For PEs, domestic fund tap turns a gusher

My Colleague Sachin P Mampatta co-authored this story appearing in DNA Money edition on Thursday, June 28, 2012.

Private equity firms that bank on domestic investors are finding it easier to raise money as they have managed to give decent returns, even as funds dependent on international funding continue to remain subdued.

If the recently closed deals are anything to go by, domestic investors are so bullish that venture capital/PE firms are not only meeting targeted corpus but also adding a few hundred crores more.

For instance, IIFL Alternate Asset Advisors Ltd, India Infoline’s venture capital arm, last week raised the size of its Rs500 crore real estate fund – IIFL Real Estate Fund (Domestic) Series-1). The fund, scheduled to close this month, will now close with Rs700 crore.

Balaji Raghavan, CEO and CIO of IIFL Alternate Asset Advisors Ltd, said, “Foreign money has not been forthcoming in the last couple of quarters for various reasons. There is a general negativity about the country and the economy as such because of credit downgrade, slowdown, taxation and GAAR to name a few. A couple of players looking to raise money outside have shelved plans.”

ASK Property Investment Advisors — the real estate private equity arm of ASK group — closed its second real estate fund (ASK Real Estate Opportunities Fund) on Monday by raising Rs1,000 crore.
According to company officials, the large corpus raised is in a contrast with the funding constraints witnessed by the real estate fund industry and is possibly the highest amount raised domestically by any realty fund in the last 4-5 years.

Sunil Rohokale, MD & CEO of ASK Investment Holdings, said despite tough economic conditions ASK has been able to leverage its strong relationships with existing clients for investments in the new fund.“Majority of our investors have been repeat investors from our first fund, who have experienced our strategy and performance,” he said.

In March this year, the Ask fund made its first exit in Noida at an internal rate of return of 54% with a multiple of 2.45. Amit Bhagat, MD & CEO, ASK Property Investment, said the current environment, also provides excellent countercyclical opportunities.

“Our first exit is a clear indicator of the potentially sound investment track record and investors have rewarded us with higher contributions in the second fund,” said Bhagat.

Another such example is of Motilal Oswal Private Equity Advisors’ India Business Excellence Fund-II. The fund is nearing a close for its second round of fundraising, according to a source.

Although there has also been a Rs100 crore investment from a fund of funds entity, the majority of the Rs450 odd crore in commitments are from domestic investors. The fund is set to close by first week of July.

DTH firms say digitisation extension will hurt them

This story first appeared in DNA Money edition on Friday, June 22, 2012.

The deferment of switchover from analog to digital cable signals in the four metros by the Union information and broadcasting ministry has not gone down well with the direct-to-home (DTH) service providers.

Describing it as a major setback to them, the DTH industry players have expressed hopes that the deadline would not be revised further. The ministry has extended the deadline by four months to October 31, citing lack of on the ground preparation by the multi-system operators (MSOs) and local cable operators (LCOs).

RC Venkateish, CEO, Dish TV India, said the deadline extension is not fair on the DTH players. “As a service provider we have made significant investments towards digitisation infrastructure, support staff / manpower, customer service initiatives, etc. And suddenly the goal post has been moved. DTH operators, since the last six years, have been religiously pursuing digitisation and the regulator appears to be only concerned about MSOs / LCOs which, despite having enough time on their side, haven’t prepared themselves for it. I hope the new deadline is made sacrosanct and doesn’t become a rolling date,” he said.

As part of the Phase I cable digitisation exercise, over 12 million television homes in New Delhi, Mumbai, Kolkata and Chennai were to switchover to digital signals by June 30, 2012. And by the end of fourth phase in December 2014, over 90 million analogue cable TV homes were estimated to convert to digital. Industry experts said the digitisation goal will not be met if the deadlines keep getting extended.

Harit Nagpal, president, DTH Operators Association of India, said the DTH community, which is licensed, regulated and pays taxes on behalf of each of its customers, has once again lost out to its analog competitors, which are not subjected to these rules.

“It is difficult to understand what different is being planned in the next 3-4 months that was not in the last six which would not lead to another postponement in October. Moreover, November hosts Diwali and could turn out to be an unwise time since it’s the peak month for broadcasters for advertising revenues and the migrant installer community goes back to their hometowns,” said Nagpal.

