No.

20-100/2007-AS-I (Pt) Department of Telecommunications (Access Services-I1 Cell) Dated 7th November 2008

MEMO FOR THE FULL TELECOM COMMISSION

Subject: Prohibition of sale of Promoter's equity for UAS licence holders.

1.

Background :

1.1

Hon'ble

Minister

of

Communications

&

Information

Technology in his note dated 5.13.2008 to Secretary, DOT has desired as below:

"Since some misleading articles either out of lack of knowledge or vested motivation, are written in the media about the issuance of new licences and spectrum allocation more specifically in case of M/s. SWAN TELECOM and M/s. UNITECH TELECOM as these companies allegedly got unlawful enrichment, the matter was discussed with Hon'ble Prime Minister and Hon'ble Finance Minister as I observed in a press conference at Chennai.

In the meeting Hon'ble Finance Minister clarified that dilution ofshares to attract foreign investment for business expansion did not amount to sale of licence and as such these companies did their share dilution as per the corporate laws.

Nevertheless, I suggest that in order to remove suspicious clouds in the minds of media and people, Telecom Commission may deliberate this issue to restrict outright sale of licences and selling of stakes by promoters to 2nd party for money."

1.2

The background of some of the Articles appearing in Press

in this regard and clarification issued by DOT are narrated below for information:

(A)

An Article titled "Valuation reveals loss of government" was

published in the Times of India on 30th October 2008 wherein it was mentioned that government has lost revenue on account of grant of UAS licenses and allocation of spectrum of 4.4 MHz for Pan India at a price of Rs.1651 crores. The Article states that Government collected roughly Rs. 9000 crores by allocating 120 licenses to 9 operators with the promise of 4.4 MHz start-up spectrum in 1800 MHz band in January 2008 and that the deals made by M/s. Swan and M/s. Unitech reveal that the revenue collection should have been closer to Rs. 45000 crores to Rs. 50000 crores if not more. Whole Text of the Article is at Annexurel.

(B)

To clarify the position of DOT in the matter and to bring out

the facts to the notice of public, a Press Release was issued on 31.10.2008. A copy of the press release is at Annexure-II.

(C)

Subsequently, an Article titled "Telcos deals show enterprise

values: DOT Experts say they are for spectrum" was published in The Times of India on 1st November 2008 wherein it was mentioned that DOT has ignored TRAI recommendation for auctioning of spectrum. Whole Text of the Article is at Annexure-III.

(D)

A letter was issued to The Editor, Times of India, stating the

facts in the matter. A copy of the letter to The Editor is at Annexure-IV.

2.

Status of Swan and Unitech deals :

2.1

The concerned service providers M/s. Swan Telecom Pvt.

Ltd. and M/s. Unitech Wireless were asked to furnish the status report about their equity shareholding in addition to the facts about the reported transaction of equity shares of the company as being reported in the press. The copy of replies as received from these companies, namely, M/s. Swan Telecom Pvt. Ltd. and M/s. Unitech Wireless is enclosed at Annexure V and VI. It may be seen that these companies have made strategic partnership for investment in the company and have entered into agreement with foreign companies namely, Etisalat and Telenor respectively for infusion of equity capital into the company for rolling out the Telecom network in the licensed service areas. M/s. Unitech Wireless has also mentioned that they were in search of an experienced international strategic partner who would enrich the company by bringing in the benefits of successful telecom experience elsewhere.

2.2

Both these companies have categorically mentioned that the

investment brought in by their strategic foreign partners would be used for rolling out the services and this could enhance their capital base keeping the absolute share holding of their promoters intact.

2.3

The present shareholding pattern of M/s. Swan Telecom

Pvt. Ltd. and M/s. Unitech Wireless as reported by these companies is enclosed at Annexure- VII & VIII respectively.

3.

License

Conditions

relating

to

lock-in

of

equity

shareholding:

3.1

It is pertinent to mention that Licence conditions in respect

of Lock-in of equity shareholding have evolved over a time period. The provision in different License Agreement in this regard from

time to time is indicated in Annexure-IX.

