Status Report Developments in the telecom sector, award of 2G licenses in and subsequent observations of audit Policy Perspectives Status Report January 07,

2 Scheme of Presentation 1. Initial developments; New Telecom Policy (NTP),1999 and its impact 2. Development policies followed in the period Award of UAS/ 2G licenses in and subsequent developments 4. “Presumptive loss” in award of licenses5. Conclusions

3 Scheme of Presentation 1. Initial developments; New Telecom Policy (NTP),1999 and its impact 2. Development policies followed in the period Award of UAS/ 2G licenses in and subsequent developments 4. “Presumptive loss” in award of licenses5. Conclusions

4 Initial developments and National Telecom Policy (NTP), 1999  NTP 1994 (approved on May 13, 1994) opened the telecom sector for private participation :  2 cellular mobile telecom service (CMTS) licenses each granted in the 4 metros in Fixed license fee prescribed (over 10 years) with spectrum usage charges payable separately.  34 CMTS licenses issued in 18 telecom circles in 1995 based on bidding for license fee (over 10 years) with spectrum usage charges payable separately.  6 basic (wireline) licenses issued in based on bidding for licence fee over 15 year license period.  Inadequate revenue generation and inability of telecom operators to honor revenue commitments :  Constitution of Group on Telecom [GoT] under Shri Jaswant Singh (then Minister of External Affairs and Minister of Electronics).  NTP, 1999 formulated to take a ‘fresh look at the policy framework for the sector’ and, ‘to resolve the problems of the existing operators’.  NTP, 1999 approved by Union Cabinet on March 26, 1999 and made effective from April 01, 1999.

5 II Initial developments and National Telecom Policy (NTP), 1999…..  Salient features of NTP, 1999 :  Objectives: (revenue maximization not an objective) o To introduce greater competition in the telecommunications sector. o To provide equal opportunities and level playing field for all players. o To make available affordable and effective communications for the citizens.  Importance assigned to Telecom Regulatory Authority of India (TRAI).  NTP, 1999 continues to be the policy matrix guiding telecom sector to date.  ‘Migration package’ offered to existing licensees (42 CMTS, 6 Basic):  Revenue sharing arrangement (15% of Adjusted gross revenue [AGR]) instead of fixed license fee, with effect from August 01,  Pro rata license fee payable upto July 31, 1999 to be treated as entry fee.  3 levies from this point: entry fee, annual license fee and annual spectrum usage charges.  Significant Financial implication of the transition.

6 Scheme of Presentation 1. Initial developments; New Telecom Policy (NTP),1999 and its impact 2. Development policies followed in the period Award of UAS/ 2G licenses in and subsequent developments 4. “Presumptive loss” in award of licenses5. Conclusions

7 Development policies followed in the period 1999 to 2004  First come first serve (FCFS) principle used for the first time, in 2001, in allotting spectrum for basic services with wireless in local loop (WLL).  Licenses for the 4 th cellular operator were issued on the basis of a bidding process, for entry fee in 2001, in 4 metros and 13 telecom circles.  The ‘pan India’ entry fee aggregated to ` 1,658 crore.  This was half of what had been charged to the 1 st and 2 nd CMTS operators in 1999, while offering them the ‘migration package’.  The annual license fee was progressively reduced:  From 15% to 12/10/8 % [Category ‘A’, ‘B’ and ‘C’ circles] in January, 2001, with significant financial implication.  By additional 2% to 10/8/6 % (8/6/5% for 1 st and 2 nd CMTS operators for 4 years, except in Metros) in April, 2004, with significant financial implication.  Spectrum entitlements were progressively enhanced.  Additional spectrum beyond 6.2 MHz upto 15 MHz, on additional revenue share of 1-3% of AGR (February, 2002 and April, 2004).