With significant capital expenditure already incurred in anticipation of huge demand for their services, DTH operators fear deadline extension is likely to impact business.

Shashi Arora, CEO, Airtel Digital TV, “It will put strain on the financial health of the DTH industry due to additional inventory carrying costs and investments in infrastructure that the industry will have to incur now. While we were fully geared up for the earlier deadline, we will continue to support government’s digitisation agenda as it is in the best interest of our customers and look forward to its successful implementation at the earliest.”

While applauding the ministry’s decision to extend the deadline, the MSO / LCO fraternity said the deferment was inevitable.

Ashok Mansukhani, president - MSO Alliance and whole-time director - Hinduja Ventures, said he was not at all surprised and was entirely expecting the deadline extension. “There was a significant delay in the regulator’s recommendations and tariff order. As a result there was not enough time left for MSOs and LCOs to finish the necessary arrangements and agreements with broadcasters. Now that we have time on our side, the focus will be on getting the Reference Interconnect Offers (carriage fees) and other commercial terms finalised so that a proper business model could be put in place.”

A meeting between the Telecom Regulatory Authority of India (Trai) and MSOs is scheduled to take place on June 25, 2012, to chalk out activities / timelines for meeting the new deadline. The Trai taskforce will be meeting every fortnight to take stock of what is happening and how much ground has been covered by the MSOs / LCOs in the effort towards digitisation.

Another hurdle, industry sources said, was with the issue of new MSO licences that were handed over by the regulator as late as Wednesday. As a result new players were in no position to roll out their services within 10 days, they said.

However, Mansukhani is confident that despite the delay in issue of licences, the new MSOs will work aggressively and put together necessary infrastructure (head-end, STBs and other customers support services) and catch up with the others.

Digitisation deadline deferred by 4 months

This story first appeared in DNA Money edition on Friday, June 22, 2012.

The sunset date for conversion of cable systems from analogue to digital has been postponed by four months to October 31.

The earlier deadline for Phase I digitisation in four metros — New Delhi, Mumbai, Kolkata and Chennai — was June 30.

“All the TRAI (Telecom Regulatory Authority of India) regulations for DAS (digital addressable system) will come into effect from November 1,” the Ministry of Information and Broadcasting said in a statement issued late Wednesday evening.

The ministry, however, did not mention any changes to the December 31, 2014 deadline set for the rest of the country.
The ministry decided to extend the deadline after taking into consideration the lack of preparedness among multi-system operators (MSOs) and local cable operators (LCOs) in the four metros.

While broadcasters have been pushing for sticking to the June 30 deadline, cable operators had sought more time citing shortfall in the availability of set top boxes. “...installation of set top boxes has not picked up necessary pace for the completion of the process of digitalisation by June 30,” the statement said.

However, the ministry asserted that there will be no further extension of the deadline thereafter and that MSOs and LCOs will have to ensure complete digitisation in the four metros within the said timeframe.

While DTH operators have been very bullish about implementing cable digitisation, the trouble largely was on the MSO and LCO side wherein some of the MSOs said they were not fully ready for various reasons including non-availability of set top boxes.

Industry sources, however, said the key reason for the delay was that commercial arrangements between broadcasters and MSOs with respect to the rates to be charged to customers had not been finalised.

Offline is becoming crucial for online travel agencies

This Q&A first appeared in DNA Money edition on Thursday, June 21, 2012.

Pratik Mazumder, head of marketing and strategic alliance, Yatra.com, says online travel agencies (OTAs) are working towards positioning themselves as one-stop-service providers for all the travel needs. He speaks about the transition in the online travel space and his company’s plans. Excerpts:

How has the business evolved over the years?
The OTA business took shape 5-6 years ago with a prime objective of offering a flexible single window customer access, convenience and transparency for booking domestic flights. However, the last few years have seen OTAs coming out of their reliance on flight bookings, restructuring their business and moving towards becoming a one-stop service provider. OTAs are now covering the overall hospitality and travel space by offering international flights, hotels, international and domestic holidays, car rentals and so on thereby addressing the consumer’s entire travel needs. That’s going to be the way the OTA industry will progress and transpose in the next five years.

So has the transition already begun? What stage is it currently at?
The top two players (Yatra and MakeMyTrip), which control a little over 70% of the overall online travel business pie, have walked the road of transition already. Though a slow one, the process started two years ago and we are now speeding up our efforts in this direction.

