TELECOMMUNICATIONS

Table of contents
1. 2. 3. 4. 5. 6. Telecom in India FDI policy in telecom sector Market- size, players and trends Opportunities Government Initiatives Bibliography 3 4 6 10 12 13

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TELECOM IN INDIA
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. India is the fourth largest telecom market in Asia after China, Japan and South Korea. The Indian telecom network is the eighth largest in the world and the second largest among emerging economies. The industry has witnessed an explosive growth in recent

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years. Teledensity has more than doubled from 2.3 per cent in 1999 to 4.8 per cent in 2002. However, the world average is almost 7.5 times and the Asian average 4.5 times the Indian average. The Indian telecom market size of over US $ 8 billion is expected to increase three fold by 2012. The expansion of the telecom industry in India has been fuelled by a massive growth in mobile phone users, which has reached a level of 10 million users in December 2002, an increase of nearly 100 per cent in 2002. This exponential growth of mobile telephony can be attributed to the introduction of digital cellular technology and decrease in tariffs due to competitive pressures. For the first time in India, the growth of cellular subscriber base has exceeded the fixed line subscriber base. However, cellular penetration is still 1 per cent as compared to world average of around 16 per cent.

MACRO ECONOMIC IMPETUS

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 worlds 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 Indias GDP and 30 per cent of Indias foreign exchange inflows.

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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.

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 license from the Department of Telecommunications and adherence by the companies (who are investing and the companies in which investment is being made) to the

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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) - Infrastructure Providers providing dark fibre - 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

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 %. 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 service MBA 6

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.

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.

GSM IN INDIA-A BURGEONING MARKET

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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 company 1 BHARTI Total subfigures 7,343,763 % Market share 26.10 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. 2 BSNL 5,549,285 19.70 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. 3 HUTCH 5,591,892 19.80 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. 4 IDEA 3,961,442 14.10 A 3 way GSM mobility joint venture between Tatas, Birlas and AT&T Wireless offering cellular services in 8 circles. IDEA Players and Trends

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has recently taken over Escotel that was operating in 3 circles. 5 BPL 2,087,740 7.4 Pure play cellular operator along with Spice, Escotel and Aircel. 6 SPICE 1,270,904 4.5 Pure play GSM based mobility player offering services in 2 circles Punjab and Karnataka. 7 AIRCEL 1,123,314 4.0 Recently acquired the contiguous metro circle of Chennai, while already operating in the state circle of Tamil Nadu. 8 RELAINCE 850,831 3.0 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. 9 MTNL 396,281 1.4 Integrated incumbent operator also offering GSM based mobility in Delhi and Mumbai. FIXED SERVICE PROVIDERS BSNL MTNL PRIVATE OPERATORS 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. WIRELINE 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

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CDMA SERVICE PROVIDERS Tatas Reliance HFCL 652,735 7,010,258 34,114

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. 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.

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

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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 Indias 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.

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. MBA 11

INDIA AND SELECT MARKETS 2002 COUNTRY/MARKET India (Total) India (Urban) China Malaysia South Korea TOTAL TELE-DENSITY % 5.2 15 32 57 116

THE INEVITABLE COMPARISON INDIA OUTSTANDING CHINA

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.

GOVERNMENT INITIATIVES
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 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.

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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.

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