TELECOM INDUSTRY IN INDIA

Page 7 of 7

INDUSTRY OVERVIEW

Introduction

The Indian telecommunications industry is one of the fastest growing in the world. Government policies and regulatory framework implemented by Telecom Regulatory Authority of India (TRAI) have provided a conducive environment for service providers. This has made the sector more competitive, while enhancing the accessibility of telecommunication services at affordable tariffs to the consumers. In the last two decades, the Indian Telecom Sector and mobile telephony in particular has caught the imagination of India by revolutionizing the way we communicate, share information; and through its staggering growth helped millions stay connected. This growth, however, has and continues to be at the cost of the Climate, powered by an unsustainable and inefficient model of energy generation and usage. Simultaneously, this growth has also come at significant and growing loss to the state exchequer, raising fundamental questions on the future business and operation model of the Telecom sector.The telecom industry has witnessed significant growth in subscriber base over the last decade, with increasing network coverage and a competition-induced decline in tariffs acting as catalysts for the growth in subscriber base. The growth story and the potential have also served to attract newer players in the industry, with the result that the intensity of competition has kept increasing. The sector expected to witness up to US$ 56.3 billion investments and the market will cross the US$ 101 billion mark in five years.Current Scenario

The Indian telecom sector has witnessed tremendous growth over the past decade. Today, the Indian telecom network is the second largest in the world after China. A liberal policy regime and involvement of the private sector have played an important role in transforming this sector. The total number of telephones as on 31st April 2013 was 897.02 million.The telecom industry has witnessed significant growth in subscriber base over the last decade, with increasing network coverage and a competition-induced decline in tariffs acting as catalysts for the growth in subscriber base. The growth story and the potential have also served to attract newer players in the industry, with the result that the intensity of competition has kept increasing. Internet subscribers in India grew to 164.81 million as of March 31, 2013, with as many as seven out of eight net users in the country accessing the services via their mobile phones, according to telecom regulator TRAI. The total number of mobile internet subscribers stood at 143.2 million at the end of the last fiscal.The number of broadband subscribers increased to 15.05 million as of March 31, 2013, from14.98 million as of December 31, 2012. The number of non-mobile internet subscribers in the quarter ended March 31, 2013, grew to 21.61 million from 21.57 million, registering a quarterly growth rate of 0.16 per cent.

Liberalization of the sector has not only led to rapid growth but also helped a great deal towards maximization of consumer benefits, evident from a huge fall in tariffs. Telecom sector has witnessed a continuous rising trend in the total number of telephone subscribers and hence the teledensity. In simple terms, Teledensity is the number of landline telephones in use for every 100 individuals living within an area. A teledensity greater than 100 means there are more telephones than people.Third-world countries may have a teledensity of less than 10. Teledensity is also an important indicator of telecom penetration in the country. Teledensity has decreased from 76.86 per cent in December 2011 to 73.16 at the end of April, 2013. Teledensity varies across circles and there is significant urban-rural divide.While urban teledensity reached 139.33 per cent at the end of April 2013 and rural teledensity was only 40.49 per cent. Subscription in the urban areas decreased from 548.80 million in February, 2013 to 544.55 million at the end of April, 2013. Subscription in rural areas increased from 349.22 million to 352.47 million during the same period. The monthly growth rate of

urban and rural subscription is -0.77% and 0.93% respectively. The overall urban Teledensity has decreased from 146.96 to145.58 and Rural Teledensity increased from41.02 to 41.37. Total wireless subscriber base decreased from 867.80 million in March 2013 to 867.02 million at the end of April 2013, registering a monthly growth of - 0.09%. This decline is largely due to disconnections by some of the service providers. The share of urban wireless subscribers has decreased from 60.53% to 60.11% where as share of rural wireless subscribers has increased from 39.47% to 39.89%. The overall wireless Teledensity in India has reached 70.71 from 70.85 ofprevious month. Wireless subscription in urban areas decreased from 525.30 million in March 2013 to 521.18 million at the end of April 2013. The wireless subscription in rural areas increased from 342.50 million to 345.85 million during the same period. The urban wireless Teledensity has decreased from 140.67 to 139.33 and rural Teledensity has increased from 40.23 to 40.59.

GROWTH IN TELECOM

Growth Drivers

Key factors, which will fuel the growth of the sector include increased access to services owing to launch of newer telecom technologies like 3G and BWA, better devices, changing consumer behavior and the emergence of cloud technologies. A majority of the investments will go into the capital expenditure for setting up newer networks like 3G and developing the backhaul, among other things.Subscriber Base

The mobile subscriber base in India is estimated rise by 9 per cent to 696 million connections this year, according to technology researcher Gartner. The mobile service penetration in the country is currently at 51 per cent and is expected to grow to 72 per cent by 2016.Mobile Value Added Services (MVAS)

India's current MVAS industry has an estimated size of US$ 2.7 billion. The industry derives its revenues majorly from the top five to six products such as game based applications, music downloads, etc, which continue to form close to 80 per cent of VAS revenues. The Indian MVAS industry estimated to grow to US$ 10.8 billion by 2015, with the next wave of growth in subscriptions expected to come from semi-urban and rural areas.Mobile Number Portability (MNP)

Mobile Number Portability requests increased from 89.70 million subscribers at the end of March 2013 to 91.73 million at the end of April 2013.

