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August
31, 2007
Revised
Guidelines for FDI in the Indian ISP business -
lowering of FDI cap from 100% to 74% and levy of 6% extra
charge
The
internet service sector was opened for private participation in
1998 with a view to encourage growth of the Internet sector in
India and increase its penetration. Regulations with respect to
Foreign Direct Investment (“FDI”)
in the telecommunication sector have recently been at the
forefront of the continuous endeavor of the government to
liberalize.
The
Department of Industrial Policy & Promotion (DIPP) had issued
Press Note No.5 (2005 Series) which had enhanced the FDI limit in
telecom services (such as Basic, Cellular, Unified Access
Services, National/International Long Distance, V-SAT, Public
Mobile Radio Trunked Services (PMRTS), Global Mobile Personal
Communications Services (GMPCS) and other value added services),
from 49% to 74%. New security norms were also introduced vide this
Press Note which became controversial, but were later finalized in
March 2007. Please refer to our earlier hotlines ‘Press
Note No. 5-FDI Limit in Telecom Sector increased to 74%’
dated November 14, 2005 and ‘Revised
Guidelines under Press Note No.3 (2007 Series) for Foreign Direct
Investment in the Telecom Sector’ dated May 3, 2007.
In
the internet services sector, the FDI limit for ISP with gateways
is 74%, while it is was 100% for ISP without gateways. For ISP
without gateways, there is a condition stipulated by the
Government that such ISP shall divest 26% of their equity in favor
of Indian public within five years, if such ISP is listed in any
other part of the world.
On
August 24, 2007 the Department of Telecommunications (“DoT”)
introduced revised guidelines[1] for grant of
license for operating internet services in India. Amongst myriad
new provisions the major revisions include a reduction in the FDI
limit in internet services to 74% from the existing 100% and the
introduction of revenue sharing. A reduction in the limit of FDI
is the first of its kind in the telecom sector in India.
A
glance at the changes
§
FDI limit
reduced from 100% to 74%.
§
A higher
entry fee of INR 2 million will be introduced for Category A
(national-level) ISP license and INR 1 million for Category B
(state-level) ISP license, as against a flat fee of INR 1 earlier.
Category C (local-level) ISP license has been done away with
altogether. Existing Category C license holders will have option
of migrating either to Category B or Category A license, subject
to fulfillment of certain conditions. In case Category C ISPs do
not migrate, they will be allowed to continue in Category C till
the expiry of the existing license which will not be renewed any
further. However, the entry fee criteria will not be applicable to
existing ISPs.
§
Annual
license fees @ 6% of Adjusted Gross Revenue (“AGR”)
which is currently charged to Internet Telephony operators will be
extended to all ISPs, subject to a minimum of INR 50,000 and INR
10,000 charged for Category A and B respectively. However revenues
accrued from pure Internet Services will be excluded from the
definition of AGR for the purpose of computing license fees. It
appears that the annual license fees are not going to be levied on
existing ISPs.
§
All new
ISPs will now be permitted to offer Internet Telephony services as
against the earlier policy requiring a special license for it.
However, the new policy continues with the existing norm that bars
ISPs from terminating internet telephony calls on landlines or
mobiles within India.
§
Non-functional
ISPs are going to be “physically investigated to verify their
presence, nature of activities and the financial viability”.
§
ISPs having
a net worth of INR 1 billion or more are allowed to offer Internet
Protocol TV (“IPTV”).
Until now there has been no regulation relating to IPTV.
§
ISPs cannot
offer IP Virtual Private Network (IP-VPN) services. On November
10, 2005, the DoT issued a Press Note to liberalize
the National Long Distance (“NLD”)
and International Long Distance (“ILD”)
licenses and decided to do away with IP-II and IP-VPN licenses. It
however clarified that the existing IP-II and IP-VPN licensees
will be allowed to migrate to NLD/ILD
service license.
§
ISPs will
be required to follow stringent security norms similar to those
applicable for other telecom services. The chief officer in charge
of technical network operations and the chief security officer can
only be resident Indian citizens. Besides majority Directors on
the Board of the company shall be Indian residents. The key
positions, if held by foreign nationals, would require clearance
from the home ministry. In other telecom services, even existing
service providers had to comply with all the norms (including
security related norms) and were given three months to comply with
these guidelines/norms. There is no such compliance provision for
existing ISPs in these guidelines. Thus, it appears that they do
not have to comply with these guidelines.
§
The
ISP shall provide services within 24 months from the date of
signing of the license agreement with the DoT as regards 18 months
specified in the old guidelines.
§
Other
security norms as that applied to telecom companies with regard to
monitoring facilities, remote access and providing information to
all security agencies will also be applicable to ISPs.
§
A Financial
Bank Guarantee (“FBG”)
of INR 1 million for Category A and INR 100 thousand for Category
B license, valid for one year, is to be provided before signing of
the license agreement. Based on the AGR, the amount of FBG shall
be reviewed annually by the Licensor. However the provision of
Performance Bank Guarantee (“PBG”) of INR 20 million for Category A and INR 2 million for each
Category B service area valid for two years remains unchanged.
Conclusion
Government
and TRAI have been discussing the need for a unified license for
all telecom services. In order to achieve a unified license, it is
important to have uniform norms. It appears that the rationale
behind revising the ISP guidelines and lowering the FDI limit to
74% is a step towards unified licensing and brings the regulations
governing ISP services at par with other telecom services
Unfortunately,
as is often the case, the revised guidelines do not deal with
their applicability to existing ISP’s who have 100% FDI in them.
If the guidelines are applicable only to new applicants for ISP
licenses then a level playing field would not be available for
such new ISPs vis-à-vis the existing ISP’s. This has
undoubtedly created certain ambiguity and will probably require
the government to issue a clarification.
The
revised guideline identifies certain services, such as IPTV that
can be provided within the scope of the ISP license for Internet
Services. The guideline defines Internet Access as use of any
device / technology / methodology to provide access to Internet
including IPTV. Although the Indian Government seems to have
recognized the potential of IPTV and have taken as step towards
its regulation for the first time, it has raised more questions
than answers. For e.g. does it mean that other service providers
(like licensed Telecom Service Providers providing basic and
mobile telephony services, cable operators, or Broadcasters) can
not provide IPTV?, Further,
the term ‘IPTV’ remains undefined in the revised guidelines.
There is lack of clarity if content regulation which is applicable
to broadcasters would also be applicable in this case or whether
the content will not be regulated at all.
Further,
consider a situation where an IPTV content provider provides IPTV
services such as video directly through the internet thereby
surpassing the involvement of an ISP. In such a situation it is
not clear from the revised guidelines as to what control can an
ISP, who merely provides internet connectivity, has with respect
to such IPTV services.
On
the one hand, it was necessary to rationalize regulations to bring
them at par with regulations of other telecom services; on the
other hand, lowering FDI would be seen as a retrograde move from
Indian FDI policy perspective.
____________________________________
No.820-1/2006-LR dated August 24, 2007
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