who will be assigned beyond the contracted amount in future. - The use of subscriber linked criteria be done away with for assignment of spectrum - Spectrum in the 800,900 and 1800 MHz bands should not be subject to auction. - Spectrum in 800 and 900 MHz bands shall however may be subject to auction as and when it is refarmed - The 3G prices be adopted as the Current price of spectrum in the 1800 MHz band. - The Current price of spectrum in the 900 MHz band be fixed at 1.5 times that of the 1800 MHz band - All the service providers having spectrum beyond the contracted quantum should pay excess spectrum charges at the Current price, pro-rated for the period of the remaining validity of their license subject to a minimum of seven years. Service providers returning the excess spectrum shall be liable to return the 900 MHz spectrum if any and also pay the additional one-time charges at the Current price for a minimum period of three years. - The excess spectrum beyond 8 MHz would be charged at 1.3 times the current price - Excess spectrum in 900 MHz band should be charged at 1.5 times that of excess spectrum in 1800 MHz band. It will equally apply in cases of 800 MHz band, if any. - Trai also stated that it is separately initiating a process to further study the subject and make suitable recommendation about the spectrum pricing. Subsequently in Feb 2011, Trai recommended fixing the price for 6.2 MHz of pan-India start-up 2G spectrum at Rs 10,972.45 crore, more than six times the present cost of Rs 1,658 crore.

- Also, as per TRAI's recommendations, the price of 1800MHz spectrum varies from Rs 268 crore/MHz to Rs 5 943 crore/MHz, a differential of 2,200%, with the differential going up 3300 per cent in case of pricing for 900MHz spectrum. - The price is retrospectively effective from 1 st Apr, 2010 TRAI recommendations have been largely criticized by incumbent telecoms operators, GSM industry association as well as analyst firms for inconsistencies and flaws.

2G Scandal and Briery Cases The well know 2G scandal in India is basically linked to irregularities in issuance of 122 new telecoms licenses in 2007-08 According to an audit by India's Comptroller and Auditor General, then Minister of Communications & IT Mr. A. Raja caused nearly US$40 billion in losses to the exchequer by selling the licenses at 2001 prices and by conducting the sale on a so-called first-come, firstserved basis (as opposed to auctions) to benefit a few select bidders. Several licenses were issued to firms who were ineligible, who had no prior experience in the sector, or who had hid material facts while applying for the license. During the investigation A. Raja has been charged and arrested for taking bribes for favoring some of the applicants. The multi-crore foreign transactions relating to the 2G spectrum scam have been traced to at least six countries including Mauritius. Loop Telecom one of the companies to get 21 licenses amongst 122 awarded in 2008 has come under scanner for violating rules. An internal probe by the department has revealed that the Essar Group held more than the 10% permissible stake in Loop Telecom, one of the companies that bagged pan-India mobile permits in 2008 under controversial circumstances. Indian laws prohibit a single group, which already has more than 10% stake in one mobile operator, from owning more than 10% in another. Essar is a 33% shareholder in Vodafone Essar Three reliance executive (Gautam Doshi, Hari Nair and Sanjay Pipara) along with chairman of Unitech group Sanjay Chandra (which holds stake in Uninor) and Vinod Goenka (Partner in Etisalat DB) have also been arrested in the case. Top official of Depatment of telecommunications Behura, Chandolia have also been chargesheet and facing trial. Further investigation in the case has revealed contingencies in license allocation way back to the regime of Dayanidhi Maran who was the Minister of Communications & IT before A. Raja. Former Aircel chief C Sivasankaran has alleged that he was forced by Dayanidhi Maran to sell his company Aircel to Malaysia's Maxis group in 2006 when he was telecoms minister. Sivasankaran heads USD three billion conglomerate, Siva Group, with operations in realty, telecom, shipping, energy and agri exports and e-education/software.