8 II Development policies followed in the period 1999 to 2004…..  Policy underpinnings of telecom sector outlined in detail in the X Plan document:  The telecom sector needs to be treated as an infrastructure sector for the next decade.  Government’s broad policy of taxes and regulation for the telecom sector has to be promotional in nature.  Revenue generation should not be a major determinant of macro policy governing the sector.  License fee needs to be aligned to the cost of regulation and administration of Universal Service Obligation (USO).  Specific planning would be required to prepare the grounds for a multi- operator system to develop and the subscriber base to expand without impediments.  Spectrum policy needs to be promotional in nature; with revenue considerations playing a secondary role.  The X Plan document was formally released on December 21, 2002 covering the period April 01, 2002 to March 31, 2007.

9 III Development policies followed in the period 1999 to 2004…..  Decision of the Union Cabinet, dated October 31, 2003, on introduction of unified access service (UAS) licensing regime (based on TRAI recommendations of October 27, 2003 and recommendations of a GoM dated October 30, 2003):  The recommendations of TRAI with regard to implementation of the UAS Licensing Regime for basic and cellular services was accepted.  Minister of Communications & IT was authorised to finalise the details of implementation including the calculation of the entry fee based on the principle given by TRAI in its recommendations.  Decisions taken by the then Minister-in-charge of Telecommunications: (in regard to migration to UAS licensing regime)  Entry fee of 4 th CMTS licensee (discovered in 2001) adopted as the entry fee for new operators into the UAS licensing regime.  New licenses to be issued on FCFS basis and spectrum allocated subject to availability on a first come first serve basis (FCFS) basis.  26 UAS licenses issued between January, 2004 and May, 2004.

10 Scheme of Presentation 1. Initial developments; New Telecom Policy (NTP),1999 and its impact 2. Development policies followed in the period Award of UAS/ 2G licenses in and subsequent developments 4. “Presumptive loss” in award of licenses5. Conclusions

11 Award of 2G licenses in and subsequent developments  25 new UAS licenses were awarded between June, 2004 and March, 2007 on FCFS basis and as per the existing license conditions.  Reference was made to TRAI in April, 2007 to furnish recommendations on limiting the number of access providers in each service area and other license conditions. Salient recommendations of TRAI dated August 28, 2007 are:  No cap be placed on the number of access service providers in any area.  Spectrum in 2G bands (800, 900 and 1800 MHz) should continue to be priced as before for new entrants.  In future, all spectrum, excluding the spectrum in the 2G bands should be auctioned.  “Dual” spectrum may be allocated to existing licensees on same entry fee charged from existing/ new licenses.  TRAI recommendations accepted in the Internal Telecom Commission (ITC) meeting held on October 10,  Approved by the then Minister-in-charge on October 17, 2007.

12 II Award of 2G licenses in and subsequent developments ….  Process followed for award of 2G licenses:  Press release issued by DoT on September 24, 2007 (appeared in news papers on September 25, 2007) specifying October 01, 2007 as the ‘cut off’ date for accepting new applications. 343 new applications were received in this period.  Reference made to Ministry of Law and Justice (ML&J) on the options to deal with the large number of applications. Advice of ML&J to refer the matter to a Empowered GoM (EGoM) not accepted.  Applications received upto September 25, 2007 taken up for processing under an FCFS methodology notified via a press release issued on January 10, 2008, wherein, fulfillment of the Letter of Intent (LoI) conditions was stipulated for earmarking seniority for allotment of UAS license.  Applicants were asked to collect DoT’s response on the applications on January 10, 2008 at 3:30 PM and submit compliance of LoI within 15 days.  121 LoIs were issued on January 10, 2008; 78 complied with on the same day; 42 complied on the next day. In all, 16 applicants were issued 120 UAS licenses between February and March, more licenses were issued in July 2008 to another applicant company, who made application prior to September 25, 2007.

13 III Award of 2G licenses in and subsequent developments ….  Salient recommendations of TRAI report dated May 11, 2010:  Auction should not be resorted to for spectrum in 2G bands (800, 900 and 1,800 MHz bands).

