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DAMODARAM SANJIVAYYA NATIONAL LAW UNIVERSITY

VISAKHAPATNAM, AP, INDIA

COMPETITION POLICY IN TELECOMMUNICATIONS IN INDIA

COMPETITION LAW

Mr. BHARAT KUMAR

KUMAR SHUBHAM RAJ


201128
IXth SEMESTER

ACKNOWLEDGEMENT
I hereby express my profound gratitude and indebtedness to my Mr. Bharat Kumar,
and my friends for their valuable guidance and encouragement in preparing this project.

CONTENT
Topic

Page No

Objectives

Significance & Benefit of the Study

Scope of the Study

Literature Review

4-5

Research Methodology

Hypothesis

Chapter I: Introduction

5-6

Chapter II: Competition Policy and TRIPS Agreement

6-7

Chapter III: Merger in Telecommunication

7-8

Chapter IV: Competition Policy in Telecommunication

8-9

Chapter V: Existing Telecom Regulatory Framework in India

10

Chapter VI: Approaches to Competition in India

10-11

Chapter VII: Case Study

11-12

Chapter VIII: Suggestions

12-13

Conclusion

13

Bibliography

13-14

OBJECTIVES
The primary objective of the study is to focus on state of competition and need for
corrective action in telecommunications in India and also to focus on interaction of the two
regimes, telecommunications regulation and competition policy effectively dealing with the
complexities of competition issues that are retarding the development of meaningful
competition.
SIGNIFICANCE AND BENEFIT OF THE STUDY
The researcher came across the challenges which are being faced by the competition
authority in telecommunications. There is need to educate the system about market
economics and competition principles.
SCOPE OF THE STUDY
The paper explains how the growth and development in the telecommunication sector
has increased the competition and affects the market. The first part of this paper intends to
explore the rationale behind competition policy intervention in telecommunications markets
and highlight some of the basic concepts of competition policy that are commonly present in
many markets of the world. The latter part intends to provide a framework for understanding
some of the evolving competition policy issues in the telecommunications sector in India and
the approaches that have been designed and undertaken by the Government of India and its
various regulatory arms. It will deal with the current trends and approaches to competition
policy in telecommunication while attempting to assess these approaches.
LITERATURE REVIEW
1. Pradeep S Mehta1 (2006), in article A Functional Competition Policy for India
explained about the issues of the competition policy and explains government
measures that directly affect the behaviour of enterprises and the structure of industry.
2. Anjan Dasgupta2 (2005), in article Competition Policy in Telecommunication states
imperfect competition can be an important source of market failure and monopoly
1Pradeep S Mehta, A Functional Competition Policy for India, 2006,
http://www.thehindubusinessline.com (last updated on 7th August 2015)
2 Anjan Dasgupta, Competition Policy in Telecommunication, 2005,
articles.economictimes.indiatimes.com (last updated on 7th August 2015)
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can be the result of the market failure. Market failure occurs when resources are
misallocated or allocated inefficiently. Thus in his article measures are discussed to
avoid market failure
3. James Hogde3 (2001) in article Market Policies and Competition defines relevant
market as the smallest group of products and geographic area in which a firm with
market power can profitably impose a sustainable price increase.
RESEARCH METHODOLOGY
The method of writing used throughout this research paper is primarily analytical and
the researcher has, for her convenience divided the write up into various Chapters and has
used secondary source for collecting information. The researcher has followed a Blue Book
(19th edition) mode of citation throughout the course of this research paper.
HYPOTHESIS
The researcher presumes that once the policies and institutions to deal with the
complexities of competition issues are in the right place, the pace and direction of the
telecommunications market and development can then be left to the businesses and the
consumers.
CHAPTER I: INTRODUCTION
The interaction of the two regimes, telecommunications regulation and competition policy,
has become increasingly important in India, as has been in other countries, to effectively deal
with the complexities of competition issues that are retarding the development of meaningful
competition. Government intervention with the objective of responding to market failures, to
limit abuses of market power and to improve economic efficiency, has become the need of
the hour. Once the policies and institutions to deal with these complexities are in the right
place, the pace and direction of the telecommunications market and development can then be
left to the businesses and the consumers. A successful competition policy management in the
telecommunications sector can be a catalyst to obtaining lower prices, new and better
services, greater consumer choice and increased investment in the telecommunications
markets.4

