Indian telecom market remains heavily regulated, says Gartner

The Indian telecom market sill remains "heavily regulated" compared with other telecom markets across the world, despite the government permitting 74 per cent foreign direct investment (FDI) in the sector.

The country has several restrictions and ambiguities still in place that could be a deterrent to foreign companies looking at investing in the Indian telecom sector, according to a study by global research and analyst firm Gartner.

The prevailing approach taken by foreign carriers entering this market is to form partnerships with Indian carriers to address demand from the multinational companies. The main benefit of this approach is that the foreign carrier gets to support customers without having to worry about licences and other entry costs and issues, says Gartner Principal Research Analyst Naresh Singh.

One of the major ambiguities in the ruling that permitted 74 per cent FDI in Indian telecom sector is that at least one of the promoters should be a "serious Indian resident", the firm says.

It further adds that the promoter should also account for at least 10 per cent equity in the licensee company.

This could be a deterrent to foreign companies looking at investing in India as under the country's Company Laws a person or entity holding 10 per cent or more has the right to go to a tribunal if they think the company has been mismanaged, he said.

The ruling also states that the majority of directors including chairman, managing director and chief executive officer should be "resident Indian citizens". A company's chief technology officer and chief financial officer operating in the country should be resident Indians.

But these clauses does not give power to minority Indian shareholders to appoint directors, and the power would remain with the majority shareholder, even if it were a foreign partner.

The major Indian investors can also move tribunals to appeal against any appointments, he states.

Some Indian companies already have non-Indian CEOs. There is no relaxation accepted on this front, even though the four-month correction period to comply with these conditions expired on March 31, 2007.

Another clause in the FDI ruling is that the Foreign Investment Promotion Board (FIPB) would see to it that the investment does not come from "unfriendly countries." The government, however, has not defined the term "unfriendly" and this leaves it to FIPB's discretion to decide which are the countries that are hostile.

According to Gartner, on a prudent basis, this means that a few countries like Pakistan and China - with whom India had earlier fought wars - and countries suspected of sponsoring or harbouring terrorist groups might fall into this category. However, it is not clear which are the countries that fall under the "unfriendly" category, he said.

The country's long distance telephony market is conducive for foreign players as the annual license fee were more than halved to 6 per cent of adjusted gross revenue, entry fees for international long distance were reduced to Rs 2.5 crore from Rs 25 crore, and that of national long distance was reduced to Rs 2.5 crore from Rs 100 crore.

The reduction of performance bank guarantee to Rs 2.5 crore from Rs 25 crore for ILD was also help to the sector.