DoT had earlier sought the recommendations of the Telecom Regulatory Authority of India (“TRAI”) and TRAI had provided its recommendations after a process of consultation and deliberation. The Circular has been directed towards companies holding the Unified Access Services (“UAS”) license who are allowed to provide wireline as well as wireless services in a service area.
Telecom operations are essentially dependent on spectrum which is not freely available and is a scare resource. Currently, spectrum is allotted as a bundled right along with the telecom license. Faced with spectrum shortage, in 2007 the DoT had considered putting a cap on the number of operators1.
This was followed by a huge rush for telecom licenses which raised concerns that non-serious players were likely to obtain the license (and spectrum) and then sell it at a premium. It is likely that the government introduced this Circular with an aimed to prevent non-serious /fly-by-night operators from making profits/ windfall gains.
SALIENT FEATURES OF THE CIRCULAR
The restriction on the declaration of dividend can be co-related to the provisions of the Indian Companies Act, 1956 (“Act”) which provides that dividends can only be declared from the distributable profits of the company3. As such, it may not be possible for a new telecom entrant to declare dividends during the lock in period as it is unlikely that the business of such company would be profitable in its initial stages. However, in furtherance of the provisions of the Act, it is to be evaluated whether such a restriction would be applicable in cases where interest is paid on the shares issued by the company for defraying the costs of works or building or of plant which cannot be made profitable over a long period.
TRAI has noted in its consultation process, that some operators have contended that the extremely high net worth requirements for promoters as set out in the UAS license coupled with the merger guidelines relating to intra-service area merger of CTMS/UAS5 by their very nature demand that dedicated and committed players enter this sector. Further there have been arguments that such restrictions would make investment in the telecom sector unattractive.
This Circular however does not impose any restrictions on inbound investments in the UAS licensee companies and would not prove as a deterrent for future investment by committed players.
The Circular itself permits issue of additional equity within the lock-in period. Further, in such cases of issue of additional equity, the Shareholders merely need to ensure that they do not transfer their shares to any third person.
There is no requirement that the Shareholders would need to increase their shareholding by acquiring further shares whenever the company issues additional equity so as to maintain their respective shareholding percentage in the company.
Further the Circular does not restrict the transfer of effective control of the licensee company itself, inspite the Shareholder not being able to transfer their shares to any third person.
For those genuine investors who may need an exit during the lock-in period, a prior approval of DOT would be required. These restrictions could also bring up issues where the completion of lock-in period/ roll-out obligations is made a condition precedent to the transfer of shares in companies having a UAS license.
Further, the Circular does not deal with a situation where a Shareholder in an existing licensee company has prior to the Circular, already sold its shareholding or part thereof before the completion of 3 years from the effective date of the license or meeting the roll out obligation. The question which therefore arises is how will such Shareholders be treated and will the lock-in apply with respect to their remaining shareholding?
Also, situations where existing telecom players after successfully rolling – out services in certain circles are seeking licenses in additional circles as expansion plans and whether such lock-in restriction would apply to such players.
Though it is the government’s imperative to alter the terms of the UAS license at any time7, clarity on applicability of the current amendments is required. It is likely that the industry would compel the government to issue a clarification stating that the Circular is to have prospective application.