14 Scheme of Presentation 1. Initial developments; New Telecom Policy (NTP),1999 and its impact 2. Development policies followed in the period Award of UAS/ 2G licenses in and subsequent developments 4. “Presumptive loss” in award of licenses5. Conclusions

15 “Presumptive loss” on award of licenses Category Criteria for working out potential loss to exchequer S Tel rate Rates on the basis of 3G auction Sale of equity by the new licensees UnitechSwan New licenses 38,9501,02,498*40,44233,230 Dual technology licenses 14,57337,154**15,13212,433 Beyond contracted quantity of 6.2 MHz 13,84136,993#14,05212,003 Total67,3641,76,64569,62657,666 ` Crore * ‘Presumptive loss’ to be estimated against 4.4 MHz (instead of 6.2 MHz) allotted to new licensees. ** ‘Presumptive loss’ to be estimated against 4.4 MHz (instead of 5 MHz) allotted to dual technology licensees. # ‘Presumptive loss’ against Spectrum beyond 6.2 MHz not to be considered as the allotment of additional spectrum (post January 17, 2008) is subject to pricing as determined in future for spectrum beyond 6.2 MHz. Decision to be taken after TRAI’s recommendations which are presently awaited after TRAI’s letter of May 18, 2010.

16 II “Presumptive loss” on award of licenses …. Observations on “Presumptive loss” based on 3G prices:  UAS licenses issued in January 2008 and 3G payments made in May, 2010., therefore, 3G prices have to be discounted to reflect time value of money.  Economic value of spectrum a function of subscriber base and ARPU. While subscriber base increased 3 times, ARPU reduced by 66%.  2G spectrum was subject to availability. On average, allottees of 2008 (and even earlier) have received spectrum after a gap of a year, therefore 2G spectrum is available on an average for 19 years instead of 20 years..  There is difference in spectral efficiency of 2G and 3G spectrum: 5 MHz of 2G and 3G spectrum have spectral efficiencies of Erlangs and Erlangs respectively, i.e., in the ratio of 1:3/4.  While computing the pro-rata value for 4.4 MHz spectrum vis-à-vis 6.2 MHz, the non-linear advantage due to consolidation of holding 6.2 MHz over 4.4 MHz needs consideration.

17 III “Presumptive loss” on award of licenses …. Observations on “Presumptive loss” based on 3G prices :  Telecom sector policy has evolved continuously since 1999 and is predicated on the following pillars: increase in teledensity and affordability to the consumer; creation of a competitive environment, with level playing field between existing and new incumbents; and, revenue accrual to Government both through one time fee and annual recurring charges.  The policy evolved through NTP, 1999; 1999 migration package for existing operators; development policies followed between 1999 and 2004; and, the overarching vision articulated through the X FYP.  The policy created a historical legacy, once it was decided to allow induction of new operators in the UAS regime on the basis of 2001 entry fee.  TRAI, the sector regulator, has recommended for induction of more players at low entry charges, in its successive recommendations of October/November, 2003; January/May, 2005; August, 2007; and, May, 2010.

18 IV “Presumptive loss” on award of licenses …. Observations on “Presumptive loss” based on 3G prices :  The policy has met with spectacular success, in terms of increase in teledensity and subscriber base; reduction in call rates; and, boosting economic growth.  Development policies pursued between 1999 and 2004 had significany financial implications. o However duopoly regime was ended and additional operators were introduced. o This resulted in direct benefit to the consumers over ` 1,00,000 crore per annum, as a result of ARPU drop between September, 2007 and May, 2010).  3G auction has a different context. There were no historical legacy issues, hence no issues of level playing field arose. Moreover, auction of 3G spectrum was a consistent recommendation of TRAI, in its successive reports of September, 2006; August, 2007; and May,  If the TRAI recommendation of May, 2010 (on the basis of which the ‘presumptive loss’ has been estimated) is seen in totality and spectrum upto 6.2 MHz is kept out of the ambit of pricing, the value of ‘presumptive loss’ reduces to NIL  If the TRAI recommendation of May, 2010 (on the basis of which the ‘presumptive loss’ has been estimated) is seen in totality and spectrum upto 6.2 MHz is kept out of the ambit of pricing, the value of ‘presumptive loss’ reduces to NIL.

