India's New Telecom Regulations – A Step in the Wrong Direction?
Kelley Drye Client Advisory
March 2, 2011
Introduction

The Indian government passed new regulations which impose several onerous restrictions on telecom equipment that is manufactured and sold by non-Indian manufacturers to telecom service providers located in India (hereinafter, the "Regulations").  For instance, the Regulations require a non-Indian manufacturer of telecom equipment to transfer the underlying technology to the Indian purchaser of the telecom equipment within a certain period, deposit the source code of telecom-related software in an escrow account that is controlled by the Indian government, and impose criminal penalties for non-compliance.  These Regulations have been introduced as a result of the Indian government's ongoing concern that India's vast mobile phone network could be subject to infiltration by foreign sources.[1]   In a country where the majority of telecom equipment is procured from non-Indian manufacturers, these Regulations could have a significant adverse impact on U.S. and other non-Indian manufacturers of telecom equipment who wish to sell their equipment to telecom service providers located in India and also on Indian telecom service providers who wish to purchase telecom equipment from non-Indian manufacturers.  Listed below are the salient features of the Regulations.

Implications and Concerns

First, a non-Indian manufacturer of telecom equipment has to transfer the technology in all critical software to the Indian telecom service provider who purchases the equipment, within a period of three (3) years from the initial sale of such software.  Criminal proceedings could be instituted against the purchaser of the software in the event of non-compliance, although the Indian government has not clarified the nature of criminal proceedings that could be instituted.  Consequently, non-Indian manufacturers of telecom equipment are now faced with the dilemma of balancing the revenues that they could earn from a one-time sale of their equipment with relinquishing their intellectual property rights in the underlying technology after the first sale.

Second, the Regulations require a non-Indian manufacturer of telecom equipment to deposit the source code and other detailed design elements for all telecom-related software into a escrow account that is controlled by the Indian government.  The Regulations further authorize Indian security agencies to access this escrow account in the event of a security threat that involves the use of the technology that is placed in escrow.  Naturally, non-Indian manufacturers of telecom equipment are concerned that the Indian government may misuse the intellectual property rights in their technology on the pretext of a national security threat.

Third, the operation and maintenance of telecom networks utilizing equipment purchased from a non-Indian manufacturer has to be performed entirely by Indian engineers within two (2) years from the date of purchase of the equipment, with minimal oversight by non-Indian engineers.  This may result in loss of significant maintenance revenues for non-Indian manufacturers of such equipment.

Fourth, the Regulations makes it mandatory for all Indian telecom service providers to obtain a security clearance before placing an order to procure any telecom equipment that is manufactured by non-Indian manufacturers.  This will make it harder for Indian companies to procure telecom equipment from non-Indian manufacturers of such equipment.  On the other hand, telecom equipment manufactured in India by companies that are either owned or controlled by Indians are not subject to this security clearance.

Grave concerns have been expressed by non-Indian manufacturers of telecom equipment as well as Indian providers of telecom services, who warn that the Regulations may jeopardize India's position as an emerging leader in global information and telecommunications sector.  In response to the concerns raised by such parties regarding the deposit of source code in an escrow account, the office of India's Prime Minister recently issued a directive to India's Department and the Ministry of Home Affairs instructing this Department to explore if it could explore implementing international best practices in lieu of the requirement to deposit the source code in escrow.  The Indian government is currently reviewing the Regulations in light of the Prime Minister's directive.  Going forward, U.S. and other non-Indian manufacturers of telecom equipment should seek proper legal counsel prior to licensing or selling their telecom equipment to Indian companies.

For more information about this advisory, please contact:

Talat Ansari
(212) 808-7605
tansari@kelleydrye.com

Deepak Nambiar
(212) 808-7982
dnambiar@kelleydrye.com


 



[1]    "Tough telecom rules spark foreign backlash," Associated Press (August 4, 2010).