Satellite TV should beam in the manufacturing model

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For the past few months the debate over the conditional access system (CAS) has taken as much if not more media space than Indo-Pak relations.

Its introduction has divided India’s decade-old satellite television industry as never before. Some call it the Videshi versus Swadeshi divide. To my mind, that is not the case. It is actually a fight among companies that do business within and outside India. Let me explain.

There are two types of companies based on how the company receives its advertisement revenues. One is a company that receives payments in dollars or in rupees but remits it abroad and two are those that receive payment in rupees only. To understand why the industry has this dual system we need to go back in time.

With the advent of satellite television bureaucrats realised that one of the ways to prevent Doordarshan from losing advertising revenue was to reduce the number of corporations who could advertise on satellite TV.

The following rule was thus introduced in the Foreign Exchange Management Act: “Prior approval of Reserve Bank is required for remittance of foreign exchange for advertisement on foreign television by a person whose export earnings are less than Rs10 lakh during each of the preceding two years, unless the payment is made from their EEFC account” (Foreign Exchange Management Rules, 2000, Current Account Transactions, item 13, Schedule III). This meant that only those corporations with export realisations in excess of Rs 10 lakh during the preceding two years could advertise on Star, ESPN, Zee and so on.

Subsequent Reserve Bank of India (RBI) circulars specify that “regarding approval for remittances for advertisement on foreign television authorized dealers are required to obtain a chartered accountant’s certificate from their customers certifying that the remittance represents advertisement charges incurred by the corporate towards telecast in foreign countries and not in India alone. This certificate will have to be obtained for each remittance” (RBI circulars 44, dated May 14, 2002, and 77, dated February 10, 2003).

Thus, two types of satellite television companies were created. In the first category were local agents of foreign broadcasting companies of the most popular Star, Sony and Zee (which I’ll call agents hereafter) and in the second are Aaj Tak amongst others (called local companies hereafter).

In the first case, the Indian subsidiary/company of, say, Star TV called XYZ Ltd became an agent of its parent, a foreign broadcasting company, and sold airtime on its behalf to Indian advertisers for which it received a commission. The advertiser pays the foreign broadcasting company in dollars if it has an EEFC account or the agent in rupees.

Subsequently, the agent, after deducting its commission, remits the balance to the foreign broadcasting company. On the other hand, local companies sell airtime to Indian advertisers who pay in rupees only.

Further, the agent signs contracts with various Indian content providers. Thereafter, it exports this content to the foreign broadcasting company in Singapore or Hong kong from where the broadcasting company uplinks it to satellites that is then beamed over Indian skies. Export of software by the agent is normally made after adding a margin to procurement or production cost.

As a result of the way this business structure has evolved the agent company’s profit and loss account mainly represents commission income/margin on export and distribution/administrative expenses incurred to earn such revenue. Some companies might show software exports as sales of goods and cost of programmes as cost of good sold but the net effect of that should be the margin referred to above.

Now what happens outside India? The foreign broadcasting company receives advertisement revenue, pays for exports from India/elsewhere, uplinking costs, satellite hire charges and local expenses. Losses, if any, made by the agent — that is, the Indian company — are funded by its shareholders.

So agents of such broadcasting companies operating in India are in a unique situation. To know why let us compare Star/Sony/Zee with another company, say, Hindustan Lever. The latter manufactures and sells soaps and the former soap operas.

Levers manufacture and sell its products within India and abroad. Its annual accounts provide us with complete details sales/costs/profits/tax payable/dividend pay-out and so on. It receives exports payments and pays for imports in foreign currency. In the case of financial dealings with associate companies it is subject to Transfer Pricing Rules just like any other company.

Every shareholder as well as the Government of India has access to Hindustan Lever’s annual report because it has a place of business and earns its revenues from manufacturing and service activities in India.

On the other hand, we have agent companies of, say, Star/Sony/Zee (of which the listed Zee Telefilms forms a part) that procure and produce software in India, sell airtime to Indian advertisers, collect subscription revenues within India but all that the government or shareholders have are the audited accounts of its agent company. In both these cases, the companies manufacture and sell their products in India so why must they be treated differently?
Some of you might argue that satellite TV companies earn revenues from other countries and uplink from outside India. Agreed, in which case they can show these revenues as export earnings.

Further, a substantial part of their advertisement and subscription revenues come from India. What is the value of advertisements on Star/ Sony/Zee by Pakistani, Bangladeshi or Sri Lankan companies and the percentage of their total advertisement revenue?

Do the residents of these countries pay subscriptions like we do? In fact, presumptuous as one might sound, it is the Indian consumer who is paying for the entertainment of the entire Indian subcontinent.

It is not my intent to blame foreign broadcasting companies or cast aspersions on their commitment to India. When they entered India in the early to mid-nineties the country was struggling to build adequate foreign exchange reserves and its industry trying to cope with the forces of globalisation.

The situation has, however, changed. Today we see a resurgent India, with over $ 75 billion in foreign exchange reserves, whose industry has increasingly restructured itself to take on world competition. Overseas investment norms for corporates have been liberalised too.

So what am I suggesting? At the outset, let me clarify that this is a complicated issue and requires dialogue among the parties involved. However, let me share an outline on how businesses could be structured using any manufacturing company as a model.

A broadcasting company that fulfils any of the three conditions — collects subscription revenue within India, sells airtime to Indian advertisers and procures software from India for the channels that beam into Indian skies must have a company incorporated in India, running the company as a complete business, not as an agent.

Therefore, all income that accrues or arises in India must be reflected in its accounts. If the same programmes are beamed in, say, Dubai, on another channel or by another broadcasting company the Indian company must receive royalty. If the same channel that beams into India also beams into Dubai, revenue received from such companies would be treated as export sales.

Broadcasting companies within India are free to uplink from within or outside India. However, if, say, a Sony decides to uplink from another Sony company in Hong Kong and that company is held to be an associate company then such payments would be subject to transfer pricing rules as are payments by any other Indian company.

The Indian company would be capitalised by its shareholders — that is, the foreign broadcasting company — to the extent required to undertake activities referred to in the preceding paragraph. At the end of the year, the Indian company would prepare a profit and loss account that reflects the performance of the entire business and declares results to its shareholders and pay dividends like any other Indian company.

If this structure is followed, the existing provisions which allow only exporters to advertise on foreign television channels need to be done way with. What it means is that an advertiser need not be an exporter to advertise on a Star/Zee/Sony.

Local companies like Aaj Tak and Sahara may protest but it is high time we created a level playing field for all broadcasting companies. Thereafter, let each one of them fight it out in the market, may the fittest survive.

The bigger issue of foreign shareholding in the broadcasting business needs to be addressed. The government must benchmark its policy with the world but be guided by only one mantra, national interest.

As India globalises further we need to make foreign investment and domestic policies increasingly transparent. The telecom experience has shown that such an approach would reduce prices, increase market size and encourage investment to ultimately benefit the consumer.

The BJP-led NDA government has, shedding the baggage of the past, provided its foreign policy with strategic intent. The moot point is, can it repeat in the broadcasting business in a manner that would be in sync with its desire to see India emerge as a global power?
(The writer is a business consultant and founder of www.esamskriti.com. He has also worked with a broadcasting company)