3 James Hogde, Market Policies and Competition, 2001, http://www.tips.org.za


(last updated on 7th August 2015)
5

The first part of this paper intends to explore the rationale behind competition policy
intervention in telecommunications markets and highlight some of the basic concepts of
competition policy that are commonly present in many markets of the world. The latter part
intends to provide a framework for understanding some of the evolving competition policy
issues in the telecommunications sector in India and the approaches that have been designed
and undertaken by the Government of India and its various regulatory arms. It will deal with
the current trends and approaches to competition policy in telecommunication while
attempting to assess these approaches. We will also compare the Indian experience with the
diverse approaches taken by different countries. This would enable us to take stock and draw
out the lessons of experience in order to identify the key elements that can be adopted in
India.5
CHAPTER II: COMPETITION POLICY AND TRIPS AGREEMENT
Concerns regarding the potential for anti-competitive abuse of rights protected under the
TRIPS Agreement were voiced by many countries (especially developing countries) during
the negotiation of the Agreement. Consequently, the TRIPS Agreement provides scope for the
enforcement of competition law vis--vis anti-competitive licensing practices and conditions.
The key operative provisions are Articles 40 and 31, especially 31(k). In addition, Article 8.2
provides general recognition that appropriate measures may be needed to prevent the abuse of
intellectual property rights by rights holders. The provisions regarding anti-competitive
practices (especially Article 40) generally are permissive rather than prescriptive in nature.
Exception: Right to consultations under Article 40.3.6
Relevant provisions of the TRIPS Agreement: Article 40
Recognizes that licensing practices that restrain competition may have adverse effects on
trade or may impede technology transfer/diffusion Article 40.1, permits members to specify
anti-competitive practices constituting abuses of IPRs and to adopt measures to prevent or
4 Pooja Gupta, Competition Policy in Telecommunication in India, available at
www.cci.gov.in (last updated on 10th August 2015)
5 Supranote 1
6 Anderson, Competition Policy and TRIPS Agreement, available at www.wipo.int
(last updated on 10th August 2015)
6

control such practices (Article 40.2). Such practices may include exclusive grantbacks,
clauses preventing validity challenges and coercive package licensing.7
Relevant provisions of the TRIPS Agreement: Article 318
Sets out detailed conditions for the granting of compulsory licences aimed at
protecting the legitimate interests of rights holders.
Provides for the non-application of two such conditions where a compulsory licence is
granted to remedy a practice determined after judicial or administrative process to be anticompetitive (Article 31(k)).
The conditions which may thereby be rendered non applicable include: (i) the requirement to
first seek a voluntary licence from the right holder (Art. 31(b)); and
(ii) the requirement that use pursuant to a compulsory license be predominantly for the supply
of the domestic market (Art. 31(f)).
CHAPTER III: MERGER AND ACQUITION IN TELECOM SECTOR
The telecommunication industry is the fastest growing industry in almost every country.
Both, technology advance in the telephony industry in general, and in the wireless technology
in particular, as well as technology advance of the Internet contributed the most for the fast
growth of this industry. Telecommunication services constitute the most natural example of
network externalities, since by definition, the nature of these services involves
communicating with a large number of people.
Mergers and acquisitions in the telecommunication industry have grown by substantial
proportions in India since the mid 1990s. Economic reforms undertaken in the 1990s in India
opened up the telecom sector which used to be a predominantly state controlled one. Private
investment in the telecom sector in India not only facilitated the rapid expansion of telecom
services in the urban, as well as rural parts of India, it also provided the opportunity for
mergers and acquisitions in this sector.
Rationale behind Mergers in the Telecommunication Industry
7 Id
8 Supranote 6
7

