Telecom Service

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Woxsen Business School Vinay Kumar Vuppalancha

Business Law

Contents
1. Which corporate form would you adopt?...................................................2
2. In which state would you start the business and why?..............................2
3. Which are the governing legislations?.......................................................4
4. What are the key material legal risks?.......................................................5
5. How would you legally structure the business?.........................................6
6. What are the material contracts?...............................................................6
7. Is there a regulator?...................................................................................6
8. What are the potential liability issues?......................................................7
9. Important case law governing the sector...................................................8

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Woxsen Business School Vinay Kumar Vuppalancha

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1. Which corporate form would you adopt?

The best corporate form for setting up a new telecom service is Joint Venture
or Wholly Owned Subsidiaries in India. This form of corporate allows the
company to directly collaborate with foreign companies, which gives the
technical support to the company. Incorporated JV is the ideal corporate for
the companies looking at opportunities for joint manufacture or provision of
service by capitalizing on the technical know-how, knowledge of the local
market, skill sets and cost advantage of each other.
The current network providers adopted similar corporate form. For example:
1. Aircel: Acquired Malaysias biggest integrated communications service provider
Maxis and formed JV with Sindya Securities & Investments Pvt Ltd where Maxis holds
74% equity in the company.
2. Airtel: Similar to Aircel, Airtel, SingTel, Vodafone together formed the public limited
company Airtel and outsourced its technical services to Ericsson and Nokia Siemens
Network and IBM.
3. Idea Cellular: Aditya Birla, Tata and AT&T together formed the Idea Cellular where
the AT&T gave the technical support to the company. Due to few issues AT&T and
Tata came out of the company.
4. Vodafone India: Vodafone acquired Hutchison Max Telecom Ltd. (HMTL), again a
joint venture between Hutchison Whampoa and the Max Group to enter India.
5. Tata DoCoMo: Tata DoCoMo is again a joint venture between Tata Teleservices and
NTT DoCoMo.

So, one of the best corporate form for telecom services is setting up a
private limited company and form a Joint venture with foreign telecom
service company. To start such a joint venture, the Indian company needs to
exist and it has to approach the Foreign Investment Promotion Board (FIPB)
or the Reserve Bank of India with a request for allowing foreign investment in
the company.

2. In which state
business and why?

would

you

start

the

India has got huge potential for network operators. The current (till 31 st
March 2014) number of mobile phones in use are 904,510,000 and there
are 74.09 connections for every 100 citizens of India.
In India, the Department of Telecommunications (DoT) auctions the
spectrum. For 2G spectrum, the government put on sale 271.25 MHz of
spectrum in 2012.The 1800 MHz band and 800 MHz band are currently being
used for GSM and CDMA services respectively. Eleven blocks having 1.25
MHz each in the 1800 MHz frequency band were auctioned, except in
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Mumbai and Delhi where only eight blocks were available. Three of the
eleven blocks, in each circle, were reserved or new telecom players for
operators whose licenses were cancelled by the Supreme Court on 2
February 2012, following the 2G spectrum scam. New players and companies
affected by the Supreme Court verdict will have to win at least 4 blocks in
each circle to start or continue their operations in that circle.
In 2014, the Dot auctioned 2G telecom spectrum in the frequency range of
900 MHz and 1800 MHz. The winners were awarded spectrum in February.
The Government earned INR612 billion (US$9.9 billion) from the spectrum
auction. The 1800 MHz spectrum auctioned were cancelled by the Supreme
Court, following the 2G spectrum scam. The government put on sale 307.2
MHz of 1800 and 46 MHz of 900 MHz-wide spectrum. The licenses are valid
for 20 years. Vodafone and Bharti were already using 900 MHz frequency and
had to renew before their license expire in November 2014. Reliance, the
only company to have all-India 4G license entered into voice service and won
in 14 circles in 1800 MHz frequency. So there is lot of scope to start network
operations in 4G all over India. There are still options to start the
operations in specified locations in India by looking at the overall tele
density:

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It would be better to start in high density states like Delhi, Tamil Nadu and
Himachal Pradesh and slowly expand all over India. So that the required
initial investment would be less and setting up the system would be easy.

