Monthly Archives: February 2014

Foreign Telecom Companies May Face Opposition And Lesser Market Share In India

Foreign Telecom Companies May Face Opposition And Lesser Market Share In IndiaThe heat is growing against foreign telecom equipments makers. Those on the list include the Chinese companies like Huawei and ZTE that are increasingly seen as a potential national security and cyber security threat to India and other jurisdictions. Recently, the Indian Electrical and Electronic Manufacturers’ Association (IEEMA) suggested that Indian government should consider banning imports of equipment related to power generation and telecom from China. This has come after the intelligence agencies of India expressed similar opinion.

Similarly, the increasing targeting of foreign nationals by intelligence agencies like National Security Agency (NSA) of U.S. and Government Communications Headquarters (GCHQ) of United Kingdom has also badly shaken the trust upon telecom companies operating from these jurisdictions.

For instance, Cisco, IBM, Microsoft and Hewlett-Packard have reported declines in business in China since the NSA surveillance program was exposed. Similar treatment is expected in India as India has already justified its Preferential Market Access (PMA) Policy for domestic telecom equipments manufacturers. India is also considering formulating norms for import and testing of telecom equipments in India. The security agencies of India have even suggested use of indigenously made cyber security softwares.

Recently the Telecom Merger and Acquisitions (M&A) Guidelines 2014 of India were announced by Indian government. The FDI policy for telecom sector of India 2014 (PDF) has also been revised to espouse greater interest of foreign telecom stakeholders. However, various telecom policies of India are subject to clear cut exception of national and cyber security compliances on the part of foreign and domestic telecom companies. In the present circumstances, companies like Huawei, ZTE, Cisco, IBM, Microsoft, Hewlett-Packard, etc would be required to ensure techno legal telecom due diligence compliances in India before their offers and proposals are accepted in India.

To control the damage these companies have started exploring mechanisms to inculcate trust among users and governments of foreign nations. Some of them have even embraced the idea of developing surveillance free products to keep praying eyes and ears at minimum.  These include use of sophisticated encryption technology and development of self destruction products in case of possible breach of security. However, encryption laws of India and cloud computing legal risks in India are still not considered by these foreign companies.

We at Perry4Law believe that all Subsidiary/Joint Ventures of Foreign Companies in India, especially those dealing in Information Technology and Online Environment, must mandatorily establish a server in India. Otherwise, such Companies and their Websites should not be allowed to operate in India. The Ministry of Home Affairs, India and Intelligence Bureau (IB) are already exploring this possibility.

A “Stringent Liability” for such Indian Subsidiaries dealing in Information Technology and Online Environment must be established by Laws of India. More stringent online advertisement, e-commerce, telecom security and cyber security provisions must be formulated for such Indian Subsidiary Companies and their Websites.

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

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

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

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

Electronic System Design And Manufacturing (ESDM) Policy And Regulations In India 2014

PRAVEEN-DALAL-MANAGING-PARTNER-OF-PERRY4LAW-CEO-PTLBElectronic System Design and Manufacturing in India is the upcoming field for telecom and electronics companies’ world over. The Department of Electronics and Information Technology (DeitY), India has formulated many pro active and reformative policies and strategies in this regard.

The laws, rules and regulations in India are also reformulated to accommodate the growing demands of ease of doing business in India and foreign direct investments (FDI) in Indian telecom sector. For instance, the FDI Policy in Telecom Sector of India 2014 (PDF) has allowed 100% FDI subject to FIPB approval and other national security requirements. Similarly, approval to establish two semiconductor wafer fabrication manufacturing facilities in India (PDF) has also been granted by Indian Government.

Both domestic and international telecom companies and electronic system design and manufacturing (ESDM) stakeholders must comply with national security and cyber security laws, policies and regulations of India in order to do business in India. The National Cyber Security Policy of India 2013 (NCSP 2013) was recently declared by Indian Government. Indian Government is also planning a legislation mandating strict cyber security disclosure norms in India. Indian Government is also investigating the alleged breach of national security of India by Huawei by hacking base station controller in AP.

Of late, Huawei and ZTE are in telecom security tangle of India and other nations like United States. India even made telecom security a part and parcel of its national telecom policy of India 2012. Other nations are also restricting market access to Chinese telecom equipments and India is not alone. The cyber security concerns excluded Huawei from Australian broadband project. Further, the US house intelligence committee is investigating Huawei cyber espionage angle. Media reports have also speculated that ZTE facilitated e-surveillance in Iran. Now Huawei is trying to inculcate trust among US government over telecom security issues. Companies like Huawei and ZTE are also in constant talks with other nations, including India, in this regard. More such companies can be brought under the legal and national security scrutiny in the near future.

The merger and acquisition rules and regulations in India for telecom sector of India have also been streamlined to provide a level playing field for both national and international telecom companies and ESDM stakeholders. 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 estimated production of electronic products will reach USD 104 billion by the year 2020. However, the supply part would not be able to meet this demand curve as domestic companies and stakeholders alone cannot meet this demand. Thus, foreign companies and stakeholders dealing in ESDM have golden chance to capatilise this opportunity.

In fact, the Indian Government has already initiated several initiatives for the development of electronics sector in the country. The Government has recently approved National Policy on Electronics (NPE) 2012 (PDF). One of the important objectives of the NPE is to achieve a turnover of about USD 400 Billion by 2020 involving investment of about USD 100 Billion and employment to around 28 million by 2020. This interalia, includes achieving a turnover of USD 55 Billion of chip design and embedded software industry, USD 80 Billion of exports in the sector. Moreover, the policy also proposes setting up of over 200 Electronic Manufacturing Clusters. Another important objective of the policy is to significantly upscale high-end human resource creation to 2500 PhDs annually by 2020 in the sector.

Several other policy initiatives have been approved in last few months. These include providing very attractive financial investment in electronics manufacturing and providing preference to domestically manufactured electronic goods in all Government procurement as well as all those electronic goods whose use has security implications for the country.

While the opportunities are ample yet techno legal compliances cannot be ignored by both domestic and international telecom players and ESDM stakeholders. Issues like cyber security due diligence, cyber law due diligence (PDF), technology related due diligence, etc cannot be ignored by these stakeholders if they wish to do hassle free business in India.