Could you tell us about the initiatives taken by Yatra in this direction?
On the product level, the offerings predominantly were in the form of domestic flights and other tabs/ user interface weren’t so prominent then. But if you look at our website now, there is a huge skew towards hotels, holidays and international flights among other things. We have set up a meeting, incentive, conference and event (MICE) division to cater to the corporate sector and handle their leisure desk.

Has having an offline presence become equally crucial for online travel companies? What are your plans in this area?
We realised very early that selling holidays online could be a challenge and hence worked towards migrating the customers to our stores by changing their brand preference. We have already set up 40-odd Yatra.com stores in 20 cities across the country and are now rolling out a franchising model. Over 100 stores will be opened in Tier II markets, particularly in high footfall areas, as a result of which customers will be able to physically experience the brand on the ground. These stores will be operational in this financial year and take the total store count to 140.

Have the OTAs finally started making money?
They are not losing money for sure. Yatra, in particular, has significantly benefited by incorporating the hotels, holiday categories as part of its offerings as these offer considerably higher margins. To further increase revenues, we will add more avenues, cross-sell and up-sell other products. In the last six years, about 20 lakh customers bought a domestic ticket product from Yatra and less than 5% booked a hotel or a holiday from us. It’s not that the balance 1.9 million people haven’t taken a holiday, just that they bought a holiday from some other brand or a mom-n-pop travel agency. So the game now is about driving brand preference and being seen as a complete travel brand and a leader in the category. That’s the reason we signed Salman Khan as the brand ambassador.

Mexico – goldmine for Indian pharma cos

My Colleague KV Ramana co-authored this story appearing in DNA Money edition on Tuesday, June 19, 2012.

Estimated size of the generic drugs market in Mexico: $4 billion (out of a total market size of $11.5 billion). Margins are high too. The regulatory regime is known for relatively quick approval of new molecules.

There’s more. Unlike in some European markets where insurers determine which drugmaker’s products are covered for claims, Mexican consumers pay for their drugs out of their pockets, hence are free to use any drugs. Apart from drugs for critical illnesses, products relating to the central nervous system (CNS), oral contraceptives and biosimilars have a big market in Mexico.

And so, Indian pharmaceutical companies, who excel in making generics, can hardly wait to check if Mexico, the second largest market in Latin America after Brazil, could be their new Eldorado.

Although only a few Indian firms are tapping Mexico as of now, analysts are convinced all that will change shortly. “Like Brazil, Mexico encourages a lot of branded generics over branded biosimilars. This market is currently growing at a rate of around 11-12%. Hence, Mexico holds promise for Indian companies, given the scope to focus on generics,” said an analyst.

For instance, Ranbaxy, Torrent, Glenmark and Sun Pharma already have a presence in Mexico. Cadila is keen to expand into Brazil and Mexico. Dr Reddy’s (DRL) has an active pharma ingredient (API) manufacturing plant in Mexico (it does not sell any products though).

Lupin set up its subsidiary Lupin Mexico 14 months ago and has started filing branded and generic products. It wants to focus on therapy segments like CNS, oral contraceptives and biosimilars.

Bhavika Thakker, research analyst at IIFL, said, “As medicine, healthcare and related costs head northwards in Western countries, markets like Mexico certainly offer immense opportunity for drugs companies in emerging economies like India. For, they already have proven capabilities in making high-quality, standard-compliant products at a fraction of the cost in developed markets.”

In developed markets, drug regulatory issues bordering on protectionism have been thwarting Indian pharmaceutical companies. In this context, Mexico’s recent measures to reduce regulatory hurdles hold much attraction.

“What makes Mexico attractive is that the government is taking proactive steps to encourage foreign participation and putting in place guidelines that could help expand the market," said Vinod Dhawan, group president, business development, Lupin.

According to analysts, Mexican drugs regulator Cofepris is aggressively working toward approving pending applications. As against 150 in 2010, the regulator approved 9,225 applications last year, thanks to select third-party agencies that preview applications and weed out incomplete ones, reducing processing time.

Foreign companies don’t have to set up a manufacturing plant in Mexico to sell drugs. However, exporters need to have their own distribution, storage and legal representatives. Mexico’s objective is to increase supply of medicines in the country. “This opens way for Indian firms to supply to Mexico from Indian facilities,” wrote Anubhav Aggarwal, research analyst with Credit Suisse, in a report.

