The Indian Techonomist: bulletin

Copyright (C) 1996, Rishab Aiyer Ghosh (
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Telecom licences half-signed amid high drama in India

October 23, 1996: It has been an eventful week for telecom in India, that began with an ultimatum to prospective telecom operators from Beni Prasad Verma, the Minister of Communications, that was much weaker than it seemed; and ends after tense midnight conferences with six firms apparently bowing to the government's demands, while in fact continuing to hold most of the cards.

The Minister was addressing a surprise press conference the day before the Department of Telecommunication's (DoT) third deadline to private firms to take on their licences to run local telecom networks spanning well over half of the country, on October 18. After missing two previous dates, July 31 and September 12, because the private operators called its bluff and preferred to wait until their concerns with the terms of agreement were met, the DoT was not going to tolerate further postponement, threatened Mr Verma. However, the effect of an ultimatum was somewhat dampened with the Minister conceding, in principle, to the main demands of the private firms - who, after winning in three rounds of tenders, hold letters of intent (LoIs) from the DoT.

Two of these have to do with the interconnect agreement, which is to set terms for revenue and traffic sharing between the DoT's nation-wide network and the regional networks of private operators, with whom the DoT will compete locally. Conflict between an incumbent losing its monopoly and its competitors is hardly limited to India, but the unique situation here is that the monopoly will remain under government ownership. An independent regulator is obviously required to ensure fair play, but until the proposed Telecom Regulatory Authority of India (TRAI) is actually constituted, the DoT acts as both plaintiff and judge. Mr Verma agreed, after repeatedly dodging the issue, that the terms of the interconnect agreement would be subject to the TRAI appeal process even if it was signed before the TRAI's creation. He also agreed, somewhat vaguely, to consider modifying parts of the agreement that specify port charges for connections to a DoT exchange from a private one.

Perhaps more significant was Mr Verma's third concession, that should reduce the worries of telecom companies trying to find the money to pay for the high licence fees they bid, as well as costs of building and running their networks. He agreed to the principle of transferability for the 15-year licences, so that they can be used as collateral for loans. They will not be ideal collateral, however, as the DoT will reserve the right to evaluate, for technical and financial soundness, any prospective buyers of licences assumed by lenders if the original licensees default. Still, this is a major concession from a government that has been stonewalling the issue for several months (the bidders should have known what they were going in for, DoT Secretary M P Modi has implied in the past). Together with an independent decision from the Finance Ministry effectively permitting foreign investment of up to 73% in telecom operators last week (see next report), Mr Verma's statement could be a breakthrough.

Given these positive signals, one might well have been surprised that the seven LoI holders did not sign on the dotted line on Friday and grab their 10 licences, rather than risk penalties and forfeit of their earnest money. Well, one of them is out of the running: the venture between Israel's Bezeq, Thailand's Shinawatra and India's HFCL (which failed to sell 49% of a holding company to AIG after the American insurance firm got scared by the implications of the recent telecom financial scandal) failed to extend its bank guarantees (given as earnest money) in June and has taken the DoT to court. As for the others, they hemmed and hawed, and after meetings with DoT officials which ran until just before midnight on Friday, three formally accepted the DoT's letters of intent (LoIs) to sign the licence agreement: Reliance-Nynex, Ispat-Hughes and Techno Telecom, which is promoted by India's Usha group.

Their acceptance was carefully worded; like those reported today of Tata-Bell Canada and Essar-Bell Atlantic, and the one expected tomorrow from RPG-NTT, acceptance of the LoIs is far from the end of the matter, even if accompanied by further extending bank guarantees of earnest money. None of the LoI holders are likely to sign either the licence or the interconnect agreement immediately; it will take at least a few weeks to make formal and acceptable changes to the agreements based on Mr Verma's imprecise promises. The deadline, though, remains October 18 and technically the LoI holders are liable to pay penalties for the period until they sign up, properly this time.

In this elaborate game of bluff and Asian face-saving (the DoT could not, of course, simply give in to private operators' demands without a simultaneous toughly worded ultimatum) the licensees-in-waiting remain a rather worried lot. On the one hand, they would like a fair, competitive environment not largely clouded with uncertainties. Rather than vague promises, they want real initiatives - Tata-Bell Canada reportedly insisted, at first, that it would only sign after the TRAI was set up - and have yet to see Mr Verma's concessions detailed in writing.

On the other hand, the huge potential of India's market - under 1% of India's 900 million people have phones - may justify taking some risks, and often these appear greater than they really are. Fuzzy government policies and unclear risks are common to most fast-growing developing countries, and India has a pretty reliable (if slow) legal system - though litigation can, of course, delay thing further. As far as the TRAI is concerned, the track record of similar institutions, notably the Securities and Exchange Board of India, is quite good. Although the current TRAI Bill awaiting Parliament's clearance (which is little changed from a Presidential ordinance that lapsed without Parliamentary ratification) could do with many improvements, not least of all greater powers, the delay in setting it up need not be a big problem.

The TRAI has hiccoughed along for over a year, largely due to procedural snags. Legislation is likely to pass in the coming session of Parliament, but this will start only next month. It could take six months after that to locate members for TRAI, which will have the status of a High Court. All in all, it will be well into next year before the TRAI can reasonably be expected to start operation. Even if the LoI holders sign licence and interconnect agreements (suitably modified for a stronger TRAI role) next month, they are unlikely to complete much of their networks till the third quarter of next year. Till then, they could concentrate on matters other than paying the DoT interconnect fees - such as finding the money to operate.