Acquisition of licenses or geographical territories


Acquisition of spectrum
Acquisition of telecom infrastructure and network
Acquisition of customer base to achieve an economic base
Acquisition of brand value
Higher operating profit (EBITDA) margin
Acquisition of Customer Base

Important mergers and acquisitions in the Indian telecommunication industry


The first merger and acquisition deal in the Indian telecom industry occurred in 1998 between
Max Group of Delhi and Hutchison Group of Hong Kong. 41% of stakes of Orange services
in Mumbai was acquired by Hutchison from Max for 560 million US Dollars. In the years
that followed several other mergers and acquisitions took place in the telecommunications
sector in India. Important ones among them includes

Acquisition of Command Cellular Services in Kolkata by Hutchison from Usha

Martin in 2000.
Acquisition of 79.24% stakes of Aircel, Chennai by Sterling group from RPG group

for Rs. 210 Crores in 2003.


Acquisition of 48% stakes in Idea cellular by Aditya Birla group from the Tata group

in 2005.
Acquisition of Hutch services in India by Vodafone in 2006.
Idea Cellular takeovers Spice Telecom
Idea buys 40.8% stake @ Rs.2720 crores.
Idea gains entry in the contiguous wireless markets of Punjab and Karnataka, which

account for 11% of Indias total wireless subscribers.


Idea gains all-India subscriber market share increasing from9.5% to 11.1%.
Ideas operations in the 900 MHz GSM spectrum band will increase from the current 7

service areas to 9 service areas.


TT DoCoMo paid 2.7 Billion USD for a 26% stake in Tata Teleservices. The deal
values Tata Teleservices at $10 bn.
CHAPTER IV: COMPETITION POLICY IN TELECOMMUNICATIONS

Since the dawn of the telecommunications sector, most markets across the globe developed
within the context of a government regulated monopoly. However, over the last two decades,
this concept has steadily eroded and governments have come to realize that competition is the
best tool for achieving those public policy goals which were previously believed to be only
attainable through monopolies. Gradually, countries started introducing market liberalization
8

measures drawing distinction between different telecommunications markets. However, in


countries where telecommunications markets have been liberalized, it has become clear that
market opening by itself has been insufficient to bring about the development of meaningful
competition. There still exists imperfect competition and monopoly which fail to serve the
interests in the long run of the telecommunications industry and the consumers. In part, this
reflects commercial realities such as limited market size, economic stability, and poor returns
on investment. But it also reflects current government processes for setting competition
policy. In this context, it has become increasingly important for countries to have the
necessary policies and institutions in place to effectively deal with the increasing quantity and
complexity of competition issues that are retarding the development of meaningful
competition.9
Market Definition and Dominance
Two fundamental concepts of competition law in telecommunications are market definition
and dominance. Market definition is necessary to define a relevant market in order to
establish if a firm has dominant position in the market. Two principal approaches generally
have been taken in defining relevant markets in the past, one based on statutory service
classifications commonly used in sector-specific regulation, and the other based on demand
and supply substitutability, used in competition law. In both methods, since markets evolve
continually, there is a risk of obsolescence if market definitions are cast in legislation or
regulations for the purpose of sector-specific regulation. In this regard, technologically
neutral market definitions, such as those underlying the new European Union
telecommunications regulatory framework are seen as more flexible than those of countries
such as the United States, where traditionally different services, such as fixed, wireless
mobile and cable services are regulated under different parts of the US Communications
Act.10
In competition law, authorities mostly concerned with firms that have market power. Firms
without market power are simply not able to cause serious problems in the economy or in the
sector. The level of market power necessary to attract competition law intervention is
commonly referred to as dominance.
9 Supranote 1
10 Supranote 1
9