3. Which are the governing legislations?

Provisioning of Telecommunications Services in India is governed by the
Indian Telegraph Act, 1885 ("Act"). This Act governs the setting up of
telecommunications network and the use of telecommunications services in
India. The Act also prohibits anyone from providing, running or maintaining a
telecommunication network in India without a valid license issued by the
Department of Telecommunications, Government of India.

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The services provided by Pioneer Elabs Limited as a licensed service provider

to a customer in India cannot be resold by the customer, since such resale
would constitute running a telecommunication network in India without a
license and would be punishable by a fine and imprisonment. In such a case
Pioneer would also be held responsible for abetting such illegal practice.
There are national security concerns since illegal telecommunications
network operators would not be subject to security monitoring as the
licensed operators are.
Leased line services are the critical infrastructure and have a potential to be
used for illegal telecommunications network and services. Therefore, the use
of leased line is strictly regulated.
The Indian Telegraph Rules, 1951 prohibit interconnection of a leased line to
the public telecommunications network, such as Public Switched Telephone
(PSTN), Integrated Services Digital Network (ISDN) & Public Land Mobile
Networks. Carrying of traffic from Private Network to Public Network and vice
versa results in a flow of unmonitored traffic from a private network to the
public network bypassing the authorized gateways and can thus result in a
security threat to the nation.
The telecommunications services cannot be used for carrying objectionable,
obscene, unauthorized or any other content, messages or communications
infringing copyright & intellectual property in any form.
Pioneer Elabs Limited Under the rules governing telecommunications in
India, the customer is obliged to provide, without any delay, access to
authorized officers of Service Provider, Department of Telecommunications,
Intelligence Department officers when such access or information is required
for investigations or detection of crimes and in the interest of national
security.
The use of the network for anti-national activities would be construed as an
offence punishable under the Indian Penal Code or other applicable laws. The
networks cannot be used in such a manner as to endanger or make
vulnerable a networked infrastructure. Acts such as break-ins or attempted
break-ins of Indian networks shall be regarded as an anti-national act and
shall be dealt with in accordance with the Indian Penal Code.
A lease line customer needs to maintain a complete network diagram, of the
private network set up, at each location where a leased line is terminated
along with details of connectivity available at the site. The same should be
made available on demand at the time of inspection as required by law.
With the entry of private sector in the provision of telecommunication
services a need was felt to have an independent regulatory body. The above
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requirement was indicated in the guidelines issued for entry of private sector
in basic telecom service. Accordingly, Telecom Regulatory Authority of India
(TRAI) was established in the year 1997 in pursuance of TRAI (Ordinance)
1997, which was later replaced by an Act of Parliament, to regulate the
telecommunication services. Some of the major recommendatory, regulatory
and tariff setting functions of TRAI are to make recommendations on the
need and timing for introduction of new service provider, on the terms and
conditions of license to a service provider, ensure compliance of terms and
conditions of license, effective management of spectrum, lay down the
standards of quality of service to be provided by the service providers and
ensure the quality of service and conduct the periodical survey of such
service provided by the service providers so as to protect interest of the
consumers of telecommunication service, ensure effective compliance of
Universal Service Obligations, notify the rates at which telecommunication
services within India and outside India shall be provided under this Act etc.
The following file shows the TRAI (Amendment) Act:

TRAI_amendment_AC
T.pdf

4. What are the key material legal risks?

Legal risk is risk from uncertainty due to legal actions or uncertainty in the
applicability or interpretation of contracts, laws or regulations.
1. The sixth common risk of doing business in India involves changing or unpredictable
regulations. Arcane portions of the law can be dredged up by state or federal
authorities to challenge a local or foreign company in an unexpected manner. This
happens rarely but can form a significant setback. Vodafone, for example, was
presented with a multi-billion dollar capital gains tax bill which they did not expect
after they purchased cell phone assets in India via a Hong Kong transaction in 2008.
2. India is a stable democracy so there is virtually no risk of the country failing. Even if
the ruling party or leader changes, most business related laws and policies generally
maintain continuity, especially since liberalization. Pressure from the public or
specific interest groups are sometimes responsible for political backtracking that has
affected foreign companies; the decision to permit foreign investment in the retail
sector in 2011-2012 took a convoluted path for example. Russian Sistema, Norways
Telenor, Abu Dhabi's Etisalat and Japans NTT DoCoMo were swept up in a major
telecom scandal in 2010 which led to the cancellation of 122 spectrum licenses.

