India: Sharing Of Telecom Infrastructure: Issues Faced By Infrastructure Providers And TSPs

Last Updated: 22 August 2017
Article by Harsh Walia and Abhinav Chandan

Most Read Contributor in India, October 2017

Introduction

On 28 November 2016, the Department of Telecommunications (DoT) issued a clarification (Notification) that entities registered as Infrastructure Provider Category-I (IP-I) may not own or share "active" telecom infrastructure such as antennae, feeder cables and transmission systems (Active Infrastructure). The Notification clarified that owning and sharing Active Infrastructure are licensed activities to be carried out only by telecom licensees (TSPs) i.e. entities granted telecom licenses by DoT under Section 4 of the Indian Telegraph Act, 1885 (Telegraph Act). The Notification resulted in widespread implications for the telecom infrastructure leasing industry.

Background

IP-I entities are not TSPs since the IP-I registration is not a telecom license. It is a registration pursuant to the guidelines for IP-I registration issued by DoT and revised from time to time (the latest issued on 4 July 2017), which allows IP-I entities to establish and provide "passive" telecom infrastructure such as dark fibers, towers and rights of way (Passive Infrastructure) to TSPs.

Regardless, prior to the Notification, several IP-I entities owned and provided Active Infrastructure to TSPs. The Notification was aimed at such IP-I entities and granted such entities a period of six months to either obtain requisite telecom licenses to continue to own and share certain allowed type of Active Infrastructure or transfer the same to valid licensees.

Although this six-month deadline has now passed, the predicaments that IP-I entities (and even TSPs) are facing because of the Notification are yet to be resolved and must be evaluated in the context of the reasons why IP-I entities were conducting such activities outside their scope in the first place. 

Infrastructure in Telecom

Telecom is an infrastructure-intensive business, requiring considerable capital and operational expenses. This includes establishing and maintaining both Passive Infrastructure and Active Infrastructure on a massive scale. Recognizing the need for the efficient use of telecom resources and to diminish the cost-prohibitive nature of the business, DoT initially permitted the sharing of Passive Infrastructure amongst TSPs under their telecom licenses.

IP-I entities were also allowed to establish Passive Infrastructure for providing it to TSPs. This enabled the TSPs to avoid the hassle of establishing and maintaining Passive Infrastructure altogether. The IP-I business has been open to the private sector since 13 August 2000.

Subsequently, DoT, through a notification on 2 April 2008, allowed TSPs to share certain permitted types of Active Infrastructure as well. Notably, IP-I entities were not included within the scope of this particular notification.

However, DoT, in its notification on 9 March 2009, expanded the scope of IP-I entities to cover Active Infrastructure if "provided on behalf of the licensees" and stated that the IP-I entities "can create active infrastructure ... only for/on behalf of ... licensees". But this notification did not clearly restrict IP-I entities from owning Active Infrastructure.

Since there was no explicit restriction in terms of ownership, several IP-I entities began owning and establishing Active Infrastructure along with Passive Infrastructure in order to provide a more complete business solution to TSPs. This is arguably based on the interpretation that since such Active Infrastructure is created only for providing to TSPs, it is "on their behalf". However, another possible interpretation is that Active Infrastructure can be created "on behalf of" a TSP only if such infrastructure is owned and provided by that TSP.

To clear the ambiguity, DoT issued the Notification in November 2016, confirming that IP-I entities may not own and share active infrastructure. The Notification, however, allows IP-I entities to install Active Infrastructure limited to "antenna, feeder cable, Node B, Radio Access Network (RAN) and transmission system only" on behalf of, and as long as, such elements are owned by, a TSP.

Considering that several IP-I entities had invested heavily in creating Active Infrastructure, DoT provided such IP-I entities the option to either obtain requisite licenses specified in the Notification within 6 months, or transfer all active assets to a holder of a valid license within such period.

However, both these options have posed several business structuring, ordering and commercial implications and complexities for IP-I entities and TSPs, some of which have been evaluated below.

