February 2010

TRAI CONSULTATION PAPER ON FDI CAP

On 15th January 2010, The Telecom Regulatory Authority of India (TRAI) released a consultation paper on foreign investment in broadcasting sector.

Foreign investment has an important role in the economic development as an important source of funding. Foreign investment has other benefits also such as bringing in new technology, international best practices, and access to export markets.

BACKGROUND

The TRAI had submitted its recommendations on Foreign Investment Limit for the Broadcasting Sector on 26th April, 2008. This was based on the methodology of calculating indirect foreign equity based on the proportionate method.

The Department of Industrial Policy & Promotion (Ministry of Commerce & Industry), Government of India vide its Press Note No 2. (2009 Series) had issued guidelines as to the methodology used for calculating indirect foreign equity.

Recognizing the need to bring in clarity, uniformity, consistency and homogeneity into the exact methodology of calculation across sectors/activities for direct and indirect foreign investment in Indian companies, the I&B ministry, vide its letter dated 30th September, 2009 has requested the TRAI to revisit its 26th April, 2008 recommendations.

Hence the TRAI has issued this consultation paper & invited all stakeholders to respond by 30th January, 2010. The comments will be posted on TRAI's website and counter comments are to be sent to TRAI by 08th February, 2010.

FDI & FII

Foreign investment can be broadly classified as Foreign Direct Investment (FDI) and Foreign Institutional Investment (FII).

FDI

Foreign Direct Investment (FDI) occurs when an investor based in one country acquires an asset in another country with the intent to manage the assets.

There are 3 types of FDI:

v Equity Capital
v Reinvested earning (Profit reinvested)
v Other capital (short & long term borrowing & lending)

FII

Foreign Institutional Investment (FII) or Portfolio investment represents passive holdings of securities such as foreign stocks, bonds, or other financial assets.

EXISTING LIMITS

The current limits for foreign investment in different segments of the broadcast sector are indicated in Table 1.

CARRIAGE & CONTENT

The TRAI has broadly classified broadcasting services as either carriage services or content services.

CARRIAGE SERVICES

Carriage services essentially provide the medium for carriage of content/ information. They create infrastructure for distribution of content.

This category broadly includes Cable TV, Headend in the Sky (HITS), DTH services, teleport services, mobile TV services and IPTV services.

Technically, it is possible for cable TV networks to provide voice telephony and broadband (including Internet). Similarly, the modern telecommunications networks are also capable delivering broadband and even TV content.

Convergence and triple play have blurred the boundaries between telecom and broadcasting carriage.

CONTENT SERVICES

Content service providers create and package content and sell it to the carriage service providers.

TV broadcasters are the typical content service providers.

Satellite & FM radio services combine both content and carriage services, as they create their own content and deliver it to the end consumers.

DIFFERENT LIMITS

The TRAI had recommended different Foreign Investment (FI) limits for carriage & content, because it felt that carriage services are infrastructural services whereas content services are considered sensitive as they influence the minds and opinions of people in a big way across all sections of society.

Within the content services, the News & Current Affairs are considered more sensitive given their power to influence public opinion which could have a bearing on maintenance of public order & security of the State.

Table-1 also lists the TRAI's recommendations dated 26 April 2008.

The TRAI has also separately recommended foreign investment limits for other activities.

HITS FI

In its 17 Oct 2007 recommendations on Headend In The Sky (HITS), the TRAI had recommended that total foreign investment including FDI for HITS should be 74% as in case of telecom sector in view of convergence of technologies.

This was reiterated on 26 April 2003.

In its 26th April 2009 HITS policy, the I&B ministry adopted the 74% recommendations. The methodology of calculation of the FDI & FII 'would be as per the extant policy of the Government.'

MOBILE TV

For Mobile TV services, the TRAI has reiterated its earlier recommendations that composite FII + FDI should be limited to 74%.

EARLIER METHODOLOGY

For all past recommendations, the TRAI had adopted a common methodology for the broadcast & telecom sectors, for calculating FDI & FII. The methodology adopted was as per the April 19, 2007 press note issued by SIA (FC Division) of the Department of Industrial Policy & Promotion (Ministry of Commerce & Industry) for the telecom sector.

NEW METHODOLOGY

As per the clause 5.5.4 of the new Press Note No 2. (2009 Series), in the I& B and Defense sectors where the sectoral cap is less than 49%, the company would need to be 'owned and controlled' by resident Indian citizens and Indian companies, which are owned and controlled by resident Indian citizens.

"Owned" if more than 50% of the equity interest in it is beneficially owned by the entity.
"Controlled" if the entity has the power to appoint a majority of its directors.

ISSUED RAISED

The TRAI's consultation note puts forward the several questions to stake holders, for their feedback. These include:

1. Is there is any need for revisiting the currently recommended foreign investment limits in the light of the new Press Notes No. 2 & No. 4 (2009 Series)?

2. Should there be any differentiation in terms of methodology used for calculation of foreign investments for Carriage Services, and Content Services?

3. Given the fact that there are now different sectoral caps for different activities in the broadcasting sector, is there any need to provide for additional safeguards in the application of Press Note 2 (2009 Series) to the broadcasting sector, particularly for activities for which a sectoral cap of more than 49% on FDI has been prescribed?

The detailed consultation paper and relevant press notes are available on the TRAI's website: http://www.trai.gov.in. n