Licensing Framework for Telecom: A Historical Overview

Before analyzing the telecom licensing framework in India, it is imperative that one must examine what is a liceince. Licence issued by the government is an authority, given to a person upon certain conditions to do something which would have been illegal or wrongful otherwise. For example, a driver’s licence issued by the government, gives the authority to a person to drive a motor vehicle. There are three main types of licence fee which the government charges: (i) initial licence fee, which generally is non-refundable, (ii) annual licence fee, and (iii) additional fee for allocation of spectrum.

Licensing framework has been an integral part of India’s telecommunication law. Under the Indian Telegraph Act, 1885, section 4 gives power to the government to grant licence to any person to establish, maintain or use a telegraph. However, in the telecom sector, the government had complete monopoly until the early 1990s. Since 1992, the government has allowed licensing in the telecom sector. The major changes in the telecom licensing schemes are listed below:

1991: The government allowed private telecom companies to manufacture telecom switches for telephone exchange.

1992: The Department of Telecommunication (DoT) invited bids for licences for cellular service across the four metros. The DoT offered two licences per metro city. The process involved two stages. First stage, technical evaluation of the bidder and the second stage involved financial evaluation of the bidder.

The rejected bidders challenged the selection process on the grounds that it was unclear and arbitrary.[1]The Supreme Court decided that it would not interfere into the government decision making function until and unless they are patently arbitrary and unfair.

The litigation delayed the launch of the cellular mobile services by three years. Finally the first mobile services were launched in Calcutta in the year 1995. It also brought to the fore-front the lack of policy with respect to licensing and regulatory framework for telecommunication.

Licence Fee and Tariff: A minimum licence fee was specified for each metro. The annual licence fee was highest in Bombay. It was set at Rs. 30 million, which was increased to Rs. 240 million by the seventh year, similarly licence fee for Delhi, Calcutta and Madras were set at Rs. 20 million, Rs. 15 million and Rs. 10 million, respectively. However, by the seventh year the licence fee for the three metros were 160 million, 120 million and 80 million, respectively.

The licence fee was revised and the DoT asked the operators to pay Rs. 5000 per subscriber as annual licence. The licence fee was again revised and service operators had to pay Rs. 6,023 per subscriber.

The DoT also placed caps on the rental and tariffs. The service providers could charge a maximum Rs. 156 only as rental. The call tariff was set at a standard rate of Rs. 8.40; off peak was set at half the standard rate and peak rate was double the standard rate. DoT placed a cap on security deposit which had to be paid by the subscriber; it was restricted to Rs. 3000.

The change in the annual licence fee in the four metro cities is illustrated in the table below:

*The service operator has to pay either the annual licence fee or Rs. 5000 per subscriber, whichever was higher.

[Source: TRAI, (1999c: 24-25) as cited in Ashok V. Desai, Indian Telecommunication Industry: History, Analysis and Diagnosis, Sage Publication 2006, pp. 77].

May, 1993: The DoT commissioned ICICI to study and prepare a report on the possibility of private participation in the telecommunication sector.

1994: The DoT took a step back, after falling into controversy, in its previous attempt to allow licensing in the telecom sector. However, the Finance Ministry was in the favour of private participation in the telecom sector and it argued that the incumbents need assistance from the private telecom service providers for increasing the tele-density in the country. In order to study the issue, a committee was set up under ICICI. The report finally culminated into the National Telecom Policy, 1994.

The National Telecom Policy, 1994 laid down the following criteria for the entry of private operators:

• Track record of the company
• Compatibility of the technology
• Usefulness of technology being offered for future development
• Protection of national security interests
• Ability to give best service to the customer at the most competitive cost
• Attractiveness of the commercial terms to the Department of Telecommunication[2]

1995: DoT allowed bidding for cellular licences and wireline licences. Spectrum was bundled with the telecom service provider licence. For the implementation of the licensing scheme, the country was divided into 21 circles (excluding four metros) and it was categorized in to circles namely A, B and C on the basis of the potential of the circle to generate revenue. DoT awarded two licences in each circle; one to the state operator and the other to the private operator. The potential service providers in order to be eligible for bidding for licences had to partner up with a foreign company. The foreign shareholder was allowed to hold equity share

Eligibility for the private companies to bid for the licence: (i) financial net worth of the company making the bid and (ii) experience of the company in providing telecom services. The minimum net worth to qualify for bidding was set by DoT. A service provider in order to be eligible for bidding should have a minimum paid up capital of Rs. 1 billion and net worth of Rs. 10 billion. The auction of the licences was carried out through a first price sealed bid auction.[3] Two licences were awarded in each circle in order to avoid monopoly of service provider in a circle.

