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Explaining FDI in Broadcasting

September 20th, 2012 1 comment

On September 14, 2012 the government announced a new FDI policy for the broadcasting sector.  Under the policy, FDI up to 74% has been allowed in broadcasting infrastructure services.  Previously the maximum level of FDI permitted in most infrastructure services in the sector was 49% through automatic route.

There could be three reasons for the increase in FDI in the sector.  First, the broadcasting sector is moving towards an addressable (digital) network.  As per Telecom Regulatory Authority of India (TRAI), this upgradation could cost Rs 40,000 crore.  Second, the increase in FDI was mandated because a higher FDI was allowed for telecommunication services, which too are utilised for broadcast purposes.  In telecommunications 74% FDI is allowed under the approval route.  Third, within the broadcasting sector, there was disparity in FDI allowed on the basis of the mode of delivery.  These issues were referred to by TRAI in detail in its recommendations of 2008 and 2010.

Recent history of FDI in broadcasting services

In 2008 and 2010 TRAI had recommended an increase in the level of FDI permitted.  A comparison of recommendations and the new policy is provided below.

 

As noted in the table, FDI in services that relate to establishing infrastructure, like setting up transmission hubs and providing services to the customers, is now at 49% under automatic route and 74% with government approval.  FDI in media houses, on the other hand, have a different level of FDI permitted.

TRAI’s recommendations on the two aspects of FDI in broadcasting

Digitisation of cable television network:  The Cable Televisions Networks Act, 1995 was amended in 2011 to require cable television networks to be digitised.  By October 31, 2012 all cable subscriptions in Delhi, Mumbai, Chennai and Kolkata are required to be digitised.  The time frame for digitisation for the entire country is December 31, 2014.   However, this requires investment to establish infrastructure.

As per the TRAI 2010 report, there are a large number of multi-system operators (who receive broadcasting signals and transmit them further to the cable operator or on their own).  As per the regulator, this has led to increased fragmentation of the industry, sub-optimal funding and poor services.  Smaller cable operators do not have the resources to provide set-top boxes and enjoy economies of scale.  As per news reports, the announcement of higher FDI permission would enable the TV distribution industry to meet the October 31 deadline for mandatory digitisation in the four metros.

Diversity in television services:  FDI in transmitting signals from India to a satellite hub for further transmission (up-linking services) has not been changed.  This varies on the basis of the nature of the channel.  For non-news channels, FDI up to 100% with government approval was allowed even under the previous policy.  However, the FDI limit for news channels is 26% with government approval.

In 2008 TRAI had recommended that this be increased to 49%.  However, it reviewed its position in 2010.  It argued that since FM and up-linking of news channels had the ability to influence the public, the existing FDI level of 26% was acceptable.  It also relied upon the level of FDI permitted in the press, stating that parity had to be maintained between the two modes of broadcast.  Under the new policy the level of FDI permitted in these sectors has not been changed.

National Telecom Policy 2012

July 2nd, 2012 3 comments

The National Telecom Policy was adopted by the cabinet on May 31, 2012.  It was released in public domain later in June.  Among other things, the policy aims to provide a single licence framework, un-bundle spectrum from licences, and liberalise spectrum.

Previously, the central government had decided to unbundle spectrum and licenses for all future licences on January 29, 2011.  TRAI too in its recommendation dated May 11, 2010 and April 23, 2012 sought to de-link spectrum from licences.  The Supreme Court in the 2G judgment had held that spectrum should not be allocated on a first-cum-first-serve basis and should instead be auctioned.  In the April 23 recommendations, TRAI has detailed the mechanism for auctioning spectrum.

TRAI has also recommended moving to a unified licence framework under which a single licence would be required to provide any telecom service.  It has also recommended that spectrum should be liberalised so that any technology could be used to exploit it.

The new policy is in line with the government decisions and TRAI recommendations discussed above.  The policy also aims to achieve higher connectivity and quality of telecommunication services.  Its key features are detailed below.