Companies such as Lupin have already started filing products from India. According to Lupin sources, Mexico’s approval process is quite similar to that of the US and Brazilian. “It doesn’t take a lot of time, is quite liberal and it is the standard time (16-22 months) that companies can expect for any regulatory pathway to action their filings,” said a Lupin official.

Even in terms of realisation, analysts said, Mexico offers very good prospects. “There is no doubt Indian companies will invest in marketing and distribution set-ups. Once they acquire a critical mass, a large part of incremental revenue will flow down to their bottomline. That’s why, markets like Mexico are highly profitable,” said an analyst.

Since Cofepris recognizes good manufacturing practice (GMP) certificates issued by regulators in the US, Canada, Japan, Australia and Brazil to foreign drugmakers, many Indian companies are expected to benefit as they already have such GMP certificates.

But not in the immediate future though, say industry veterans.

“Many Indian pharma majors already have agreements with pharma multinationals to share markets. Indian pharma companies have entrusted the responsibility of tapping emerging markets to their foreign partners. So, at least in the immediate future, the presence of Indian companies in Mexico would be through these tie-ups and not directly,” said a CEO of a pharma research major.

He cited agreements of Dr Reddy’s with GSK and Aurobindo with Pfizer as examples. Dr Reddy’s, for instance, has not registered any revenues from its API facility in Mexico.

Mobile is an area Yatra.com is tracking very closely for opportunities: Dhruv Shringi

Dhruv Shringi

Gurgaon-based online travel agency (OTA) Yatra Online P Ltd (Yatra) recently acquired online hotel distribution network Travelguru from Travelocity for an undisclosed sum. With relations spanning over 7,000 hotels Travelguru has a tremendous brand recall in the ‘hotel only’ space. While Yatra has always been synonymous with flights, acquisition of Travelguru will help the company strengthen its position in the OTA segment as hotel providers also apart from flight ticket booking said Dhruv Shringi, CEO, Yatra. In conversation, Shringi shares his plans in the mobile space, overall market sentiments, business and more. Edited excerpts...

Now that Travelguru deal is done, how do you plan to go about the integration process?

We want to keep it (Travelguru.com) fairly independent. There isn’t that much integration we are doing apart from Travelguru becoming the supplier of content to Yatra. I don’t foresee this to be a major integration challenge. The Travelguru business will continue to be run by its existing management viz. Rajesh Jindal and Deepak Mavinkurve who will be leading a team of 150 people.

Which other areas will Yatra now look at for acquisitions?

From an opportunity point of view, there is a lot of stuff happening or beginning to happen on the mobile front. That’s an area we are tracking very closely for interesting opportunities. The advent of smart phones is expected to significantly facilitate mobile travel booking and travel research and trend increasing significantly with newer and affordable handsets getting launched at regular intervals.

Though companies like Via, Cleartrip etc. have tried doing a few things on the mobile platform no one has really been able to do something really cool and differentiated. So we are still on the lookout in that area. While we are working on it organically, we will certainly explore any interesting / exciting opportunity on the mobile front.

Is there a specific sum you have set aside for inorganic growth?

We haven’t really set aside any specific corpus for inorganic expansion. We are actively exploring opportunities and if anything exciting does come up we will evaluate it on a case to case basis.

How was business last year? Do you see the momentum sustainable?

Our overall business in FY’12 grew at slightly over 60% year-on-year (YOY). We are expecting the growth rate to temper a bit considering what is happening in the macro environment at the moment. But we still think that growth would be in the region of mid-to-late 40% based on our internal projections for the current fiscal. While international flight bookings as a segment is growing, holidays and domestic hotels are obvious drivers of the business going forward. We see these segments registering growth in the region of 80-100% over the course of this fiscal.

So you are sensing a slowdown in the travel space?

For the first time in almost seven years, domestic air-traffic was negative last month. This clearly indicates that the overall market sentiment at the moment definitely is negative. Despite the fact that everyone knows what needs to be done from an economic standpoint, it is one of those scenarios where the political will just doesn’t seem to be there. We are looking at a fiscal deficit situation which people very well know how it can be reduced, but the big challenge is whether they have the political will and desire to take necessary measures. Given that things are reaching at such a dire strait now, action is required and I’m hopeful the government will initiate it.

