Quit piecemeal approach to telecom FDI

LEGAL EAGLE

Will the New Year bring the ringing tones of the Hutch takeover? Speculations on the successful bidder continue as the government appears poised to make policy changes.

Restrictions on FDI in the telecom sector due to security concerns are justified in national interest. Which is why when FDI in certain telecom services was enhanced from 49 per cent to 74 per cent, Press Note 5 subjected it to certain caveats with legal implications. The licence agreement between the Indian joint venture operator and the DoT provides that the board majority and key posts be with Indians.

Such appointments would require the concurrence of "serious Indian investors" holding 10 per cent stake and the conditions would be incorporated in the shareholders' agreement and the articles of association, with non-adherence entailing cancellation of the licence.

In the one year since this announcement, there have been no takers, as investors have been understandably reluctant to adhere to the restrictions accompanying the proposed increase. Media reports suggest that the DoT's proposal on dilution of Press Note 5 stand referred to a Cabinet committee and a decision is expected any day.

Telecom being a sensitive sector, the vulnerability is at two levels""technological and corporate control. The question is whether matters of corporate governance can be dictated by a Press Note. The Companies Act provides for proportionate representation of shareholders on the board, variable by shareholders' agreement. Further, while a minority investor holding 26 per cent has powers to block special resolutions, powers of an investor with a 10 per cent stake are limited to redressal of grievances pertaining to mismanagement and oppression. Directions under press notes have some legal sanctity under the FEMA (Transfer & Issue of Securities ) Regulations.2000, but these relate to exchange control issues and cannot be extended to overriding the Act even for sectoral purposes, which is a legislative prerogative.

However, though the DoT has proposed dropping of the "serious Indian promoter" enjoying veto powers over key appointments, majority of Indian citizens on the board is still mandated.

Press notes are essentially policy statements, and the new proposal envisages allowing foreigners on key posts, subject to security clearance from the home ministry. Currently, the ministry of company affairs prescribes fairly detailed disclosures for foreign directors. While not applicable to officers, would the vetting require a similar exercise, and if so, why have duplication and involve another ministry? And why exclude Indians? Legally, whether this distinction is reasonable would depend on the perception of an informed intelligent person to be in public interest, which has to be tested against the touchstone of legislative deliberations, and not imposed by a Press Note. The FIPB, on policy grounds, has every right to ensure that investments do not originate from unfriendly countries, but one cannot justify economic patriotism for jingoistic reasons, unsupported by legal sanction and expect a foreign investor to infuse 74 per cent equity and be denied the choice of board appointees and key personnel.

On technological security, the moot question is whether these issues are to be determined by the government in a single uniform law, or the ministry concerned. The answer is that each sector has different sensitivities and an umbrella law cannot be feasible. If a nodal security agency has to provide sector-specific norms, the same will have to be factored in a reasonable manner so that the commercial viability of the policy is not lost. The most contentious issue on technology has been on remote access. Currently, Press Note 5 denies remote access even to equipment manufacturers for maintenance and repair, except in case of catastrophic software failure. Repeated representations were made to the government that such restrictions were unwarranted, and not imposed even in other more terrorist-prone jurisdictions. Reportedly, the DoT is now contemplating blanket approval for access for licencees to their parents/affiliates etc, with new networks requiring government approval. The National Security Council proposes is to bring communication equipment under industrial licences and a review of foreign acquisitions in the telecom sector by a screening committee, as if the FIPB is not empowered adequately.

There are more safeguards under the present legal regime than warrant raising of a red flag. Unfortunately, security issues are still addressed by way of delegated legislation under the otherwise obsolete Indian Telegraph Act. It's high time these should be addressed under sector-specific laws, with legislative deliberation on whether concerns are translating into bottlenecks. The solution lies not in hasty piecemeal solutions, but in evolving policy, supported by proper laws.

kumkumsen@rnclegal.com