  • Licensing:  Presently, as per the 2003 Amendment to the 1999 Telecom Policy, there are two forms of licences – Unified Service Licence (to provide any telegraph service in various geographical areas) and Unified Access Service Licence (to provide basic and cellular services in defined service areas).  The new policy targets simplification of licensing framework by establishing a unified license for all telecom services and conversion to a single-license system for the entire country.  It also seeks to remove roaming charges.
  • Spectrum:  As of now spectrum bands are reserved on the basis of technology that may be used to exploit them.  For instance, the 900 and 1800 bands are reserved for GSM technology and 800 for use of CDMA technology.  The new policy seeks to liberalise spectrum.  Further, spectrum would be de-linked from all future licenses.  Spectrum would be refarmed so that it is available to be used for new technology.  The policy aims to move to a system where spectrum can be pooled, shared and traded.  Periodic audits of spectrum usage would be conducted to ensure efficient utilization of spectrum.  The policy aims at making 300 MHz of additional spectrum available for mobile telecom services by the year 2017 and another 200 MHz by 2020.
  • Connectivity: The policy aims to increase rural tele-density from the current level of approximately 39% to 70% by 2017, and 100% by 2020.  It seeks to provide 175 million broadband connections by the year 2017 and 600 million by 2020 at a minimum 2 Mbps download speed.  Higher download speeds of 100 Mbps would be made available on demand.  Broadband access to all village panchayats would be made available by 2014 and to all villages by 2020.  The policy aims to recognise telecom, including broadband connectivity, as a basic necessity like education and health, and work towards the ‘Right to Broadband’.
  • Promotion of domestic industry: The policy seeks to incentivise and give preference to domestic telecom products in procurements that (i) have security implications for India; or (ii) are for the government’s own use.  It also seeks to establish a Telecom Finance Corporation to mobilise and channelise finances for telecom projects.
  • Legislations: The policy seeks to review the TRAI Act to remove impediments to effective functioning of TRAI.  It also seeks to review the Indian Telegraph Act, 1885.  The need to review the Indian Telegraph Act, 1885 was also recognised in the 1999 Telecom Policy.

The policy as adopted can be accessed here.

TRAI’s recommendations on auction of spectrum

April 27th, 2012 No comments

TRAI released its recommendations on auction of spectrum on April 23, 2012.   The recommendations are in pursuance of the Supreme Court order cancelling 122 telecom licences.  The cancellation was ordered on grounds of procedural irregularities and arbitrariness in the first-cum-first-serve policy for allocation of spectrum.   The recommendations, if adopted by the Department of Telecommunications, would change various aspects of the present telecom policy, including (a) relationship between a telecom licence and spectrum; (b) procedure for allocation of spectrum; (c) pricing of spectrum; (d)  limits on spectrum allocation; and (e) use of spectrum.

Relationship between telecom licences and spectrum

Previously, under the Telecom Policy 1994 (updated in 1999), spectrum was tied in with telecom licences.  Since 2003, licence conditions provided for award of two blocks of 6.2 MHz of spectrum for GSM technology and two blocks of 5 MHz for CDMA technology.  As per the government’s decision of January 17, 2008 (as explained in TRAI’s consultation paper, see page 3 paragraph 7) additional spectrum would be awarded on the basis of increment in the number of subscribers.  Service providers had to pay a licence fee (on obtaining the licence), an annual licence fee and a spectrum usage charge determined on the basis of their adjusted gross revenue.

TRAI has recommended that telecom licences and spectrum should be de-linked.  The service provider would thus pay separately for the value of the licence and the spectrum.  With this formulation an entity that does not hold a licence, but is eligible to secure one, may also procure spectrum.  This would help in avoiding situations where licence holders have to wait to secure spectrum or offer wire line services in the absence of spectrum.

