The decision in this regard was taken at a cabinet meeting chaired by Chief Minister, Pinarayi Vijayan.
The aim is to enable public access internet at reduced rates and provide school and government offices with high speed internet connectivity, a government press release said.
KFON will be a Joint Venture company with Kerala State Electricity Board (KSEB) and Kerala state IT Infrastructure Ltd (KSITIL).
About 20 lakh families are expected to get free internet connectivity through this project, the release added.
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