3.2

It is evident that the clause relating to lock-in of equity

shareholding in the initial licenses were liberalized over a period of time through amendments and finally removed with due approvals of the Government.

4.

Deliberation of the issue

4.1

Government is presently issuing Unified Access Services

(UAS) licenses under UAS licensing guidelines of 2005. Since introduction of UAS licensine regime in 2003, 50 new UAS licenses have been issued till December 2006 based on the policy of First-Come-First-Served (FCFS) and spectrum was also allocated based on FCFS basis under a separate wireless Operating License, subject to availability. The number of UASL applications has been increasing and there were already about 5 to 8 licensed Access Service Providers in each service area. The increase in number of applications had increased the demand of GSM spectrum in a substantial manner. Therefore, a reference was made to TRAl on 13.4.2007, inter-alia, seeking their recommendations whether to put a limit on the number of access service providers in each service area. In its recommendations dated 28-8-2007, TRAI, inter-alia, recommended that no cap be placed on the number of access service providers in any service area. The recommendation of TRAI was accepted by the Government in October 2007 after due deliberation. It was observed that there has been a spurt in the number of applications received by DOT for grant of UAS licenses after receipt of TRAI recommendations dated 28.08.2008. Therefore, a cut-off date was announced as 1.10.2007 stating that no new UASL application will be received after this cut-off date till further orders. 575 applications for UASL licenses were received till the cut-off date, i.e. 01-10-2007, from 46 applicant companies in respect of 22

service areas in the country. In view of the volume of applications, it was decided to issue Letter of Intents (LOIs) to all eligible applicants for UASL who applied upto 25-9-2007 (i.e. the date on which the cut-off date for receipt of applications were made public through press) in each service area. With the appropriate decision by the competent authority, 17 eligible applicant companies have been issued 122 UAS licences out of 232 UASL applications received upto 25.09.2007 from 22 different companies. Thus, total 173 new UAS licences have been issued till date since announcement of UAS regime in November 2003. Balance 343 (=575-232) applications filed within the period of 26.09.2007 and 1.10.2007 are pending but these are not likely to be considered for grant of UAS licence in foreseeable future due to sufficient competition already in place and scarcity of spectrum. Spectrum has also been allocated to new operators and additional spectrum to existing operators as per justification in many service areas. The new UAS licensees will set up the required infrastructure for providing mobile services and, would provide competition to the existing players. Public will be largely benefitted by increased competition and thereby reduction in tariff. However, to ensure that the promoters/ partners/ shareholders of the new licensees do not walk away after selling their stakes at high price and take advantage of spectrum allocation for their financial gain but should really set up the requisite network/ infrastructure and start operations of service which is intention of the government, it is desirable that some stringent conditions may be put in the licenses in this regard.

4.2

The present eligibility conditions for grant of UAS Licenses

stipulate that:

The applicant and promoters of applicant company should have a combined net-worth of amount as detailed in the Table below.

Net-worth Rs.30 Crores for

Total Minimum Net-worth required each 100 X+ 50 Y+ 30 Z where X.Y & Z is respectively the Number of A, B & C Service Areas for which

Category C Service Area

Rs.100

Crores

for

each either LOI / Licence have been issued or applied for in the name of applicant.

Category B Service Area

Rs. 100 Crores for each Category A Service Area The net-worth of only those promoters shall be counted who have at least 10% equity stake or more in the total equity of the company. Here net worth shall mean as the sum total in Indian Rupees, of paid up equity capital and free reserves. While counting Net-worth the foreign currency shall be converted into Indian Rupees at the prevalent rate indicated by the Reserve Bank of India as on the date of Application received. The minimum net worth & paid-up capital shall be maintained during currency of the Licence.

4.3

Therefore, it may be desirable that the promoters/ partners/

shareholders who have 10% or more stakes in the company and whose net worth has been taken into consideration for determining the eligibility for grant of UAS license should not be able to sell their equity and walk out from the company for a period of say 5 years from the effective date of license. However, issue of additional equity share capital by the licensee companies/ their holding companies by way of private placement/ public issues shall be permitted. Further, the lock-in provisions shall not be applicable in case the shares are transferred pursuant to enforcement of pledge by the lending financial institutions/banks due to events of defaults committed by the borrowers with the condition that such shares should have been pledged for investment only in the particular licensed project.