National Telecom Policy (NTP) 2011 Amidst the various ups and downs under the cloud of political scandal, DoT is working redefining rules for telecoms sector in the India. The proposed policy overhaul aims as doing away with 4

contagious issues and develop a progressive and transparent licensing and regulatory mechanism for smooth operation of the sector. NTP 2011 aims at directional shift in policy, while the broad contours of the new policy include: - De-linking licence from spectrum - Spectrum to be awarded on market-based pricing mechanism - TRAI will frame recommendations on new mechanism - The requirement for adequate spectrum will be addressed - Operators will receive adequate spectrum - New licence issued to operators will be in nature of unified licence - Licence holders will be free to offer any service - There will be no more contractual spectrum - The concept of initial/start-up spectrum will be eliminated - A uniform rate for all players for revenue sharing will be ensured - Services will be made technology-neutral - The new telecom policy will not be with retrospective effect - The new policy will create a level playing field in the telecom space

Latest updates on NTP 2011 The Telecom Commission (TC), the highest decision-making body of the communications ministry, has approved a slew of major policy changes: A uniform revenue share as license fee for all UASL, NLD and ILD licensees at 8.5% of adjusted gross revenue (AGR). At present, telcos share 6-10% of annual revenues towards licence fee depending on the area of operation - license fee is highest at 10% for metros and category A regions, which include lucrative states like Tamil Nadu, Andhra Pradesh & Maharashtra. This is a deviation from the Telecom Regulatory Authority of India recommendation to bring down the license fee to a uniform 6 per cent, a panel set up by the DoT pegged this at 8.5 per cent in order to protect Government income. The commission has cleared Trai's plan that mobile phone companies be given the contracted amount of airwaves (6.2 MHz for GSM and 5 MHz for CDMA) at a price fixed by the regulator equivalent to the market value of spectrum at that time This implies companies such as Bharti Airtel, Vodafone Essar and Idea Cellular, among others, which currently hold up to 10 MHz of 2G airwaves in many regions, will be given only 6.2 MHz when they renew their permits at market rates. The commission has also approved stricter rollout norms mandating mobile phone companies to offer services in all regions that have more than 500 residents, a move that will significantly increase their capital and operating expenditure. However, the TRAI had suggested roll out obligation based on population whereby operators would be required to cover all areas with more than 10,000 people within two years and 2,000-5,000 people in four years. The Commission has agreed with most other recommendations made by the DoT internal panel. For example, the TRAI had sought powers to scrutinize spectrum usage by Government agencies 5

such as the defense forces. The Commission has agreed with the DoT panel views that TRAI should only look at spectrum use by telecom operators. The Commission has also ratified DoT panel's views that there was no need to set up a new fund to meet expenses related to spectrum re-farming. It has also accepted moving to a new license regime whereby all licenses will be unified, spectrum will be delinked from the license and will be renewed only for a 10-year period after their current tenure expires.

Analysis on NTP 2011 This opens the window for legal challenges since any deviation from Trai recommendations requires DoT to re-refer the matter back for reconsideration to the regulator under Sec 11, 1(a), 5th proviso, which has not been done. Even if telecom minister approves the TC's decision, DoT is still obligated to refer the matter back to TRAI and therefore the entire exercise of putting the TC through this approval process seems futile as it should have come after the reference to TRAI rather than at an interim stage. Revenue Sharing @ 8.5% - This move will benefit operators in Metro areas which are currently paying 10 per cent of the annual revenues. However, Internet Service Providers and Long Distance Telephony operators would have to pay out more as they currently pay only 6 per cent. For establish pan-India players, this move may not have any major impact as they end up paying about 8.5 per cent of the overall revenues on an average. - Aircel has recently grown to a pan-india operator. It has a strong presence in some of the circles in south India especially in Chennai and TN which is a metro circle accounting for 35% of groups subscriber base in may 2011. Group also has well established operations in c categories circles, where license fee is proposed to be increase by 2.5% from 6% to 8.5%. Hence, Aircel may neither benefit or be adversely affected with 8.5% license fee.