A policy which calls for regular government approvals could create an element of uncertainty

The Ministry of Information and Broadcasting (MIB) announced the policy for downlinking of television channels in November 2005, which is effective from May 2006. The policy seeks to regulate channels that broadcast from outside India. It has evoked a strong response from some like Ten Sports who have moved the Mumbai High Court on compulsory sharing of sports feeds with Doordarshan. India is unique in the sense that the largest channels broadcast from abroad, so drafting a policy framework is a complicated job.

Some key provisions:
• Channels uplinked from outside India can be downlinked in India where the Indian company providing the channels has obtained permission from the MIB according to the terms and conditions of the policy.
• The entity applying for permission to downlink a channel that is uplinked from abroad must be a company registered under the Companies Act 1956.
• The applicant company seeking to downlink must own the channels it wants to downlink or have India exclusive marketing/distribution rights including advertising/subscription revenues.
• News and current affairs channels can be downlinked provided the channel is neither specifically designed for, nor do its advertisements target the Indian consumer, for instance, CNN or BBC. However, the government may allow channels to beam advertisements on a case-to-case basis.
• Sports channels must share their feed with Doordarshan (DD) for all events of “national importance” held in India or abroad, for terrestrial telecast/DTH.
• The company permitted to downlink needs to comply with the Programme and Advertising Code under the Cable Television Network (Regulation) Act 1995.

Ownership/management:

What constitutes “ownership” of channels by the applicant company seeking to download is not very clear. Does it mean that the applicant company owns the channel name and/or has the right to receive all advertising/subscription revenues that accrue globally? National security clearance for CEO and so on is going back to pre-1991 days. How are the CEO, CFO and so on Star TV, say, a threat to national security?

News channels:

Giving the government discretionary powers to allow foreign news channels to carry advertisement on a case-to-case basis is like saying “Toe our line or no permission to air advertisements.” The policy is not clear on how news channels like BBC would be treated since it is a standard international channel but with substantial content targeted at Indian viewers.

Sports channels:

Compulsory sharing of sports feeds with the national broadcaster is against the spirit of competition that successive Indians governments have promoted since 1991 and could make sports channels unviable since there will no longer be any need for a cable operator to subscribe to, say, Ten Sports for the Indo-Pak series, for instance. In hindsight, sports channels have forced the government hand on this. In the past, foreign sports channels hiked subscription rates days before the telecast of important cricket matches forcing cable operators to black out the channel.

Positives:

By asking channels beamed from abroad to comply with the Programme and Advertising Code, the policy seeks to create a level playing field with channels uplinked from India. Another positive is that no channel can be beamed into Indian homes unless the applicant company has registered with the MIB. This would respect viewer’s privacy and indirectly force channels to regulate their content.

Tax issues:

Asking the applicant company to have the authority to conclude contracts on behalf of the channel results in the Indian company constituting a permanent establishment in India of the foreign company. In the absence of an appropriate double taxation agreement, it could mean that the foreign company’s profits from channels downlinked into India would be subject to Indian taxes.

Negatives:

Giving permission for downlinking for one year and registration for five years means there is a Damocles’ sword hanging over the broadcasters head. Broadcasting is a capital-intensive long gestation business and a policy that asks for regular government approvals could create an element of uncertainty. Instead the policy could have provided automatic renewal based on a compliance certificate issued by the applicant company’s statutory auditor.

Instead of creating doubts in the minds of foreign broadcasters what this policy could have done is to restructure the relationship between the applicant company and its parent. Currently, channels that are broadcast from abroad have appointed agent companies in India (mostly fully owned by the parent) to sell advertising revenues, market and distribute the channel. For a fee, the applicant company collects advertising revenues/subscriptions on behalf of the parent and remits the same thereafter. So also programming content is exported to the parent. This way channels with substantial business interests in India are taxed outside India.

Recommendation:

Rather than introducing more rules within the existing legal framework the government needs to come out with a comprehensive policy whereby channels with substantial resident Indian audiences run their Indian operations as full-fledged businesses and not as agents. They should offer their global profits for tax in India. In a globalised world, it makes economic sense for broadcasters to have their uplinking facilities at a single location. So whether these channels uplink from India or not is immaterial. The key is their profits should be subject to Indian taxes. If uplinked from outside India, any transaction with an “associate enterprise” as defined under Section 92A of the Income-Tax Act would be scrutinised by the assessing officer to ascertain whether the transaction is on an arms-length basis.

Restructuring of the private sector if not accompanied by the corporatisation of DD would amount to not providing the government body with a level playing field. It would be advisable to attach a value to the social service obligation performed by it, which could possibly be funded by the Budget.

writer is CEO, Surya Consulting.