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Woxsen Business School Vinay Kumar Vuppalancha

5. How would
business?

you

legally

Business Law

structure

the

The legal structure of the business can be a Private Limited company and
then forming a Joint Venture with foreign company.
A private limited company is defined by the limited liability of its
shareholders and restrictions on share transfers. The minimum paid up
capital at the time of incorporation of a private limited company is INR 1,
00,000. It can be increased at any time, by certain payments of stamp duties
and registration fees. A private limited company must have a minimum of
two and a maximum of 50 members as its shareholders, as well as a
minimum of two directors and maximum of 12 directors. When the paid-up
capital is equal to or exceeds INR 50 million, a company secretary must be
appointed. The shareholders and directors need not be Indian citizens. A
private limited company has a separate legal identity.
Advantages of a Private Limited Company:

Relatively less compliance requirements than on a Public Limited Company

It is an ideal business entity, when the shares of the company will be closely held and
when there is no requirement for more capital to be raised through public issue

Disadvantages of a Private Limited Company:

There are some restrictions on share transfers, as nobody but the members of the
company are allowed to transfer shares, and even those transfers have some
regulation
While most of the time, shareholders have limited liability, there have been cases
where the director or the manager of the company does not have that protection

6. What are the material contracts?

The key material contracts for a mobile operator includes:
1. Spectrum contract with DoT
2. Outsourcing of IT, for example Airtel outsourced its IT to IBM.
3. Similar to IT, outsourcing base stations, micro wave links to Ericsson and Nokia
Siemens Network.

7. Is there a regulator?
The important departments that regulate the telecom industry in India are as
follows:
Department of Telecommunications: As per the Indian Telegraph Act,
1885 and the Indian Wireless Telegraphy Act, 1933 the Central Government
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has the exclusive privilege of establishing, maintaining and working

telegraph and wireless telegraphy equipment and has the authority to grant
licenses for such activities. The Central Government acts through the DoT.
TRAI: TRAI is an autonomous statutory body established under Telecom
Regulatory Authority of India Act, 1997. TRAI is the sole authority empowered
to take binding decisions on the fixation of tariffs for provision of
telecommunication services.
Emphasis needs to be placed on the interplay between the recommendatory
powers of TRAI and the policy making powers of DoT. While the DoT is the
sole authority for licensing of all telecommunications services in India, it is
mandatory for the DoT to have TRAI's recommendations, beforehand, with
regard to matters over which TRAI has recommendatory powers (mentioned
above). Having done so, the DoT has the discretion to either accept or reject
the recommendations of TRAI.
TDSAT: The TDSAT was established in 2000 under an amendment to the
Telecom Regulatory Authority of India Act, 1997. The TDSAT has been vested
with exclusive powers to adjudicate any dispute between:

The DoT and a licensee;

various service providers; and
service providers and groups of customers

The jurisdiction of civil courts has been expressly barred in cases where the
TDSAT has jurisdiction.
Wireless Planning Commission (WPC): The WPC was created in 1952 and
is a wing of the DoT which is responsible for Frequency Spectrum
Management, including licensing of wireless stations and caters to the needs
of all wireless users (Government and Private) in India.
Standing Advisory Committee on Frequency Application ('SACFA"):
SACFA is a wing of the DoT which gives approval for radio frequency
(spectrum) used by telecom service providers. Obtaining a telecom license is
not enough for the operator to begin rolling out the services; a no objection
from SACFA is required.

8. What are the potential liability issues?

There are many potential liability issues for a network operator:
As per the ITAA 2008, telecom service provider is liable for any offence under
the ITAA 2008. A telecom service provider is free from liability in relation to
any third party information or communication link, provided:
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a. The role of the service provider is limited to providing access to a

communication system over which third party information is transmitted or
temporarily stored; or
b. The service provider does not initiate, select the recipient of or select / modify
the information in the transmission; and
c. The service provider observes due careful while discharging his duties.

