NK Singh Report: Fund Raising Features

Indian telecom is on a fast track. Service providers are busy setting up

world-class infrastructure, which will help in realizing the objectives of NTP

’99. From a tele-density of 4.4 as on 31 March 2002, it aims at a tele-density

of 7 by 2005, and 15 by 2010. Accordingly, the country should be aiming for a

tele-density of around 10 by 2007. But, the Tenth Five Year Plan projections for

telecom are on a higher side–to achieve an overall tele-density of 11.5, with

a tele-density of 3 in the rural areas by 31 March 2007. The target may be

achieved only through active involvement of both the private and public sector

companies.

For the Tenth Plan (2002-07), the Working Group on Telecom has projected that

India will add around 82.7 million connections (fixed as well as wireless),

taking the overall tally to 127.82 million connections as on 31 March 2007. It

is projected that this will translate into a tele-density of 11.5 from a present

tele-density of 4.4, an increase of 7.1. Fixed connections will contribute

around 52 million lines whereas mobile ones will contribute around 31 million

lines. On the cellular services front, private operators will have a larger

share and will contribute around 58.7 percent of the overall cellular pie,

whereas on the fixed services front, the private operator will contribute only

25 percent. On the fixed services front, the incumbent operators–BSNL and MTNL–will

have a dominant market share, as they have a large network and will contribute

around 75 percent of the overall pie.

NK Singh Committee’s Proposals Spectrum Policy Pricing and allocation should ensure that the available spectrum is utilized optimally Spectrum pricing needs to be based on relative demand and supply over space and time in a dynamic manner. Opportunity cost should reflect scarcity of the resource in the given situation To ensure optimal utilization all users, including defense, police, and paramilitary forces should be required to pay for the allocated spectrum Rural Telecom Services USO funds, if inadequate, need to be supplemented through other means, including budget support by the government Keeping in view the opportunity cost of spectrum in the rural areas, only nominal spectrum charge may be levied for providing services in the rural areas Taking into account the issue of affordability, Internet telephony may be included as part of the business model The implementation of the USO will be divided into two clearly identifiable streams–provision of public telecom and information services, and provision of household telephones in net high cost rural/remote areas. The former will be given priority with respect to disbursement of funds Implementation of USO shall be through a multi-layered bidding process on the least quoted subsidy support basis. The lowest bid offering the least subsidy shall be accepted, subject to the ceiling of benchmark cost as determined by DoT Research and Development Setting up of a communications research council as the apex body to prioritize, plan, and finance the R&D projects. It should basically be industry financed and governed body wherein the government provides one-time corpus fund The present infrastructure available with C-DoT, the premier body in the government sector, is of such a high standard that it can be converted into a national research organization. The industry should be fully associated with financing and management of the organization Earmarking a percentage of the turnover of the companies in the organized sector for financing the R&D corpus with a view to ensure a sufficient and regular flow of funds to the research activities

Towards formulation of the Tenth Five Year Plan, Planning Commission

constituted a Steering Committee on Communications and Information whose basic

objective was to make recommendations on various policy matters relevant to the

sector. The Steering Committee was initially headed by Montek Singh Ahluwalia

and later by NK Singh, member, Planning Commission. The NK Singh Committee

recently submitted a report to the Prime Minister.

The objective of the committee was to make recommendations on the various

policy matters relevant to the formulation of the Tenth Five Year Plan.

According to the report, the Telecom Working Group of the Steering Committee

suggested that an investment of Rs 165,216 crore would be required if the

country wants to achieve a tele-density of 11.5. The investment is huge for both

public and the private sectors. It seems the private sector has to contribute 30

percent of the overall requirement, which is roughly around Rs 50,000 crore. The

rural requirement is also a sizable portion and comes to around Rs 44,160 crore.

The quantum of investment in telecom is huge and the role of private sector

cannot be negated. Therefore, the role of the private sector is all the more

important if the government wants to achieve the targets of the Tenth Plan.

According to NK Singh Committee, the private sector has to provide an estimated

investment of around Rs 50,000 crore. So to help the private sector generate

more funds, the ministry is looking at two measures–increasing the FDI limit,

and reduction in revenue share.

Both these measures will have a positive impact on the industry and help the

industry to achieve the objectives of NTP 99.

FDI and Related Issues



India gets an FDI of $4 billion i.e. Rs 19,600 crore every year. As a

percentage of GDP, it is 0.5 percent as compared to China’s 4.7 percent.