CHAPTER V: EXISTING TELECOM REGULATORY FRAMEWOR IN INDIA


The present telecom regulatory framework is derived principally from the archaic Indian
Telegraph Act 1885 (IT Act), Indian Wireless Telegraphy Act 1933 (IWT Act) and the
relatively recent Telecom Regulatory Authority of India Act 1997 (TRAI Act). While the
licensing and policy making powers of the Central Government emanate from the IT Act and
the IWT Act, the TRAI Act lays down the principal powers and functions of the industry
regulator, the Telecom Regulatory Authority of India (TRAI). The present licensing
authority is the Department of Telecom (DoT), part of the Central Governments Ministry
of Communications and Information Technology. Currently, the general telecom policy is
embodied in the New Telecom Policy, 1999 (NTP-99). Subsequent to the publication of
NTP 99, the TRAI Act was amended in 2000, following which TRAIs powers to adjudicate
disputes have been now vested in the Telecom Disputes Settlement and Appellate Tribunal
(TDSAT). Frequency allocation is carried out in accordance with the National Frequency
Allocation Plan 2002 (NFAP), formulated by the Standing Advisory Committee on
Frequency Allocation (SACFA) and frequency is assigned to the telecom operators by the
Wireless Planning and Coordination Wing of the DoT (WPC). The DoTs
Telecommunications Engineering Centre is responsible for issuing equipment and interface
approvals.11
The functions of TRAI fall broadly within two categories recommendatory and mandatory.
The principal recommendatory functions of TRAI may be exercised either on its own
initiative or on request from the licensor. This function mainly covers introduction of new
services and ensuring compliance with the terms and conditions of the licenses. It also
includes fixing tariffs, fixing the terms and conditions of the interconnection agreements and
establishing and ensuring standards of quality of services. The recommendatory function inter
alia covers measures to facilitate competition and promote efficiency in the operation of
telecommunication services so as to facilitate growth in such services.12
CHAPTER VI: APPROACHES TO COMPETITION IN INDIA
11 Supranote 4
12 Id
10

The Telecommunication Tariff Order 1999 and the periodical amendments made thereto
(TTO) sets out the tariff at which telecommunication services within India and outside
India should be provided. The order was made by the TRAI in exercise of the powers
conferred upon it under sub-section (2) of Section 11 of the TRAI Act. The TTO provides that
the tariff for various telecommunications services and their dates of implementation shall be
as set out in schedules I to IX. It however provides that where the authority has, for the
time being forborne from fixing tariffs for any telecommunications service or part thereof, a
service provider shall be at liberty to fix any tariff for such telecommunication services. This
clause gives the service provider the right to fix any tariff, provided that the service provider
has complied with the reporting requirements and that the tariff has been agreed by the TRAI.
The TTO prevents any service provider from charging in excess of one year's rental
chargeable from the subscriber for the particular telecommunications service as specified in
the relevant standard package.13
For the purposes of fixing tariffs the TTO relates to either a ceiling to a tariff or a floor. If
a tariff has been fixed by the TRAI, no tariff shall be fixed by any service provider in excess
of such ceiling, or shall be fixed below such floor. The TTO also provides that unless the
Authority intervenes with the mandatory notice period of five working days, the service
provider may implement the proposed tariff. This enables the service provider to alter a
tariff (at the expiry of the five day period) but binds him to comply with the reporting
requirement under the TTO. As per the TTO, TRAI can at any time modify and review any
tariff, and must give good and sufficient reasons for doing so.14
The TTO further provides that no service provider shall, in any manner, discriminate
between subscribers of the same class and such classification of subscribers shall not be
arbitrary. This clause is applicable to all telecommunications service providers, irrespective
of whether they are the incumbent operators (as they are in a dominant position and are more
likely to abuse their dominant position by discriminating between subscribers) or not. By
fixing the tariffs the TRAI reduces the ability of the incumbent operators to charge

