India Scraps Telecom Rules Opposed By U.S., But Some Questions Remain
Inside US Trade
June 24, 2011
The Indian government has backed off from its demands that foreign vendors of
telecommunications equipment enter into strict template agreements with Indian
service providers that would force foreign vendors to assume strict liability, hand
over source code and transfer technology as conditions for doing business in India,
sources said.
This is a positive development for U.S. exporters and the Office of the U.S. Trade
Representative, both of which had objected to the Indian demands. Last April, USTR
cited Indian regulations requiring vendors to enter into these template agreements
as foreign trade barrier that needs to be remedied (Inside U.S. Trade, April 8).
India has been reviewing these demands for months, and never actually implemented
its controversial policy. Late last month, India issued a new regulation that
abandoned the most controversial elements of its policies, although U.S. industry
groups still have questions and worries about the new regulation that they would
like India to clarify.
For instance, U.S. industry groups remain cautious about the new telecommunications
regulation because it still references elements of the old policies, such as a
requirement that foreign companies deposit their source code in an escrow account as
a condition for doing business in India. Industry groups had argued this requirement
left them open to having their intellectual property stolen.
This is somewhat troublesome because it shows that the Indian government still
considers the transference of source code a viable option when India services
providers are negotiating contracts with those foreign vendors, according to an
industry source. That said, the new regulation no longer requires contracts to
include transference of source code.
Another drawback of the new regulation -- which, like the old policy, is intended to
govern the terms under which foreign vendors and Indian service providers negotiate
contracts -- is that it requires all testing of devices to take place in India
before they can be used on an Indian network.
This is worrisome for U.S. vendors because it is constraining and because it is
unclear whether India has enough facilities that are accredited for testing to
international standards, one industry source said. "We don't like to be told where
to test our products," this source said. "That should be negotiated between a
service provider and a vendor."
Another industry source said U.S. industry representatives plan to clarify this
issue next week with Indian government officials during a meeting of the U.S.-India
information and communications technology dialogue, which is a meeting between U.S.
officials from USTR and the State Department and their Indian counterparts.
Despite the worries cited with the new policy, it represents a major improvement and
will likely make it more comfortable for foreign equipment manufacturers to move
forward with more than $1 billion in stalled contracts with Indian service
providers, industry sources said.
"I think the Indian government recognized the mistake they made," an industry source
said, in reference to the old policy. "Companies weren't signing contract because of
these rules." The loss in foreign contracts may have been the most compelling reason
for why India scrapped its controversial requirements, this source said.
But but pressure from foreign governments and the private sector also played a role,
this source added.
"We appreciate the significant improvements in the recently announced telecom
security policy and welcome the Indian Government's recognition that the previous
policy would not have met its understandable security needs," a USTR spokesman said
this week, when asked about the new regulation.
"We continue to review the new policy in light of our previous concerns and look
forward to continuing our constructive engagement with the Government of India and
industry on these important security issues," he added.
The new regulation issued by the Indian government last month abandons the most
controversial elements from the template for negotiating contracts, including
technology transfer and depositing of source code into an escrow account, which
foreign equipment companies feared would lead to theft of intellectual property
(IP), sources said.
These policies were first unveiled in December 2009 but were never officially
implemented. India instituted a 60-day grace period starting in August 2010 to
consult with foreign firms.
That deadline for implementation was delayed for another 60 days, and then for
another 100 days at the start of the year as the Indian government initiated a broad
review of all telecommunications policies in the wake of a scandal where valuable
telecommunications spectrum was auctioned at cut rates, depriving the government of
massive revenues.
Before its reversal last month, India was moving forward with such aggressive
policies in order to protect its networks from security breaches, industry sources
said.
Under the old regulation, foreign vendors of telecommunications equipment would have
been required to hand over valuable source code, which Indian service providers
would have been able to use it to repair their networks in the case of a breach.
Source code includes all the technical information for devices and their parts and
components.
But providing the complete source code of an entire product to the Indian government
would have been nearly impossible because an end-item, such as a mobile phone,
contains parts and technology developed by other companies and used under a license
in the final product, one industry source argued.
The relevant license agreements would have prevented the manufacturer from issuing
the source code for the entire product, this source argued. This means that it would
have been impossible for U.S. vendors to fulfill the requirements of contracts with
Indian providers that the old Indian policy would have required.
The liability requirements under the old template agreement would have also given
Indian service providers the power to modify source code to address security
breaches. The reasoning behind the policy was that the foreign vendors are liable
for breaches, and therefore Indian service providers are within their rights to
modify the source code.
However, this ability to modify source code -- while intended for security reasons
-- could also have allowed Indian providers to create new products that eventually
would have the potential for competing directly with the foreign products
themselves. This is another reason why U.S. exporters had opposed the old template
agreement.
The template agreement would have also made it acceptable for Indian service
providers to transfer liability in the form of government penalties to foreign
vendors if a breach were to occur, an industry source said.
The new regulation does leave the door open for the Indian government to revert to
the terms of the old template agreement because they are referenced in the new
agreement. One industry source said it allows the Indian government to make all the
terms of the old agreement, or at least parts of it, mandatory in the future if
there was a need to address a large network breach.
The new regulation also fails to set up a permanent public-private partnership where
the government would consult regularly with the private sector on existing and
future regulations. The policy leaves it up to the private sector to organize a
telecommunications security commission that would focus on emerging threats.
The failure of the government to be proactive in establishing a security commission
could leave foreign equipment suppliers open to future regulatory problems because
there would be no ongoing dialogue about these issues, one industry source said.