19 V “Presumptive loss” on award of licenses …. Observations on “Presumptive loss” based on Offer of S Tel Ltd.:  The offer was conditional and untenable, since it pertained to 6.2 MHz spectrum in the 900 MHz band, in all 22 service areas which was not available.  The company also asked for permission for active infrastructure sharing whereas sharing of spectrum is not permitted under the current UAS regime.  The offer was subsequently withdrawn by the company and this was stated in its affidavit before the Supreme Court of India.  The amount offered ( ` 13,752 crore) was spread over 10 years, with the first year offer being only ` 250 crore. The company could have reneged on its commitment after being allotted spectrum at 1/5 th of its extant price.  There is no provision in the licensing regime to offer spectrum on the basis of conditional offers.

20 VI “Presumptive loss” on award of licenses …. Observations on “Presumptive loss” due to ‘Sale of Equity’ by Swan and Unitech:  Valuation of company is a function of many factors, and not just the quantum of spectrum held.  The cases are of dilution, not sale of equity.  Government has been encouraging induction of Foreign Direct Investment in all sectors, including telecom.

21 Scheme of Presentation 1. Initial developments; New Telecom Policy (NTP),1999 and its impact 2. Development policies followed in the period Award of UAS/ 2G licenses in and subsequent developments 4. “Presumptive loss” in award of licenses5. Conclusions

22 Conclusion…..  The policy matrix which led to the issue of UAS licenses in 2008 evolved over a period of time, through NTP, 1999; decision of the Union Cabinet, dated October 31, 2003; practice adopted by successive Ministers for grant of UAS licenses; and, successive TRAI recommendations of 2003, 2005 and 2007.Ministers  The policy has met with unqualified success and has propelled India into the fastest growth telecom market worldwide.  The issue of deficiencies, if any, in translating policy into procedure and procedure into actions, are being looked in to by the One Man Committee set up by DoT and Investigating Agencies. Appropriate action will be taken based on the findings.

OVERALL IMPACT…NATION TO DECIDE.. SUMMARY OF TRADEOFFS 23 REVENUE IMPLICATIONS 1. Revenue losses/ Amount foregone over years, due to conscious policy changes, like: a) ‘Migration Package’ under NTP 1999 from fixed License fee to revenue sharing b) Progressive reduction in License fee charges, as % of AGR c) ‘Low Entry Fee’ maintained (Assumptions regarding ‘Presumptive Losses’ are open to question) d) Progressive enhancement of Spectrum entitlement (Amount foregone does not arise at this stage, since it is yet to be charged) 2.Consistent Policies since 1999 aimed at maximizing growth and competition rather than revenue, and minimizing tariffs. BENEFITS REALISED 1. DIRECT CONSUMER BENEFITS  Indian customers have benefitted by World’s lowest tariffs (Fallen from Rs 32 /min to Rs 0.30 /Min) due intense competition (Benefit to Aam Aadmi : Over1,00,000 Cr/year)  Citizen connectivity and empowerment, which cannot be estimated in value terms. 2. RAPID GROWTH IN INDIAN TELECOM MARKET Due to the Policies, favoring ‘promotion’ of Telecom Sector over revenue generation, Indian Telecom Market has become World’s fastest growing market, with subscriber addition of million/month, ahead of China’s 8Million/month) and World’s second largest Telecom Market, after China. Since 2005, Indian subscribers have thus grown from 9.83Cr to 74.21Cr (Oct 2010) and similarly, Tele-density has grown from 8.95% to 62.51%), empowering masses. 3.SPIN OFF BENEFITS TO ECONOMY:  Huge indirect gain from impact on GDP Growth Rate  High Service Tax accruals (30% of total Service collections coming from Telecom sector alone)  Huge investments by Telecom Service providers and Manufacturers.  Indian Telecom has turned out to be third biggest recipient sector of FDI and has attracted more than US 10 Billion $ since 2000)  Network externalities like facilitation and productivity enhancements in Trade, industry and commerce  Employment opportunities

24 Thank You 24

25 Growth of the Telecom Sector since 2000 Source : TRAI