The Technology-Media-Telecom (TMT) sector in India has experienced robust growth over the last decade. The Government of India has provided the sector its much needed impetus to investment and growth by opening up or relaxing the entry barriers for foreign investments (foreign direct investments/FDI as well as indirect investments) in certain important areas. Today, the TMT sector provides investment opportunities in areas as diverse as software development, hardware, outsourcing, movies, television, animation, print media, sports, mobile entertainment and advertising.

An India entry strategy in the TMT space must consider the following:

• Potential investment routes and restrictions as per the permitted foreign investment limits in key areas.
• Exchange control regulations under the Foreign Exchange Management Act, 1999 (FEMA).
• Guidelines issued by the Ministry of Information and Broadcasting (MIB) and Telecom Regulatory Authority of India (TRAI).
• Regulations governing External Commercial Borrowings (ECB) Security regulations under the Securities and Exchange Board of India (SEBI).
• Tax considerations.

Investment Routes and Restrictions
Foreign investors may undertake investments in TMT as Foreign Institutional Investors (FII) or as Foreign Venture Capital Investors (FVCI). Entry into India as an FII or via the FVCI route may be undertaken after obtaining registration under the relevant SEBI regulations. Investments via the FII route are permissible on the floor of the stock exchange while FVCIs are prohibited on undertaking the same. However, FVCIs have the benefit of entry and exit pricing norms in relation to investments made in Indian securities. FDI limits in certain sectors are a combination of FIIs and FVCIs and are discussed below for some key areas.

IT&ITES: Foreign investment in Information Technology including companies engaged in Business–to–Business (B2B) e-commerce activities is permissible up to 100 percent under the automatic route. However, foreign investment in Business–to-Consumer (B2C) e-commerce retail activities is prohibited, except for single brand retailing where foreign investment is permissible up to 51 percent, subject to prior approval of the Foreign Investment Promotion Board (FIPB).

Media: Foreign investment into advertising and content companies is allowed up to 100 percent without any regulatory approvals, while in broadcasting entities it is subject to the following:

• Each of the above requires prior approval of FIPB and MIB.
• Broadcasting licenses are granted only to companies incorporated in India.

Telecom: As in case of media, the foreign investment restrictions are as follows:

• Each of the above are subject to licensing and security requirements notified by the Department of Telecommunications (DOT).
• Telecom licenses are granted only to companies incorporated in India.
• Manufacture of telecom equipments in subject to sectoral requirements up to 100 percent foreign investment allowed through the automatic route.

Further, some of the above media and telecom license conditions require:

• majority of the directors to be Indians;
• key positions in the company, if held by foreign nationals, to be security vetted by the Ministry of Home Affairs (MHA);
• promoter’s investment to be locked-in for a specified period;
• prior approval for change in shareholding pattern of the licensee entity.

Taking the above into consideration along with the rights available to majority and minority shareholder under the Companies Act, 1956, a foreign investment has to be carefully structured so as to ensure that the interests of the foreign investor is adequately protected.

Remittances: At present there are certain limits (lumpsum fee of USD 2 million and payments of 5% on domestic sales and 8% on exports) on the amount of remittance in relation to technology transfers, without prior government approvals. However, the government has declared that the limits will be removed and an official notification is shortly expected.

Tax friendly jurisdiction
Foreign investments may be made through an intermediate holding company set up in a tax-favourable jurisdiction. Taking advantage of India’s wide treaty network and judiciously choosing an appropriate offshore location could result in many benefits for the parent company, such as a reduced or zero rate of tax on capital gains income and reduction in withholding tax rates.

Withholding taxes may be applicable bearing in mind the characterization/nature of such remittances. Thus, the investments need to be carefully structured backed with relevant documentation so as to ensure tax efficiency.

Recently the Indian tax authorities issued notices to Vodafone International Holdings B.V. for failure to withhold taxes on capital gains earned by Hutchison in a transaction where Hutchison had transferred its stake in a Cayman Islands entity to Vodafone. The Indian tax authorities assumed extraterritorial jurisdiction since there was a nexus between the transfer of shares outside India and a capital asset situated in India. In view thereof, any indirect foreign acquisition resulting in the transfer of shares of an Indian company needs to be cautiously structured.

Instruments
Apart from the issue of equity shares by the Indian company, investors may avail of compulsorily convertible debentures (CCDs) and/or compulsorily convertible preference shares (CCPs), subject to the relevant MIB and TRAI regulations. CCDs, for the purposes of the Income Tax Act, 1961, are considered to be debt. This interpretation creates a benefit whereby the interest payable to the foreign CCD holder is a tax deductible expense in the books of the Indian company. While CCPs carry a preferential right to dividends or repayment of capital on winding up, both CCPs and CCDs are compulsorily convertible into equity shares. However, at the time of liquidation, CCDs get a preference over CCPs and CCPs get a preference over equity shares.

Incentives Offered by the Government
The Special Economic Zones (SEZ) Act, 2005 has been brought into effect along with the Special Economic Zones Rules, 2006. According to this Act, SEZ units which begin to manufacture or produce articles or things or provide any services, on or after 1 April 2005 are eligible for a 15 year tax benefit in relation to export profits, in the following manner:

• 100 percent income tax exemption on the export income for the first 5 years under Section 10AA of the IT Act;
• 50 percent income tax exemption for next 5 years thereafter; and
• 50 percent income tax exemption of the ploughed back export profit for the following 5 years.

The SEZ units are also exempted from capital gains arising due to the transfer of capital assets when shifting an industrial undertaking from an urban area to an SEZ.

Recent Developments
Telecom: To promote the rollout of 3G and broadband services and to resolve congestion issues with second generation mobile services, the Department of Telecom (DOT) has announced the auction for radio spectrum to support ”third generation mobile services” and “broadband wireless access”.

Media: TRAI has issued recommendations on cross holdings (vertical or horizontal) for media companies. These recommendations are currently being evaluated by the government. Currently, cross-media ownership restrictions are in place in relation to DTH services and private FM radio. Broadcasting companies/cable networks are allowed to own a maximum 20 percent equity in a DTH company and a company providing FM radio services cannot hold more than 15 percent of the total number of radio channels allocated in the country.

Technology: The India Information Technology Act, 2000 has been recently amended to tackle newer forms of cyber crimes not limited to cheating by impersonation, data theft, cyber terrorism, offensive e-communications etc. The government has also been considering to introduce the Communications Convergence bill to promote, facilitate, develop and harmonize the carriage/content of communications under the Indian communication sector.

Conclusion
The Indian government has kept abreast with global trends in the TMT sector by liberalizing associated policies with the objective of encouraging foreign investments as well as protecting Indian consumers through effective regulations. The Indian Information Technology & Enabled Services exports in the year 2009 reached USD 47.3 billion as against USD 40.9 billion in the year 2008, thereby posting a growth of 16 %. Similar growth has been witnessed in the media and technology sector, thereby making India a global hub for TMT services.

Nishith Desai Associates
Legal & Tax Counseling Worldwide
93-B, Mittal Court
Nariman Point
Mumbai – 400 021, India
Phone: +91 22 / 6669 5000
Fax: +91 22 / 6669 5001
Internet: www.nishithdesai.com
Gowree Gokhale, Partner
Email: gowree@nishithdesai.com