Merger And Acquisitions (M&A) Policy And Guidelines 2014 For Telecom Sector Of India

The regulatory environment for telecom sector of India is fast changing to the betterment of various stakeholders. Foreign companies have been demanding a liberal telecom policy before they invest in India. Indian government started accepting these demands one by one.

The first assurance in this regard can be found in the form of the FDI policy for telecom sector of India 2014 (PDF). Indian government has liberalised and enhanced the FDI limit with FIPB approval. Similarly, Indian government has also given approval to establish two semiconductor wafer fabrication manufacturing facilities in India (PDF). This would benefit companies of Japan and Korea in expanding their bases in India. The electronic system design and manufacturing (ESDM) policy of India has also been streamlined by Indian government.

The guidelines for merger and acquisitions of telecom companies in India 2014 (PDF) have also been issued and many international telecom companies have shown their interest in this regard. The M&A policy for the telecom sector is likely to be presented before the cabinet for approval by 27 February 2014.

However, companies like Tata Tele and Aircel, which carry non-auctioned spectrum in their fold, may not be benefited much by this policy. All companies that are purely targeting spectrum acquisition would prefer to avoid the M&A route as it involves debt intake and risks, heavy costs and regulatory approvals. Rather they would opt for engaging in spectrum trading or sharing, policies for which are on the anvil. The M&A route would be generally preferred by those who wish to improve and enhance their subscriber base or infrastructure.

The new M&A guidelines prescribes that an acquirer will have to pay market price for spectrum of an acquired company in case of non-auction airwaves and came in with entry fee along with the licence. This has to be paid on a pro-rata basis for the remaining period of the licence. The guidelines are also liberal and pro active in the sense that they have removed the condition of a three-year lock-in period before any new spectrum can be sold. The guidelines also allow a higher 50% combined market share for the merged entity instead of the 35% proposed earlier, making it easier for bigger companies to engage in M&As.

Due Diligence In Telecom Mergers And Acquisitions (M&A) In India

With the announcement of merger and acquisition (M&A) guidelines for telecom sector of India 2014, negotiations and dealings in the telecom sector have significantly increased. While these negotiations and dealings are at the infancy stage yet they have indicated how things would take a shape in the near future.

As on date memorandum of understandings (MOUs) and letter of intents (LOIs) are being signed by various stakeholders. The next stage would be conducting of due diligence exercise for various fields like management, finance, legal, etc that are essential part of any business including telecom business.

The legal due diligence exercise may involve examination of the legal structure of business, contracts, potential regulatory issues and impact on the business, statutory clearances made till date, list of legal cases filed by and against the Company and the current status. Partner agreements, DOT license Agreements, VAS Services, liquidated damages, if any levied by licensor and list of all IPR Audits and IPR regulation issues could also be analysed during the legal due diligence exercise.

The primary regulators governing M&A activity in India are the Securities and Exchange Board of India (“SEBI”), the Reserve Bank of India (“RBI”) the Foreign Investment Promotion Board (“FIPB”) and the Competition Commission of India (“CCI”). The provisions of Indian Companies Act, 2013 (PDF), Income Tax of India, 1961, Foreign Exchange Management Act, 1999 (FEMA), The Competition Act, 2002, etc have to be duly complied with in this regard.  Further, telecom stakeholders exploring the M&A route must also comply with the Internet intermediaries requirements and cyber law due diligence requirements (PDF) as prescribed by the Information Technology Act, 2000 (IT Act 2000).

The Securities and Exchange Board of India (SEBI) has announced that it would release corporate governance rules for the listed entities in India. Further, the Parliament of India passed the Indian Companies Act, 2013 (PDF) to improve the corporate culture in India. Powers of Serious Fraud Investigation Office (SFIO) were also enhanced so that they can effectively deal with corporate frauds and crimes in India.

The Ministry of Corporate Affairs (MCA) has also issued some Rules under Chapter XIV of Indian Companies Act, 2013 pertaining to Inspection, Inquiry and Investigation by Indian Authorities and Serious Frauds Investigation Office (SFIO). The Suggestions Regarding Rules Pertaining to Inspection, Inquiry and Investigation (SFIO) by Perry4Law (PDF) has already been provided by us in this regard.

Taxation issues have been at the core of dispute between big telecom companies and Indian Government. For instance, companies having commercial presence in India were accused of violating the transfer pricing laws of India. Transfer pricing orders have already been issued against Vodafone and Shell India and Nokia has been accused of violating the income tax and transfer pricing laws of India.