According to sources in the ministry, it is felt that an increase in FDI will

help in supplementing the resources of the domestic private sector.

Mahajan Speakt

There has been unanimity in the group of ministers on increasing FDI cap in telecom, but concerns are about management control

In terms of FDI approval, telecom is the second largest sector after energy.

Still, the actual inflow of FDI, in India, in the telecom sector from August

1991 to November 2001 has been to the tune of around Rs 8,122 crore only.

At present, in India, FDI in telecom is limited to 49 percent for basic and

mobile services. NK Singh Committee has proposed to increase the cap from 49

percent to 74 percent. And it seems that ministry for communications and IT is

moving at a very fast pace on this front. Recently, while addressing the Global

Telecom Summit organized by FICCI in Bangalore, Pramod Mahajan, minister for

communications and IT, said, "Issues of management control among telecom

firms need to be sorted out before any final decision can be taken on permitting

an increase from 49 percent to 74 percent. We will have to decide whether

management of such companies should remain in Indian hands or in foreign

hands."

There has been unanimity in the group of ministers on increasing of FDI cap

in telecom, but the basic concern is about the management control. The

communications and IT ministry is considering to make an amendment in the

Section 87 of the Companies Act, along with amendments in Sections 78 and 208,

to ensure that control of management remains in Indian hands.

Amending the Section 87 of the Companies Act, which talks about preference

shareholders also getting voting rights under certain conditions and therefore,

has implication on management control. The amendment provides for limiting the

voting rights of foreign investors to the FDI cap of 49 percent even though

dividend remained unpaid in terms of Section 87. This amendment will help in

ensuring management control with the Indian shareholders. Amendment of Section

78 will act as an incentive to foreign investor as they are assured of return on

their investment and will also facilitate Indian company to retain control by

making payment through security premium account.

For Private players...
	The private sector has to contribute 30 percent of the overall investment requirement
	This roughly works out at Rs 50,000 crore
	The government is actively planning to reduce the existing revenue share
	Towards this end, it proposes to bring down the USO component and administrative cost

Amendment to Section 208 will help in providing payment of interest not

exceeding 12 percent to the preference share capital.

Revenue Sharing



The government is actively planning to reduce the existing revenue share of

12 percent for category A circles, 10 percent for category B circles, and 8

percent for category C circles. The NK Singh Committee’s proposals talk about

the need for reducing the revenue share. The revenue share comprises the USO

component and administrative costs. For category A and B circles, the ministry

is planning to bring the revenue share down by reducing the USO component and

administrative cost. For category C circles, the government is thinking of doing

away with the USO obligation altogether. The government is thinking of a revenue

share of 8 percent for category A as well as B circles and 5 percent revenue

share for category C circles.

It seems there has been a mismatch between the industry associations and the

government on the revenue-sharing front. The industry has been talking about

further lowering of revenue share from 8 percent to 6.5 percent for category A

circles, and from 8 percent to 6 percent for category B circles. Even 5-8-8

percent revenue share for category C, B, and A circles, respectively, will help

companies to become profitable at the earliest and it will also help in lowering

of prices if these benefits are passed on to the end consumer. In view of this

development, there is a need for TRAI to work out afresh the USO regime and the

revenue share, so that revenue share can be implemented at the earliest.

Conclusion



Sure, the change in FDI and revenue sharing will have a good impact on

service providers in India, but will the consumer get some benefit in the

bargain resulting to further drop in prices? Will India get enough revenue from

reduction in USO obligation to help her achieve the rural tele-density of 3 by

March 2007? It is expected that there will be a huge shortfall as only Rs 1,800

crore is likely to be accrued through universal service levy (USL) in 2002-03,

according to the 34th report of the Standing Committee on IT in the present

circumstances. Even after taking into consideration an increase in revenue of

service providers, the USL levy collection for the Tenth Five Year Plan would

not be more than Rs 10,000 to 12,000 crore, under the present circumstances.

But, if there is a reduction in USO obligation, the USL levy collected from

service providers will decrease from the expected level of Rs 10,000 crore.

The rural network is going to need around Rs 44,160 crore. So who is going to

make up for the huge shortfall? The NK Singh Committee Report also talks about

earmarking a percentage of turnover of companies for financing the R&D

corpus. How will the policy makers try to ensure this, knowing that India’s

telecom manufacturing industry has not been doing well?

Pravin Prashant