Licence fee and Tariff: A total of 34 licences were issued. The term of the licence was fixed at ten years which was revised to 15 years. The service providers had to pay an annual licence fee which was agreed upon during the auction of the licence. The annual licence fee was based on the projection of revenue generation. There was no allocation spectrum but the government levied charges for spectrum usage as well. The tariffs were same as for the metro licences.

Wire line Licences: DoT also issued six licences for basic telephone services.

Financial Breakdown: After the issue of cellular licences in 1995, six of the service providers were in default due to non-payment of licence fee by the early 1997. By the year 1998 the number of defaulters increased to eight.

The Bureau of Industry Cost and Prices (BICP) was requested to look into the matter. The BICP after investigation reported that 13 operators were running in loss. According to the BICP report, the telecom service providers were running in loss because of the high licence fee, interconnection charges and spectrum usage charges imposed by the DoT. One of the recommendations of the BICP was that the rental should be increased from Rs. 156 to Rs. 600. This would decrease the demand for mobile phones but allow service providers to sustain their business.

ICICI conducted a study, as well. The study revealed that 17 per cent of the consumers had not used their cell phone at all and 37 per cent of the subscriber had bills below Rs. 500 a month. This clearly showed that projection of revenue by the DoT was faulty.

Reasons for the Financial Breakdown (TRAI Report, 1999)

Later, in 1999 the TRAI studied the cellular operators. The study showed that main reasons for the financial failure of the telecom service provider were:

• Heavy capital investment for setting up infrastructure, which was underutilized
• Number of subscriber lower than projected
• The average revenue per user (ARPU) was lower than the costs incurred by the service provider. The ARPU in circles A, B and C were Rs. 1100, Rs. 800 and Rs. 600 respectively.
• Significant amount of the finances of the service provider were used to pay licence fees.
• Operational charges also took a toll on the service providers.

None of the studies took into consideration that the industry was oligopolistic in nature and the incumbents flooded the market with basic telephone connections.[4] The obvious conclusion was that the revenue generated by the cellular operators was not able to cover their costs.

The financial failure of the telecom operator under the 1994 policy led to the implementation of New Telecom Policy, 1999.

1998: Internet services were rolled out in 1995 by Videsh Sanchar Nigam Limited (VSNL). In November, 1998, the government opened it up to the private sectors.

1999: The New Telecom Policy, 1999 allowed the migration of the licensees from a Fixed Licence Fee Regime to a Revenue Arrangement Scheme (w.e.f. 1/08/1999). Under the new scheme a licence fees was collected as proportional tax on the service provider’s revenue. Previously, there were two operators in each circle and the 1999 Policy allowed the government as the third operator in the circle.

The 1999 Policy issued licences for the following services:

1. Cellular Mobile Service Providers (CMSPs);
2. Fixed Service Providers (FSPs) and Cable Service Providers, collectively referred as ‘Access Providers’;
3. Radio Paging Service Providers;
4. Public Mobile Radio Trunking Service Providers;
5. National Long Distance Operators;
6. International Long Distance Operators;
7. Global Mobile Personal Communication by Satellite (GMPCS) Service Providers;
8. V-SAT based Service Providers

Licence and Tariff: Licence holders under the 1994 policy migrated to the new licensing regime, under the New Telecom Policy, 1999. In order to shift from the fixed licence fee regime to revenue arrangement scheme the service providers had to pay previous arrears in licence fee on a  pro-rata basis till July 31, 1999. Under the new adjusted gross revenue, the service providers had to pay 15 per cent of their adjusted gross revenue.[5] The circle operators also had to pay spectrum usage charge.

TRAI regulated the tariff under the New Telecom Policy, 1999. It brought down the call tariff from the peak rate of 16.80 to Rs. 6 per minute with a pulse of 20 seconds. This allowed the consumers to make calls for a minimum of Rs. 2.00. TRAI also put a cap of Rs. 600 on the rental charges. After notification of tariffs in the year 1999, TRAI examined the accounts of the service providers and found out that under the 1999 licensing regime there was healthy competition and the service providers were providing mobiles services at price, below the TRAI ceilings.

