Revised Guidelines under Press Note No. 3 (2007
Series) for Foreign Direct Investment in the Telecom Sector
Amidst industry and governmental debate over a
roll back of the liberalized telecom sector ceiling (of up to 74%
FDI), the Department of Industrial Policy and Promotion on April
19, 2007, issued a Press Note upholding the upper ceiling in the
sector, but laying down new security- related guidelines.
Liberalization of the Foreign Direct Investment
(FDI) policies play a vital role in encouraging foreign investors
and enhancing competitiveness within the domestic market. In
furtherance of its efforts to regularize investments, the
government of India has recently undertaken a comprehensive review
of Press Note No. 5 (of 2005) Series dated 3.11.2005 and issued
certain guidelines under Press Note No. 3 (2007) Series dated
April 19, 20071.
Although Press Note No. 5 (2005) Series dated
3.11.2005 had enhanced Foreign Direct Investment (FDI) from 49% to
74% in the telecom sector, it had enough caveats to subject it to
various controversies. The foremost criticism of Press Note No. 5
(2005) Series was that majority directors on the board of a
company including the chairman, managing director and chief
executive officer would have to be resident Indian citizens. This
came under severe scrutiny and multinationals questioned the
rationale behind holding 74% in a telecom company as they still
did not have the liberty to appoint a chairman, managing director
or CEO of a foreign nationality.
Another criticism under the earlier Press Note
No. 5 (2005) Series was that it was mandatory for all telecom
operators to locate their network monitoring centers within the
country and thus remote access was limited to within the
boundaries of India. This again generated criticism as
multinational telecom companies would have to invest huge amounts
for setting up remote access within India as oppose to their
already existing large network monitoring set ups elsewhere in the
The revised guidelines under Press Note 3, 2007
Series allows telecom companies to extend their remote access to
approved location(s) outside India but via the approved location(s)
in India and whereas such approvals would only be given by the
government in consultation with the appropriate security agencies.
The other directives under the earlier Press Note
No. 5 (2005) Series, which stand revised by the release of the
current Press Note 3, 2007 Series are as follows:
The current Press Note 3, 2007 Series has
expanded the definition of indirect foreign holding by including
proportionate investments made by a foreign entity in a telecom
company through mutual funds, trusts or a holding company. In any
case, the Indian' shareholding will not be less than 26 per cent.
Henceforth, ”Indirect foreign investments”
shall mean, foreign investments in the company/ companies holding
shares of the licensee company and their holding company/companies
or legal entity (such as mutual funds, trusts) on proportionate
Therefore unlike Press Note No. 5, 2005 Series
which only specified investments through holding companies as FDI,
the current Press Note further clarifies the ambit of indirect
current Press Note 3, 2007 Series expressly states that the
guidelines for security would be applicable to all licensee
companies operating in the telecom sector irrespective of the
level of Foreign Direct Investment (FDI). However what remains
uncertain is whether these security conditions would be applicable
if there is no FDI at all because the current guidelines are
silent on those aspects.
In the previous Press Note 5, Series 2005 there
wasn’t any classification undertaken in accordance with the
level of FDI or on the applicability of such security conditions.
Salient features of Press Note No. 3, 2007 Series
from the above mentioned carve outs, the release of Press Note No.
3 (of 2007) also sets out certain security conditions which have
to be adhered to by prospective investors in the telecom sector.
Mentioned below are the revised security conditions, which were
brought about by the release of the current Press Note.
and adequate measures to be undertaken to ensure that
information which is transacted through the network in secured
and well protected.
officers / officials who would be officially intercepting the
messages should be Indian resident citizens.
telecom service provider should be able to provide the
geographical location of any subscriber on the request of the
no remote access to be extended to Lawful Interception System
(LIS), Lawful Interception Monitoring (LIM) or any other
device should be made available so as to create a mirror image
for remote access information for on line monitoring purpose.
audit trail of the remote access should be maintained for a
period of six (6) months and details of the same to be
provided on request to the government.
telecom service providers should be updated with the Vigilance
Technical Monitoring system (VTM) and the other relevant
security agencies for the operations of their systems.
Press Note will also be applicable to service providers
providing services like call centers, Business Process
Outsourcing (BPO), tele-marketing, tele-education etc. using
the telecom infrastructure. In this case the FDI up to 100% is
government of India by the release of this current Press Note 3,
2007 Series has expressed its own decision to improve the
investment climate in the country and protect the monies brought
in by foreign investors. Although there is an anomaly in the
current Press Note on whether the security conditions are
applicable even if there is no FDI, nevertheless the government
has sought to rationalize its policies under the current Press
Note and categorically lay guidelines for ensuring FDI enhancement
under well-regulated security conditions in the telecom sector.
The release of this Press Note has lead to broadening
the scope of policy application to sectors such as BPO,
telemarketing, expansion of the definition of Indirect Foreign
Investments, allowing foreign nationals to hold key posts and many
other reformative measures. The guidelines under this current
Press Note assist in striking an appropriate balance between the
security conditions and the operability under the telecom sector.
The release of this Press Note can also be construed as a
prospective and liberal approach on behalf of the Indian
government towards the telecom industry.
No. 12/2/2006-FC dated April 19, 2007