4.4

It is worth mentioning that the present guidelines for merger

of licences in a service area stipulate that "Any permission for merger shall be accorded only after completion of 3 years from the effective date of licenses." Therefore, the proposed lock-in of promoters/shareholders equity for a period of 5 years may be alternatively considered for a period of 3 years only.

4.5

Any unilateral modification in the license agreement if not

accepted by the licensee may be challenged in a Court of Law. However, Government reserves the right under the licence agreement for modification in terms and conditions of the license quoted as below:

The LICENSOR reserves the right to modify, at any time the terms and conditions of the LICENCE, if in the opinion of the LICENSOR it is necessary or expedient to do so in public interest or in the interest of the security of the State or for the proper conduct of the telegraphs. The decision of the LICENSOR shall be final and binding in this regard.

4.6

The UAS licences under the first-come-first-serve policy as

per guidelines of November 2005 are being granted in consonance with stipulations of NTP 99 which envisages that "Access to telecommunications is of utmost importance for achievement of the country's social and economic goals. Availability of affordable and effective communications for the citizens is at the core of the vision and goal of the telecom policy." In view of this the entry conditions for getting UAS license are not very stringent and no up-front fee for spectrum allocation has been charged in the interest of competition for ensuring good quality service to the citizens at affordable tariff to achieve the teledensity target of 500 million phones in the country by 2010.

4.7

Therefore, the proposed amendment is in the public interest

and for proper conduct of the telegraphs. Thus, the amendment can be imposed on the service providers for a period of 3 or 5 years from the effective date of the license such that they set up the network and operate the services and not resort to outright sale of the licenses of selling of stakes by the promoters.

4.8

The above issue needs consideration in view of above

deliberations and examining legal tenability.

5.0

Proposal:

5.1

As already stated in para 3.1 and 3.2 above, initially there

was a clause relating to lock-in of equity shareholding in the initial licenses, which were removed over a period of time through amendments. Further, as stated in para 4.5 above, Government reserves right for carrying out modification in the license agreement(s) in public interest and for proper conduct of telegraphs. This may need to be examined from legal angle also.

5.2

It is proposed to amend the UAS License conditions to

incorporate a condition relating to lock-in of equity shareholding to the effect that: The promoters who have 10% or more stakes in the company and whose net worth has been taken into consideration for determining the eligibility for grant of UAS license should not sell their equity in the UAS Licensee company for a period of 5 years (alternatively 3 years) from the effective date of licence(s). However, issue of additional equity share capital by the licensee companies/ their holding companies by way of private placement/ public issues shall be permitted. Further, the lock-in provisions shall not be applicable in case the shares are transferred pursuant to

enforcement of pledge by the lending financial institutions/ banks due to events of defaults committed by the borrowers with the condition that such shares should have been pledged for investment only in the particular licensed project.

6.0

The proposal contained in para 5.2 may kindly be

considered for approval in the light of observations in para 5.1 above.

7.0 This is issued with the approval of Member (T), Telecom Commission.

Sd/(A.K. Srivastava) Dy. Director General (AS-I)

Unitech Wireless (Tamil Nadu) Private Limited Regd. Office: Basement, 6, Community Centre, Saket, New Delhi-110017 04 November 2008

Mr. Siddhartha Behura, Secretary, Department of Telecommunications, Sanchar Bhawan, 20, Ashoka Road, New Delhi

Sub: Unitech partners with Telenor

Dear Mr. Behura,

Consequent to Unitech informing the Mumbai Stock Exchange and the press, on 29th October 2008, of an agreement signed on the night before, between Unitech Wireless (used collectively for 8 companies holding between them 22 UASLs across the country) and Unitech Ltd on the one hand, and Telenor Mobile Communications AS, Norway and Telenor Asia Pte Ltd, Singapore, on the other, there have been various press reports, many of them misleading, professing to throw light on the agreement. Some of the reports attempt to show the partnership in a negative light, prompted possibly by the vested interests of competing forces interested in creating barriers to the entry of respected, world renowned players. In fact, we are a bit surprised at this reaction, because Unitech Ltd had all along been transparent about its intent to diversify into other business verticals, and to rope in a global strategic partner for its telecom foray.