Handsets

The mobile handset market's revenues in India will grow from US$ 5.7 billion in 2010 to US$7.8 billion in 2016, according to the study. India is the second largest mobile handset market in the world and is set to become an even larger market with unit shipment of 208.4 million in 2016 at a CAGR of 11.8 per cent from 2010 to 2016.The Indian mobile handset market posted revenue of Rs 359.46 billion in 2012-2013, compared to Rs 313.30 billion in the earlier fiscal year on the back of increasing sale of smartphones. In 2012-2013, Karbonn grew 73.1 per cent, Samsung ended the year with revenue of Rs 113.28 billion compared to Rs 78.91 billion last year showing a growth of 43.6 per cent. The iconic Apple posted revenue of Rs 12.93 billion in FY 2013 in the country compared to Rs 2.50 billion in the previous financial year

MARKET PLAYERS

Key Players

With new players coming in, the intensity of competition in the industry has increased, especially over the last four years. The market share of telecom operators of the telecom companies reflects the fragmented nature of the industry, with as many as 15 players. As of April 30, 2012, Bharti telecom led the market with 19.94 per cent share, Reliance (16.58 per cent), Vodafone (16.41 per cent), Idea (12.4 per cent), BSNL (10.51 per cent), Tata (8.77 per cent), Aircel (6.93 per cent), with the remaining share being held by other smaller operators.Telecom Operator wise Market Share

Bharti is far ahead with close 20% market share in India, Reliance (16.58%) and Vodafone (16.41) are having a close battle. Reliance currently has 154 million subscribers as compared to 152.5 million of Vodafone. Uninor, who is one of the late entrants in Indian Telecom market now has over 45 million subscribers and accounts for close to 5 percent of Indian mobile market share

GOVERNMENT POLICY

Government Initiative

The Cabinet has given its approval to National telecom Policy (NTP) 2012. The policy directs new initiatives, which includes free roaming, unrestricted Net telephony and a new unified licensing regime for operators. The policy also endorses a boost to broadband expansion and an increase in local manufacturing of telecom equipment.The National Science and Technology Entrepreneurship Development Board (NSTEDB), the Department of Science and Technology (DST), Government of India, Technopark and MobME Wireless have joined hands to set up the Startup Village - Indian Telecom Innovation Hub in Kerala. The country's first Public Private Partnership (PPP) telecom business incubator is a step to support new product initiatives and turn them into successful ventures.TRAI is also doing its bit to achieve the aim of carbon emission reduction under which operators are directed to achieve carbon reduction to the extent of 5 per cent by 2012-13, 12 per cent by 2016-17 and 17 per cent by 2018-19. Concerning these norms under 'Green Telephony', TRAI has further mandated for all the operators that at least 50 per cent of all rural towers and 20 per cent of all urban towers are to be powered by hybrid power by 2015.FDI Policy in Telecom

Foreign direct investment (FDI) in telecom sector (including radio paging, cellular mobile, and basic telephone services) during April-March 2011-12 stood at US$ 1,997 million, as per the Department of Industrial Policy & Promotion (DIPP) data.Total telephone subscriber base in the country reached 952.91 million at the end of April 2012 from 951.34 million at the end of March 2012.Total Wireless subscriber base increased from 919.17 million in March 2012 to 921.02 million at the end of April 2012. Wireline subscription stood at 31.89 million at the end of April 2012.Overall tele-density has reached 78.71.

Total Broadband subscriber base has increased from 13.79 million at the end of March 2012 to13.95 million at the end of April 2012, there by showing a monthly growth of 1.13 per cent.

Investment Policy

Foreign direct investment limit in telecom services is 74 per cent subject to the following conditions:

This is applicable in case of Basic, Cellular, Unified Access Services, National/ International Long Distance, V-Sat, Public Mobile Radio Trunked Services (PMRTS), Global Mobile Personal Communications Services (GMPCS) and other value added ServicesBoth direct and indirect foreign investment in the licensee company shall be counted for FDI ceiling. Foreign Investment shall include investment by Foreign Institutional Investors (FIIs), Non-resident Indians (NRIs), Foreign Currency Convertible Bonds (FCCBs), American Depository Receipts (ADRs), Global Depository Receipts (GDRs) and convertible preference shares held by foreign entity. In any case, the 'Indian' shareholding will not be less than 26 per cent.FDI up to 49 per cent is on the automatic route and beyond that on the government route.FDI in the licensee company/Indian promoters/investment companies including their holding companies shall require approval of the Foreign Investment Promotion Board (FIPB) if it has a bearing on the overall ceiling of 74 per cent. While approving the investment proposals, FIPB shall take note that investment is not coming from countries of concern and/or unfriendly entities.The investment approval by FIPB shall envisage the conditionality that the Company would adhere to licence Agreement.FDI shall be subject to laws of India and not the laws of the foreign country/countries.