13 Zian Patel, Competition Policy in India, Available at www.iimahd.ernet.in (last


updated on 10th August 2015)
14 Supranote 10
11

uncompetitive tariffs. The tariff control would also enable operators to charge competitive
tariffs to their subscribers.15
CHAPTER VII: CASE STUDY
1. Title: Vodafone International Holdings B.V. v. Union of India & Anr16
Facts: In February 2007, Vodafone International Holdings B.V (Vodafone or VIH), a
Dutch entity, had acquired 100 percent shares in CGP (Holdings) Limited (CGP), a
Cayman Islands company for USD 11.1 billion from Hutchinson Telecommunications
International Limited (HTIL).
CGP, through various intermediate companies/ contractual arrangements controlled 67
percent of Hutchison Essar Limited (HEL), an Indian company. The acquisition
resulted in Vodafone acquiring control over CGP and its downstream subsidiaries
including, ultimately, HEL.
HEL was a joint venture between the Hutchinson group and the Essar group. It had
obtained telecom licences to provide cellular telephony in different circles in India
from November 1994.
In September 2007, the tax department issued a show-cause notice to Vodafone to
explain why tax was not withheld on payments made to HTIL in relation to the above
transaction. The tax department contended that the transaction of transfer of shares in
CGP had the effect of indirect transfer of assets situated in India.
Vodafone filed a writ petition in the Bombay High Court, inter alia, challenging the
jurisdiction of the tax authorities in the matter.
Issue: Non Payment of Tax.
Judgment: In a landmark decision, the Supreme Court reversed the decision of the
Bombay High Court and held that the Indian tax authorities did not have territorial
jurisdiction to tax the offshore transaction, and therefore, Vodafone was not liable to
withhold Indian taxes.
CHAPTER VIII: SUGGESSTION
1) There are other issues that indirectly impacts competition in a particular sector.
Therefore, CCI should try widening its role such that it is possible for the commission to
monitor those indirect actions. For example: CCI could play an aggressive role in facilitating

15 Id
16 S.L.P. (C) No. 26529 of 2010, dated 20 January 2012
12

competition in International calls which would lower down the prices and improve consumer
welfare.
2) Correction Of legislative Ambiguities between CCI and TRAI: One fundamental flaw
exists regarding predatory pricing, especially with respect to the ongoing tariff war between
mobile operators. For a mobile operator to be guilty of predatory pricing, it must be in a
dominant position as per section 4 of the Act. Since the Indian market is all about number
(which is probably why our government feels that it can sustain competition even with 14
telecom operators), no new entrant can be said to be in a dominant position and, therefore,
may never be guilty of predatory pricing, even though it may have deep pockets to withstand
lower tariffs as compared to other operators and successfully eliminate any future
competition from other new entrants. This can also have a negative impact on the older and
established operators, who may be in a dominant position, but may not have a suitable
business model to sustain lower tariffs for a very long period of time. Therefore, competition
can be negatively impacted even though the operator accused of predatory pricing is not
dominant.
CONCLUSION
It is apparent that the Indian national telecom policy and regulation - both the regulations and
the regulators - will play a major role in implementing competition and telecommunications
reforms. The distinctive telecommunications networks and public interest characteristics of
the sector will require a continuing proactive role for regulation if network development
objectives are to be met, and the foundations prepared for the next generation
telecommunications services.
Today there are many competitions policies in the telecommunications sector in India. Some
of them have been able to achieve their objectives and some of them have not been able to
achieve the desired objectives. One of the reasons for its failure is that technologies are
improving rapidly, and markets and industries are in a continuing process of realignment but
the policy and regulatory frameworks have remained focused on, and constrained to the
inherited boundaries of the telecom industry. Policy and regulation is lagging behind
technology and markets in adapting effectively to the changing environment.
BIBLIOGRAPHY
List of Statutes
13

Competition Act, 2002

Websites

www.iimahd.ernet.in
www.wipo.int
http://www.tips.org.za
www.cci.gov.in
http://www.thehindubusinessline.com
articles.economictimes.indiatimes.com

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