Officers from your department have approached us recently seeking information on the agreement. Hence, we write to apprise

you of the status of implementation of the GSM services project of Unitech Wireless and also of the salient aspects of the above mentioned partnership agreement.

1.

Unitech Wireless, a 100% subsidiary of Unitech Ltd, signed 22 UASLs on 24th January 2008, after paying an entry fee amounting to Rs.1651 crores, and providing bank guarantees amounting to Rs. 880 crores. The fee was funded by a combination of equity and debt infused by Unitech Ltd, and also bank borrowings.

2. Unitech

Wireless set about building a team of Indian

telecom professionals to build the company, its network, its business processes, offices, distribution channels, to leverage the resources of the tower manufacturing business of Unitech Ltd, and to do all else that is required for running a successful telecom operation. It also hired the services of a renowned international strategy consultant to help develop a business plan and to advise it on various aspects of the business.
3. Simultaneously,

using the services of an international UBS a AG, Switzerland, for an Unitech

Financial Wireless

Advisor, initiated

search

experienced

International Strategic partner who would enrich the company by bringing in the benefits of successful telecom experience elsewhere.
4.

The status of the project on 30th September 2008 was as follows:

A project implementation cum Corporate Office at Noida, and project offices in the 5 circles where the first tranche of spectrum was received, were operational.

250 telecom professionals, including senior management like CEO, CTO, Chief Human Relations Officer, Chief of Sales and Chief Regulatory Officer were in place.

The team had completed radio planning for 5 circles.

Subsequently the above work was extended to the additional 8 circles where spectrum was obtained subsequently.

RFPs were prepared and floated for network, IT (including billing system) and passive infrastructure.

After detailed discussions, we are today on the brink of placing orders for network and lT systems.

Similarly we are close to finalizing arrangements for leasing of passive infrastructure from such infrastructure providers.

External agencies have been commissioned for conducting market surveys, and for a comprehensive branding exercise to build upon the "Unitech" brand of the promoter company. As on 30th September 2008, the total expenditure of Unitech Wireless comprising of the entry fee, and the expenses incurred from all the above mentioned activities stood at around Rs. 2100 cr.

Additionally, the promoters, Unitech Ltd, have supported the operation by providing corporate guarantees, and physical assets as collateral totaling about Rs 2000 cr, for procuring bank guarantees and debt from our bankers. They are also leveraging their brand and relationships with high value and enterprise customers for the benefit of Unitech Wireless. Use of Unitech's brand and access to using its sales and distribution channels, including rights to provide services to all occupiers of the group, is a part of the agreement.

5.

In parallel, the partner search had narrowed down from a

long initial list to two leading international operators by 30th September 2008. The agreement was finally reached with Telenor on 28th October 2008. 6. Telenor is partnering with us at a stage where about 6

months of effort, and Rs.2100 cr of expenses, have already been expended. It is not entering an entity where the only value is the spectrum that it holds, as is attempted to be made out by some of the press reports. 7. Headquartered in Oslo, Norway, Telenor is an international

provider of high quality telecommunications, data and media communication services. Telenor is one of Norway's largest companies with revenues in 2007 of approx. NOK 105 Nlion (including Kyivstar) and a work force of more than 35,800 domestically and abroad. Telenor is owned 54% by the Ministry of Industry and Trade, Norway. It has operations in 12 countries. Its emerging markets experience includes the hugely successful Grameen Phone, as a result of which we believe that Telenor can add immense value to Rural Telephony in India.

8.

We provide the salient features of the agreement: Telenor Asia Pte Ltd, Singapore will invest about Rs.6,120 crores to subscribe to new shares in United Wireless (ie. collectively in the 8 companies holding the licences). Unitech Ltd, will continue to stay invested to the extent of its equity in Unitech Wireless before the agreement. Hence, Unitech Ltd will not be selling any of its holdings in Unitech Wireless nor making any profit as a direct consequence of the partnership agreement. The investment by Telenor will represent a 60% share of the increased equity of Unitech Wireless. The cash will be brought into Unitech Wireless in stages as explained below, and will amount to 60% of the total funds infused into the business. Hence the valuations being quoted by the press are "post-money", it reflecting the value of the funds applied to the business, and not the value of the license or spectrum.

