Equipment sourcing rule likely for IT, telecom

In an initiative that could prompt foreign telecom equipment majors such as Huawei, ZTE and Ericsson to set up base in India, the government is working on a Cabinet note to make it mandatory for all information technology (IT) and telecom public sector units to source 30 per cent of their purchases from domestic equipment makers.

Work on the note has started following a proposal by the Department of Telecommunications (DoT), recommendations of the Telecom Regulatory Authority of India (Trai) and the IT department.

The DoT proposal had, in fact mooted that from the eighth year of any such rule, the sourcing from domestic equipment makers should go up to 80 per cent. However, in that case, the manufacturer would have to match the price of the first lowest bidder. This proposal, officials said might not be included in the final cabinet note.

The note is to also ensure that companies setting up base in India do not lose in the long run. So, the research & development rights for their equipment will remain with these companies. Also, for internet protocol (IP) commercial activities by these companies, the commercial value derived from global sales of the product or the IP will accrue to them.

The note will also have value addition norms to ensure foreign companies do not merely import equipment and make only small changes at the Indian facility, officials said. The value addition for Indian products will be 40 per cent for the first year and go up to 60 per cent by the fifth year.

For products assembled or manufactured in India but where intellectual property rights belong to a company registered outside India, or these were developed abroad, the value addition will be 25 per cent for the first year and go up to 45 per cent by the fifth year.

DoT will amend the Unified Access Service Licence conditions to include the provision of market access, value addition and auditing in terms of domestic products.

According to Trai estimates, the market for telecom equipment is expected to grow from $12.5 billion in 2009-10 to $40 bn in 2020. At present, locally produced telecom equipment hardware contributes 12-13 per cent of mobile operators’ needs and Indian firms account for only three per cent of this.

The note will define a domestic manufacturer as a company registered in India and with a manufacturing facility in the country that could be involved in contract manufacturing. But traders are excluded.

The note from DoT said a service provider procuring over 10 per cent of the requirement of telecom equipment from Indian products should get a discount of 10 per cent of its licence fee for the year. But if the service provider fails to meet the criteria, it would have to deposit an amount equal to 10 per cent of the shortfall in the value of the equipment in the telecom research fund or telecom equipment manufacturing fund.