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.