There are provisions under the Income Tax Act for avoidance of tax by certain transactions in securities and avoidance of income-tax by transactions resulting in transfer of income to non residents. To further curb income tax avoidance and to check black money accumulation in foreign jurisdictions, Income Tax Overseas Units (ITOUs) of India in foreign countries would also be established.

With the advance in information technology, costs pertaining to sharing and storing of information, details and data of the merging company can be significantly reduced as all information can be stored in a secured online environment known as data rooms. The virtual legal due diligence in India has already taken a shape and many companies are using the same to ensure economy and a timely legal due diligence.

Perry4Law wishes all the best to all the stakeholders who are exploring M&A in telecom sector and contemplating engaging in electronic system design and manufacturing (ESDM) business in India.

Telecom Commission Approves Satellite Based Mobile Services In India

The Telecom Commission is an essential and core segment of Indian Department of Telecommunications (DoT). It has been playing a major role in bringing order to the chaotic telecom situation existing in India. The Commission along with the DoT manages the policy formulation, licensing, wireless spectrum management, administrative monitoring of PSUs, research and development and standardization/validation of equipment etc.

The Telecom Commission was constituted by the Government of India vide Notification dated 11th April, 1989 with administrative and financial powers of the Government of India to deal with various aspects of Telecommunications. The composition of the Commission consists of a Chairman, four full time members, who are ex-officio Secretary to the Government of India in the Department of Telecommunications and four part time members who are the Secretaries to the Government of India of the concerned Departments.

One of the areas covered by the Commission pertains to satellite based services management in India. The Satellite phones are permitted in India only with specific permission from DoT. Presently use of specific types of International Mobile Satellite Organisation (INMARSAT) terminals is only permitted as per details available under the link INMARSAT.

In a welcome move, the Telecom Commission has given the approval for introducing satellite based mobile services in India. The approval comes after a recommendation from the Telecom Regulatory Authority of India (TRAI) to introduce a regulatory mechanism to govern satellite phones. Initially, the services will be offered by Bharat Sanchar Nigam Ltd through a partnership with INMARSAT. INMARSAT provides its satellite services with a constellation of four satellites which are located in the Geo-stationary earth orbit.

Currently, in India, the satellite services of INMARSAT are used by maritime users through the Tata Communications Ltd under its international long-distance licence. Some limited numbers of users of land mobile have also been permitted by the DoT on a case-to-case basis.

Satellites provide telephone and broadcasting services, covering large geographical areas. A satellite-based communication system provides an ideal solution for connecting remote and inaccessible areas. In addition, satellite communication is widely used for the transmission of emergency traffic, such as distress and safety messages, to and from vessels at sea or remote locations.

While the INMARSAT services cater to maritime communication, the Government had envisaged satellite services, namely, Global Mobile Personal Communication by Satellite (GMPCS) in the new telecom policy 1999. Under this licence, satellite-based communication services were permitted. However, establishment of GMPCS Gateway in India by the licensee was a mandatory license condition, which dampened interest from potential investors. This required substantial financial expenditure which was not feasible to be recovered from the limited number of users.

Now the regulatory environment for telecom sector of India has changed and there is good sense in making such expenditure. The FDI Policy in telecom sector of India 2014 (PDF) is also conducive for investment purposes. Indian government has also given approval to establish two semiconductor wafer fabrication manufacturing facilities in India (PDF). This is in conformity with the policy of India government to encourage electronic system design and manufacturing in India. The new merger and acquisition (M&A) guidelines issued by Indian government is also seen as a pro active step by many telecom stakeholders. These developments would encourage establishment of GMPCS Gateway in India by the concerned licensee and widespread use of Satellite Based Mobile Services in India.

Until now, DoT was giving permission to procure the INMARSAT handsets and taking services from a foreign service provider was given to meet the requirement of paramilitary forces and disaster management. However, there are security related limitations in this arrangement.  There is a possibility of monitoring of calls outside the country as the earth station is located outside the country. In view of the above drawbacks, the Defence forces have not procured these handsets. They are continuing to use the old terminals. However, as declared by the INMARSAT, some of these old terminals will cease to be supported by their satellites from September. Thus, the decision by the Telecom Commission to permit BSNL to offer satellite services could help tide over the problems.