How long do you think will the slowdown last?

I am hoping that by Diwali things should start picking up. If you look at India vis-a-vis rest of the world, things here are not so bad. We are still growing at 5.5% whereas there is absolutely no growth in the rest of the world and some countries are even witnessing negative growth. So we are still in a better position. I feel, if the government can initiate some action right now (even though a lot of it is still sentimental) we should be able to get back on the path to recovery by the end of this calendar year.

While there are large macro factors, like stuff happening in the European Union (EU) which has a big overhang. It has a major impact on the Indian currency and the fiscal deficit. However, with Prime Minister Manmohan Singh expected to keep the finance ministry I am hoping some reforms to happen soon. There are no fundamental issues which is why I think the opportunity is there.

You are going aggressive on opening franchise outlets in the country with 100-odd stores in this fiscal. Is the number achievable?

The franchising opportunity being offered by us has gained a lot of traction in the market. What is happening is that rental yields are heading southwards thus owners of commercial real estate space are not very keen on giving it out on rent. Besides, people owning a property and having interest in becoming a franchisee are more keen on starting a business. So from a return point of view, this is becoming a very attractive business and that’s the kind of alternatives people are currently looking out in the market.

We are targeting 100 franchise outlets in the current fiscal and I think the number is fairly achievable. While we started that off as a very stretched target, looking at the kind of response in the first quarter of the year, we should be able to get all of them up and running in this fiscal.

What are your views on car rentals and bus ticket bookings being added by various online travel portals?

I see bus ticket bookings as largely a value-add service because the marginal earning per transaction is fairly low. Car rental services however, is a bit more attractive from an overall earnings point of view. It might not turn out be very materialistic in this fiscal (as the focus is on building the hotels proposition), but over the course of next couple of years car rental services will begin to play a meaningful part in the overall business.

Any new fund raising plans?

No. We don’t have any fund raising plans at the moment.

You recently appointed Bollywood actor Salman Khan as brand ambassador for Yatra.com. Does he also have a stake in the company?

Salman is a shareholder in the company with a minority stake. While there is market rumour about him (Salman Khan) owning 5% in the company, I really can’t comment on market speculations.

On PE St, Warburg’s deal with Future no tide-turn

This story first appeared in DNA Money edition on Wednesday, June 6, 2012.

The deal between Warburg Pincus and Future Capital Holdings is more an exception than sign of an emerging trend on Private Equity Street, say experts.

To be sure, equities have lost a fifth of their value over the past year and valuations look much better.

“But valuation expectations have not softened yet and that is only making things more difficult. It’s a great time to invest, but one also needs to take into consideration that PE firms are fighting their own battle justifying their existence and the current state of economy is not really helping,” said Pankaj Karna, managing director, Maple Capital Advisors.

Gaurav Deepak, managing director, Avendus Capital, also sees the increasing economic uncertainties slowing down growth-oriented private equity deals in infrastructure related sectors. “At the same time, we believe that consumer, healthcare and other non-cyclical sectors will continue to see robust deal closures,” he said.

According to PE investments data compiled by Grant Thornton, in April this year, mergers and acquisitions and PE deals totalled $2.6 billion (99 deals), way below the $8.2 billion (101 deals) logged in April 2011 and $3.1 billion (136 deals) seen in April 2010.

PE deals cut much smaller portions at $0.6 billion (38 deals) in April 2012 compared with $0.8 billion (37 deals) and 0.8 billion (35 deals) in the corresponding period of 2011 and 2010, respectively.

One may continue to see evidence that a sombre global outlook, slowdown in Indian GDP growth, high inflation and elevated deficits has “significantly impacted investor confidence and private equity firms are reassessing/ refocusing on the way they do business,” auditing and consulting firm Deloitte said in a recent report titled ‘PE fueling India’s growth’.

Over a longer term, however, PE deals are seen materialising.

Kalpana Jain, senior director, Deloitte Touche Tohmatsu India said that while there is caution in the market, PE firms have shown great appetite for directing monies into companies that would benefit from the strength of domestic consumption in India and the potential beneficiaries of such an approach by the PE firms will be segments like small retail format stores, hospitality and food and beverage.