Notwithstanding the above qualifications, the amended Section 79 further

goes on to provide that irrespective of the exemptions provided above and
irrespective of the exercise of due diligence, an service provider would still
be liable where:
I.
II.

III.

IV.

V.

The service provider has conspired, aided, induced or abetted in any unlawful
activity; or
The service provider upon obtaining knowledge or upon being notified fails to
expeditiously remove or disable access to any information, data or communication
link controlled by the service provider which is being used to commit an unlawful act.
Penalty of up to INR 50 crores has been prescribed for any security breach caused
due to inadvertent inadequacy (Inadvertent Breach). The DOT shall set up a five
member panel which will determine whether the breach is due to such inadvertent
inadequacy and the amount of penalty.
Penalty of INR 50 crores has been prescribed for any intentional omissions /
deliberate vulnerability or deliberate attempt for security breach (Intentional
Breach).
In addition to the monetary liabilities on the telecom licensees, the DoT may also
cancel the license of the telecom licensee as well as blacklist any vendor/supplier of
telecom equipment from doing business in India. The DoT has mandated the insertion
of a clause to allow DoT, the discretion to blacklist such vendor/supplier in all
equipment procurement agreements entered into by the telecom licensee.

Mobile Operator providing Mobile Finance will have following

Liabilities:
As mobile financial transactions are concluded through mobile network
installed by mobile network operator, in case of transaction errors arising in
the course of electronically transmitting or processing the conclusion of a
transaction, there may be cases where not financial institution but mobile
network operator shall be liable for the loss.
However, in reality, its almost impossible for customers to clarify whether
error was caused by financial institution or mobile network operator. It would
be desirable to make financial institution compensate customer for damage
caused by transaction errors arising in the course of electronically
transmitting or processing the conclusion of a transaction, and then allow
financial institution to exercise right of indemnify over the mobile network
operator by proving the intention or negligence of the mobile network
operator.

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Woxsen Business School Vinay Kumar Vuppalancha

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9. Important case law governing the sector

The following are the acts and rules for telecommunications in India:
a.
b.
c.
d.
e.
f.

India Wireless Act, 1933.

Information Technology Act, 2000.
Indian Telegraph Rule.
Telecom Regulatory Authority of India (TRAI) Act, 1997.
Subordinate Legislations
Indian Telegraph Act.

The Indian Telegraph Act, 1885: This Act is one of the oldest legislations
still in effect in India and it inter alia authorizes the Government of India to
grant telecom licenses on such conditions and in consideration of such
payments as it thinks fit, to any person to establish, maintain, and work a
telegraph within any part of India.
The Indian Wireless Telegraphy Act, 1933: This Act was enacted to
regulate the possession of wireless telegraphy apparatus. According to this
Act, the possession of wireless telegraphy apparatus by any person can only
be allowed in accordance with a license issued by the telecom authority.
Further, the Act also levies penalties if any wireless telegraphy apparatus is
held without a valid license.
The Telecom Regulatory Authority of India Act, 1997: This Act enabled
the establishment of the TRAI. Interestingly, the 1997 Act empowered the
TRAI with quasi-judicial authority to adjudicate upon and settle telecom
disputes. Later this Act was amended by the Telecom Regulatory Authority of
India (Amendment) Act, 2000 to bring in better clarity and distinction
between the regulatory and recommendatory functions of TRAI. Further, the
2000 amendment served a very important purpose in completely
differentiating the judicial functions of TRAI by setting up of the TDSAT.
There are various other laws which have an impact on the telecom industry
in India such as the Information Technology Act, 2000 and the rules framed
thereunder which inter alia sets out rules under which an intermediary
(which by definition now includes telecom service providers such as internet
service providers) may be exempt for liability in relation to third party links
and content. The Government also notifies various regulations from time to
time which have an impact on this sector such as the Anti-Spamming
Regulations which prohibit unsolicited commercial communications sent via
SMS and require all telemarketers to register under the said regulations.

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