Implication

In view of the Notification, IP-I entities have been struggling to decide whether to continue with their Active Infrastructure business and the most suitable business structure for conducting such business. Certain structuring options available with IP-I entities are briefly summarized below:

  • Obtaining a requisite license and conducting the entire business (i.e. provisioning of permitted Active Infrastructure and Passive Infrastructure) under this license, while retaining all assets;
  • Transferring all Active Infrastructure to a parent, subsidiary or affiliated entity (Affiliate) which either has or will obtain a requisite license for providing permitted Active Infrastructure, while the IP-I entity continues to provide Passive Infrastructure under its IP-I registration;

Vice versa, the IP-I entity may obtain a requisite license and continue providing permitted Active Infrastructure, and transfer its Passive Infrastructure to an Affiliate which either has or will obtain an IP-I registration; and

  • Transferring Active Infrastructure to an unaffiliated TSP, while the IP-I entity continues to provide only Passive Infrastructure under its IP-I registration.

A complete business and commercial due diligence is required to choose a suitable business model. However, in this context, one key factor that IP-I entities are considering is the incidence of recurring license fees (apart from the initial cost of obtaining the license). Once an IP-I entity obtains any of the licenses specified in the Notification, it will become a telecom licensee under the Telegraph Act and thus, will be liable to pay license fees on its adjusted gross revenue (AGR), in accordance with the license. For example, 8% license fee on AGR is applicable under the Virtual Network Operator (VNO) licenses, which is one of the requisite licenses suggested in the Notification.

The gripe of the IP-I entities is that this license fee cost will have to be borne for conducting the same business that was being conducted prior to obtaining the license. In addition, in case the entire business is continued to be conducted by the same entity, for instance, under the first structuring option above, license fee will likely be computed on the AGR generated from provisioning of both permitted Active Infrastructure and Passive Infrastructure. This could be one of the reasons for IP-I entities to segregate their business into licensed (permitted Active Infrastructure provisioning) and non-licensed (IP-I) activities, for instance, under the second and third structuring options.

Even in case of a split, incidence of license fee must be evaluated in context of the ordering models that will be offered to the TSP customers, along with related issues with such models. 

  • If the provisioning of permitted Active Infrastructure and Passive Infrastructure is split between two Affiliates, then two ordering models may be adopted. Either the two Affiliates may accept separate orders and payments from the TSP customers for their respective activities, or the licensed Affiliate may accept composite orders and payments for both permitted Active Infrastructure and Passive Infrastructure. In case of the latter, the licensed Affiliate will have to enter into a separate arrangement with the non-licensed IP-I Affiliate for procuring Passive Infrastructure. In any circumstance, the non-licensed Affiliate may not accept composite orders for both activities because of the prohibition in the Notification and because Active Infrastructure may be provided only by one TSP to another.
    • A composite ordering and payment option may be preferred by TSPs. However, the difference in license fee computation on the AGR of the licensed Affiliate in cases of split and composite ordering would be a significant factor to be considered.
    • Further, regardless of whether composite or split ordering model is adopted, the existing contracts with TSP customers (Existing Contracts) will have to be amended or novated to record the segregation in the delivery of services going forward, depending on the manner of the split. This may be an arduous task for the Affiliates.
  • Similarly, an IP-I entity deciding to split and transfer its Active Infrastructure to an unaffiliated TSP has its own set of issues. First, like above, the Existing Contracts will have to be amended and novated to the extent required. However, more importantly, it is likely that all or most of the Active Infrastructure already established by the IP-I entity is being shared by several TSPs simultaneously. Accordingly, transferring such shared infrastructure to one TSP may not be acceptable to other TSPs sharing that infrastructure, considering the substantial control over the shared assets that will be granted to the transferee TSP. At the same time, it may pose a challenge for the TSP to accept such a transfer because of the costs and complexities involved in paying for such assets, recovering those amounts from other TSPs through Active Infrastructure sharing arrangements and paying license fees on those revenues. 

Khaitan Comment

IP-I entities seeking to obtain requisite licenses for dealing in both permitted Active Infrastructure and Passive Infrastructure will be inclined to pass-on the additional cost of license fee. However, given the current state of the telecom industry, the TSPs may be unwilling to bear this burden. Therefore, several IP-I entities are contemplating splitting their business into licensed and non-licensed activities.

In case the activities are split between Affiliates such that permitted Active Infrastructure and Passive Infrastructure are held and provided by separate entities, whether the resulting business is within the boundaries of the legal and regulatory framework of India would largely depend on the exact manner in which the business is structured and conducted. For instance, in case of the separate ordering model discussed above, whether the activities are conducted and priced independently and transparently, and if there is proper segregation of accounts, may be vital. 

Further, apart from the prospective application of the Notification, it also needs to be seen if DoT takes any action against existing IP-I entities for owning and sharing active assets prior to the Notification.

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at legalalerts@khaitanco.com

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Emails

From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.