“Given that money is needed at core infrastructure, the investing community is of the opinion that although it may take time, investment in backbone sectors such as infrastructure, education, healthcare and renewables will continue to see more traction as government policies streamline investment and exit modalities,” said Jain.

According to sources, what also helped in the case of Future Capital was that it was in the market for almost a year.
In fact, promoter Kishore Biyani had almost negotiated a deal with the Deccan Chronicle Group.

“It was almost concluded but got delayed as Deccan was awaiting funds required to make the acquisition,” said a source.
A number of private equity players, including Baring Private Equity, Bain Capital, CX Partners and L&T Finance were also pursuing the acquisition till about three weeks ago.

“While it was certain that Deccan will acquire Future Capital, other suitors continued to pursue the deal simultaneously. However, when Deccan informed they didn’t have enough funds to conclude the deal, that’s when Warburg Pincus stepped in. Surprisingly, it took them just two weeks to negotiate and close the deal,” said the source.

On Monday, Future Group said it will sell a 40% stake in the non-banking finance company to US-based Warburg Pincus for Rs 425 crore. Warburg’s stake in the entity will rise to 53.67% post an open offer, taking its total deal size to Rs 550-560 crore. Additionally, Warburg will invest Rs 100 crore in Future Capital.

Cable Digitisaton: Chaos is fine, extension of deadline is not

The Cable and Satellite (C&S) fraternity has been working aggressively to meet the government's June 30, 2012 deadline for Phase-1 cable digitisation and compulsory use of set-top boxes (STBs) in the four metros, which is just a three weeks away.

Despite a short timeline for digitisation, the fraternity stressed that it should be met with without fail. While majority of the players foresee a chaos situation in the market place, the consensus is that chaos is still better as cable subscribers will then make time for digitisation.

Recollecting a similar situation that broke out earlier over the 'know your customer' (KYC) deadline for mobile connections, Nagpal said, "The mobile subscribers took it seriously only after their connections were taken off the network. We saw long queues in the following days and weeks for getting the KYC procedure done.

"It is very likely to happen in case of digital cable as well. Customers who do not act before the July 1 deadline should be willing to wait for 5-10 days or more without TV, whatever it takes us to get it to them. That's because if you give them an additional 6 months, you will fall back into a limbo."

Ravi Mansukhani, MD, Incable, Indusind Media & Communications Ltd while pointing to other issues viz. terms of business, selling price of boxes to consumers, price for retailing the channels, overall business plan etc, stressed on the fact that the deadline should be met.

"Who is the biggest loser, if digital addressable system (DAS) does not happen? Who is spending all the money in this entire exercise? We have all ordered 2 million boxes, spent the maximum amount of money. We are sitting on inventory.

"We want to implement DAS effectively and successfully. Now whether the government wants to phase it further or stick to the phase, let them come up with the solution. But that is the bottom line," asserted Mansukhani.

Digitisation will help plug tax losses

The story first appeared in DNA Money edition on Tuesday, June 5, 2012.

Digitisation in the Indian cable and satellite (C&S) sector is set to significantly plug tax losses caused by under-declaration of subscriber numbers by some last-mile cable operators, say industry experts.

According to data presented by Jawahar Goel, former president of Indian Broadcasting Federation (IBF), to the Telecom Disputes Settlement & Appellate Tribunal (TDSAT) in 2008, a meagre 6.8% service tax was being declared by cable operators across cities such as Delhi, Kolkata, Bangalore, Chennai, Hyderabad, Jaipur, Ludhiana and Gurgaon.

The data also showed that Delhi, Kolkata, Bangalore, Chennai and Hyderabad were among the cities that reported highest leakage.

Goel said he is in the process of collecting similar data for the last four years, which will throw light on latest scenario.

Low tax compliance, according to industry sources, is because a certain section of cable operators uses various means to influence the tax implementation authorities and gets away with it.

“The not so influential cable operators, however, bear the brunt as they are being made a scapegoat by the tax authorities to meet their targeted revenues. The authorities also go to the extent of arresting such honest cable operators because they refuse to pay up,” said the source requesting anonymity.

The C&S players also feel that the government’s taxation policies need to be rationalised. The fraternity says that a lot was promised like fiscal incentives, some compensation in terms of taxations, etc, but nothing has really happened.

