Foreign investment in 3G mobile services

By Juhi Singh, S&R Associates
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Foreign direct investment (FDI) in the telecommunications sector in India has experienced a substantial increase in the recent past and a further growth is expected following the auction of spectrum to support third generation (3G) mobile services.

Juhi Singh Partner S&R Associates
Juhi Singh
Partner
S&R Associates

The Revised Information Memorandum on Auction of 3G and broadband wireless access spectrum dated 23 October 2009 issued by the Department of Telecommunications (DoT) states that the following entities are eligible to bid for 3G spectrum: (i) any entity that holds a unified access service (UAS) or a cellular mobile telephone service (CMTS) licence; or (ii) any entity that (a) has previous experience of 3G telecommunication services and (b) provides an undertaking to obtain a UAS licence before commencing commercial operations either directly (if the bidder is an Indian company) or through an Indian nominee company in which it directly or indirectly holds at least a 26% equity interest.

Accordingly, an overseas telecommunications operator seeking to bid on 3G spectrum will need to have an existing joint venture (JV) entity in India that holds a UAS or a CMTS licence or form a JV entity in India which will obtain a UAS licence before commencing 3G operations. Any investment by an overseas operator in an Indian licensee company will be subject to certain foreign investment regulations and guidelines on mergers and acquisitions, which are briefly outlined below.

Press Note 3 (2007) permits up to 49% foreign investment without prior approval from the Foreign Investment Promotion Board (FIPB) in a licensee company, and requires prior FIPB approval if such investment exceeds 49% subject to an overall ceiling of 74%. Press Note 3 also specifies that the FIPB while granting approval will consider whether the foreign investment is from “countries of concern and/or unfriendly entities” and requires: (i) that certain officers and directors of the licensee company be Indian citizens, (ii) security clearance of certain officers of foreign nationality, (iii) compliance with restrictions on remote access to networks and (iv) access by security agencies to networks and books of accounts.

The total foreign investment (direct and indirect) in a licensee company will be calculated in accordance with Press Note 2 (2009), which specifies that all investments made directly by non-resident entities in an Indian company will be counted towards foreign investment.

If an Indian investing company is owned (beneficial ownership of more than 50% equity interest) and controlled (the power to appoint a majority of the directors) by resident Indian citizens and/or Indian companies, foreign investment in the Indian investing company will not be considered when calculating foreign investment in the Indian investee company. However, if an Indian investing company is owned or controlled by non-resident entities, the entire investment by such a company in the Indian investee company will be considered foreign investment in the investee company. An exception to this rule is that if the investee company is a wholly owned subsidiary of the investing company which is owned or controlled by non-resident entities, foreign investment in the investee company will be the same as foreign investment in the investing company.

In line with Press Note 3 (2009), prior approval of the FIPB is required for the establishment of a licensee company with foreign investment if a company is owned or controlled by a non-resident entity and for the transfer of control or ownership of an existing licensee company from resident Indian citizens to a non-resident entity.

Mergers and acquisitions within the same service area are governed by the Guidelines for Intra Service Area Merger of CMTS/UAS Licences dated 22 April 2008. These guidelines permit mergers between two licence holders subject to certain conditions, including that (i) the prior approval of the DoT is obtained for the merger, which approval will be granted only after three years from the effective date of the licences, (ii) the merger does not result in less than four operators in the service area, (iii) the market share of the merged entity in the relevant market does not exceed 40%, either in terms of subscriber base separately for wireless as well as wireline or in terms of the adjusted gross revenue and (iv) any excess spectrum (based on a subscriber-linked criterion) held by the merged entity would need to be surrendered.

A proposed investment in a licensee company is subject to the cross-holding restriction, which prohibits an entity from holding 10% or more equity interest in more than one licensee company in the same service area.Pursuant to the lock-in restriction of the DoT, an investor is not permitted to acquire shares of a UAS licensee company from an existing shareholder whose shareholding in the company was 10% or more on the effective date of the UAS licence and whose net worth was taken into consideration to determine the eligibility for a UAS licence, prior to the earlier of (i) three years of the UAS licence and (ii) the fulfilment of all the rollout obligations.

Finally, subject to certain exceptions provided in Press Note 1 (2005), prior FIPB approval will be required if, as of 12 January 2005, the investor had an existing JV in the same field of business as the company in which foreign investment is contemplated.

Juhi Singh is a partner at S&R Associates, a New Delhi-based law firm.

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