2000: The government issued licence for national long distance telephony (NLDO). There was no restriction on the number of operators to whom the licence was granted. The licence was issued for a period of 20 years on a non-exclusive basis and could be extended upto a period of 10 years once. The entry fee for NLDO licence is Rs. 2.5 crore.[6] There are 32 companies other than BSNL, the incumbent, which have been granted licence for national long distance services. This has facilitated healthy competition in the market.

2001: Licence for basic telephone services using wireless in local loop (WLL). This was the first time that the first-come-first-serve scheme was implemented for issuing licences.

2001: A bid for cellular licence for a fourth operator was introduced in January 2001. The auction was carried out in three stages. The fourth licensee had to pay a sum of 17 per cent of the revenue in addition to the entry fees.

2002: DoT issued licence to private operators for International Long Distance Telephony (ILD) services. The entry fee for ILD licence is 2.5 crores.[7] The licence was valid for a term of 30 years. Currently the annual licence fee on ILD service is 7 per cent on the adjusted gross revenue. However, DoT has revised it to a uniform rate of 8 per cent on the adjusted gross revenue from the year 2013-2014.[8]

2003: Introduction of calling party pays (CPP). Under CPP, no charges can be levied on receiving a call in the home circle.

2003: Unified Access Service Licensing (UASL) regime was introduced by DoT on the recommendation of the TRAI. The UASL “permitted an access service provider to offer both fixed and/or mobile services under the same licence, using any technology.”[9]

The country was divided into 23 service areas, 19 telecom circles and 4 metro circles for the purpose of implementing unified access services (UAS).

TRAI announced the guidelines for migration to the UASL regime on November 11, 2003.[10] An operator under the UASL was allowed to provide for free within its own area of operation, service which cover collection, carriage, transmission and delivery of voice and/or non-voice messages over licensee’s network by deploying circuit and/or packet switched equipment.

Licence Fees: The licence fee for the service operator was two-fold. Fee was charged for migration from Cellular Mobile Telephone Service (CMTS) licence to UASL. This fee was equal to the amount paid by the fourth licensee introduced in the market in the year 2001. Apart from the migration fee, an annual licence fee is also levied according to the circle in which the service provider is operating. The annual licence fee is 10 per cent, 8 per cent and 6 per cent on the adjusted gross revenue in the circles A, B and C respectively.

2007: DoT allowed issuing of licences for operating on dual technologies that is CDMA and GSM. DoT also allowed single licence to Internet Service Providers (ISP) but restriction was put in VoIP.

2011: The government introduced mobile number portability (MNP) which injected further competition in the telecom market. Under the MNP, a cellular subscriber can avail services of another service provider while keeping the same mobile number. Previously, change of mobile number used to be the biggest deterrent to change service provider, this was done away with the MNP scheme.

2012: National Telecom Policy, 2012 introduced Unified Licensing Regime. Under the regime, service operators can provide converged services. The spectrum has been delinked from the licence.

[1]. Tata Cellular v. Union of India, 1994 SCC (6) 651.
[2]. Para 9, National Telecom Policy, 1994 available at  http://bit.ly/N4dlEk
[3]. In first price sealed bid auction, the bids are kept secret; the bids are then compared and the highest bidder wins and pays a sum equal to the bid amount.
[4]. Ashok V. Desai, India’s Telecommunication Industry: History, Analysis, Diagnosis, Sage Publication, 2006, pp. 83-84.
[5]. A licensee's adjusted gross revenue usually refers to the total amount of its gross revenue (including all charges, sees, sale proceeds, and miscellaneous revenue) minus interconnection and roaming charges paid to other licensees and service taxes paid to rhe government. See Model Cellular License, Schedule-II, at paragraph 20.1.
[6]. Department of Telecommunication, Annual Report 2011-12 pp. 18
[7]. Id. At pp. 19.
[8]. Notification no. 10-54/2010-CS-11 dated 28^th June, 2012 available at http://bit.ly/Q5nI5O
[9]. Recommendations on Spectrum Management and Licensing Frampework, TRAI, 11th May, 2010.
[10].Unified Access Services available at http://bit.ly/lOQZW7