Harit Nagpal, MD & CEO, Tata Sky and president of DTH Association, said, “We are okay with tax. But over-taxation or multiple-taxation is certainly a problem. The state takes the entertainment tax. The Centre charges the service tax. There is duty on imported set-top boxes. And this is in addition to the licence fee.”

“The DTH and cable operators have become the collector of tax from its subscriber base,” said Dish TV’s Goel, adding, “while there’s multiple taxation for DTH and cable operators, the multiplex industry with a similar business doesn’t pay any service tax.”

Besides multiple taxation, the industry feels charging entertainment and service taxes onfree-to-air (FTA) channels is not appropriate.

Anil Kumar Malhotra, COO - sales & operations, Wire & Wireless India Ltd, said, “In Maharashtra, entertainment tax on cable connection is Rs45 (per subscriber). Add service tax to that and the subscriber is paying approximately Rs160 i.e. around 60% over and above by way of taxation for FTA channels...something that is of essential value to the consumer.”

Echoing the sentiment, Anil Khera, CEO, Videocon Digital DTH Service, said, “There will be a lot of confusion on how much you really collect from a customer.”

Cable industry fears chaos as digital deadline nears

This story originally appeared in DNA Money edition on Thursday, May 17, 2012.

The government-set June 30, 2012 deadline for Phase-1 cable digitisation and compulsory use of set-top boxes (STBs) in the four metros might get extended. Independent cable operators have approached the ministry of information and broadcasting (I&B) to sort out contentious issues before making the switch from analogue to digital.

The government notification on the deadline for digital addressable system (DAS) was issued on on November 11, 2011. But, Roop Sharma, president of the Cable Operators Federation of India (Cofi), said that government delay in decision-making meant that the final guidelines came only on April 30, 2012.

This left the cable fraternity with a very short execution window, said Sharma. “As per rules, the cable fraternity should get at least six months to prepare themselves to meet the deadline. But this won’t be possible now. It is a very genuine problem faced by cable operators. Hence, an extension is inevitable.”

Jagjit Singh Kohli, MD and CEO of Digicable Network, agreed. “I think an extension will be necessary. If not six months, the industry should at least get another three months to implement Phase-1 digitisation.”

On May 10, the Mumbai High Court, acting on a petition fined by 15 cable operators, directed the national government to defer the deadline.

Anil Malhotra, COO of Wire and Wireless India Ltd (WWIL), a multi-system operator or MSO, said, “While MSOs are more than eager to implement digitisation, the final decision still rests with the subscribers. The deadline is nearing by the day. A last-minute decision to opt for a digital cable connection will very likely lead to a blackout kind of a scenario sooner or later,” said Malhotra.

Harit Nagpal, MD and CEO of Tata Sky, feared chaos of the kind that broke out earlier over the know your customer (KYC) deadline for mobile connections. “The subscribers took it seriously only after their connections were taken off the network and we saw long queues in the following days and weeks for getting the KYC procedure done. It is very likely to happen in case of digital cable as well.”

As suspense over deadline extension intensifies, large MSOs are busy putting together a business model for the digital cable era with focus on commercial arrangements with broadcasters.

In fact, operators and broadcasters held an informal meeting May 14 to discuss the matter, said a highly placed source. “Any concrete direction on the future course of action will be arrived at only after the commercial arrangements are agreed upon. Till then, it’s a wait-and-watch situation,” said the source.

Industry sources said that coming weeks will see a series of meetings involving local cable operators (LCOs), MSOs, direct-to-home (DTH) operators, broadcasters and investors. Several issues will be discussed threadbare.

Cofi’s Sharma alleged that the Telecom Regulatory Authority of India (Trai), the industry regulator, had ignored cable operators’ views while framing the guidelines, particularly those relating to the revenue sharing ratios between LCOs and MSOs which will affect LCOs’ livelihood.

Quality and interoperability of STBs to be provided by MSOs is another issue causing concern to LCOs, said Sharma. Digitisation, including taxes and other levies, will make home television entertainment more expensive, particularly for households with multiple televisions, said Sharma.

Trai data show 94 million cable customers in India in 2011, out of 147 million TV households.Some 44.4 million homes have DTH TV. With MSO digital penetration currently at 5 million, some 90 million STBs will have to be deployed country-wide, to meet the 2014 deadline for pan-India digitisation.