Procedure for allocation of spectrum

TRAI has recommended that spectrum be auctioned by means of a simultaneous multiple round ascending auction (SMRA).  This means that the service providers would bid for spectrum in different blocks simultaneously.  In the first round of auction a reserve price (base price) set by the government is used.

Reserve price for auction and payment mechanism

A reserve price indicates the minimum amount the bidder must pay to win the object.  In case it is too low, it may reduce the gains made by the seller and lead to a sub-optimal sale.  If it is too high, it may reduce the number of bidders and the probability of the good not being sold.

Various countries have adopted a reserve price of 0.5 times the final price.  TRAI has recommended that the reserve price should be 0.8 times the expected winning bid.  It has also recommended that telecom companies pay 67% to 75% of the final price in installments over 10 years, depending on the spectrum band.

TRAI has reasoned that a higher price would reduce the possibility of further sales upon bidders securing spectrum.  However, this may lead to fewer bidders and ultimately fewer service providers.  It is argued in news reports that this may increase investments to be made by the service providers and eventually an increase in tariffs.

Spectrum blocks and caps

TRAI has recommended that the spectrum cap should be determined on the basis of market share.  A service provider can now secure a maximum of 50% of spectrum assigned in each band in each service area.  However, a service provider cannot hold more than 25% of the total spectrum assigned in all the bands across the country.

As per the January 2008 decision, additional spectrum could be awarded to telecom companies when they reached incremental slabs of subscribers.  This could extend to two blocks of 1 MHz for GSM technology, and two blocks of 1.25 MHz for CDMA, for each slab of subscribers.

TRAI has recommended that spectrum should be auctioned in blocks of 1.25 MHz.  Each auction would at least offer 5 MHz of spectrum at a time.  Smaller blocks would ensure that service providers who are nearing the spectrum cap may secure spectrum without exceeding the cap.  However, experts have argued that 1.25 MHz block may be too limited for launching services.  Also, TRAI in the recommendation has noted that a minimum of 5 MHz of contiguous spectrum is required to launch efficient services with new technologies.

Use of spectrum

TRAI has recommended that the use of spectrum should be liberalised.  This implies that spectrum should be technology neutral.  Telecom companies would now be free to launch services with any technology of their choice.

Mandate of Committee examining issue of 2G-licenses and allocation of spectrum

December 21st, 2010 No comments

A Committee has been set up to examine appropriateness of procedures followed by the Department of Telecommunications in issuance of licences and allocation of spectrum during the period 2001-2009.  The Committee will be chaired by retired Judge of the Supreme Court, Justice (Retd.) Shri Shivraj V. Patil.  According to news reports the Committee is scheduled to submit its report by the first week of January 2011.  The Terms of Reference (TOR) of the Committee have been listed as:

1. To study the circumstances and developments in the Telecom sector that led to the formulation of the New Telecom Policy 1999 and subsequently, introduction of 4th Cellular Telecom Mobile Service (CMTS) licence in 2001.

2. To examine the internal (intra-departmental) procedures adopted by DoT during the period 2001-2009 for:
a. Issue of telecom access service licences, and
b. Allocation of spectrum to all telecom access services licencees during the above period.

3. To examine whether these procedures were in accordance with existing policies and directions of DoT/Government.

4. To examine whether these procedures were followed consistently and if not, identify specific instances of:
a. Deviation from laid down procedures;
b. Inappropriate application of laid down procedures;
c. Violation of underlying principles of laid down procedures.

5. To examine whether the procedures adopted were fair and transparent and were in keeping with the principles of natural justice and if not, identify the specific instances of lack of fairness and transparency.

6. To identify the deficiencies, if any, in the procedures as formulated and identify the public officials responsible for such deficiencies.

7. To identify the shortcomings and lapses, if any, in the implementation of the laid down procedures and identify the public officials responsible for such lapses.

8. To suggest remedial measures to avoid in future:
a. Deficiencies in formulation of procedures; and
b. Lapses in implementation of laid-down procedures.