The investment will be made in convenient blocks as per the funding needs of the business. With every infusion of funds, Telenor's equity will increase by a proportionate amount.

Before the equity reaches a level which amounts to an increase in FDI, as defined in the license agreement, beyond 49%, Unitech Wireless will apply to, and obtain approval from, FIPB for going beyond 49%.

The process of increase in equity from 0% to 60% is

expected to take about one year. During the period Unitech Wireless would have launched operations in the 13 circles in which it presently has spectrum, and in other circles subject to allotment of spectrum. As of today no money has yet been brought in by Telenor, and hence no shares have been issued to Telenor to date.

Unitech Wireless will comply with all the requirements pertaining to FDI and ownership, as prescribed by its licence agreement, at all times.

We are proud that we have brought in Telenor, a respectable international operator with majority Norwegian Government ownership, to partner with us. Both the partners are looking forward to a long term symbiotic relationship for mutual business growth and neither intends to cash out in the foreseeable future. Not only Unitech Wireless but also the Indian Telecom Industry and the Indian consumer stand to gain from Telenor’s depth of understanding of emerging markets. Moreover Telenor's commitment to India comes at a time of a severe worldwide cash crunch which according to us should be matter of pride for the Government of India also.

We shall be happy to meet with you, and provide any further clarifications that you or your Officers may require.

Best regards, Yours sincerely, Sd/(Ashok Sud) President - Corporate Affairs

CC: Mr A.K. Srivastava, DDG (AS-I) Mr P. K. Mittal, DDG (AS-II)

Swan Telecom Private Limited Regd Off: DB House, Yashddham, Gen A.K. Vaidya Marg, Goregaon (East), Mumbai 400 063

November 4, 2008 To,

Dy. Director General (AS-II)/Dy Director General (AS-I) Department of Telecommunications Ministry of Communication & Information Technology Sanchar Bhawan, New Delhi

Sub: Strategic Partner

Sir,

We refer to the telephonic queries made by DDG AS-I and DDG AS-II last night and this morning on the above subject. In this regard, we would like to state as under:-

1)

The Company (Swan Telecom Pvt Ltd) has entered into a

Share Subscription Agreement (SSA) on 23rd September, 2008 with Etisalat international India Limited and Genex Exim ventures Private Limited for Subscription to new Equity Shares of the Company. Etisalat is hereinafter referred to as Strategic Partner.

2)

As per the SSA, Etisalat has agreed to subscribe upto 45%

in the increased equity of Swan Telecom and will invest Rs. 3217 crores (approx.) into the Company and Genex Exim Ventures Private Limited has agreed to invest Rs.380 ccores (approx.) into the Company.

3)

Pursuant to the SSA, the paid up equity capital of the

company shall stand increased to Rs.251.47 crores from the existing Rs.109.01 crores.

4)

As per the SSA, "NO" shares of the founding promoter

shareholders are proposed to be sold to any party including the Incoming shareholders. As per the SSA, the founding promoter shareholders will be subscribing to further new shares into the company. 5) The founding promoter shareholders have as on date

invested Rs. 2404 crores by way of equity and preference capital and Debt in the Company. For the sake of clarity it is repeated that the founding promoter shareholders have not sold any and do not propose to sell any of their shares to any party including but not limited to the strategic investor or the Indian Investor.

6)

The strategic parties shall bring in technical expertise and

global experience to roll out the services in the 13 circle where the Company has an UAS Licence. The fresh equity capital raised by the Company from the Strategic Partner, the founding promoter shareholders and the Indian investor will be utilized for rolling out the telecom network in the licence areas.

Thanking you

Yours truly For Swan Telecom Pvt Ltd

Sd/(Dr Vinod Kumar Budhiraja) Authorized Signatory

CC: Secretary, DoT

Sign up to vote on this title
UsefulNot useful