Circumventing regulations

THE Star News channel is in the news, for the wrong reasons. Even as the government was engaged in hectic parleys with broadcasters and cable TV operators to save the Conditional Access System (CAS), its credibility suffered a serious blow from allegations that it had allowed the Rupert Murdoch-owned Star News channel to take advantage of the loopholes in regulations governing foreign ownership of news channels uplinking from India.

The allegations centre on the means adopted by the company to defeat, in letter and spirit, the objectives of the government's announcement of norms for regulations on foreign direct investment (FDI) in news channels that uplink from the country, which were issued on March 26.

The defining feature of the regulations is the 26 per cent cap on FDI in news channels uplinking from India. At the time the regulations were issued the government had given a "grace period" of 90 days to such channels to dilute the foreign stakes. The only other significant foreign-owned channel uplinking from India was CNBC, which had a 51:49 partnership with TV-18, an Indian entity. The norms for uplinking are crucial for news broadcasting operations as they determine whether these companies will be able to provide live coverage of events in India.

Days before the June 26 deadline to dilute its stake in order to comply with the new norms, Star India Pvt. Ltd, the wholly owned subsidiary of the Virgin Island-based News Corporation, initiated moves to alter its corporate structure by forming Media Content & Communications Services India Pvt. Ltd. (MCCSL), which was designated as the broadcasting arm of the Star News channel. Star found an innovative method to bring down the equity stake of the foreign entity by roping in several prominent personalities as stakeholders in MCCSL. Kumaramangalam Birla, the head of the Aditya Birla group, an industrial conglomerate, was reported to have gathered a stake of 25 per cent in MCCSL; Hemendra Kothari, the chairman of DSP-Merrill Lynch, an investment bank, also picked up a similar stake. Four other Indian residents, Jeetendra, the film actor, Suhel Seth, the chief executive of an advertising agency, Vir Sanghvi, the Editor of Hindustan Times, Maya Alagh, wife of a prominent industrialist, and a Delhi-based corporate lawyer gathered a combined stake of 24 per cent in the company. All the investments by these personalities were reported to be in their "personal capacities". In effect, after the restructuring, Star India had the highest stake of 26 per cent, and therefore, controlled the company. Although Star managed to dilute its stake, the terms on which the shares were offloaded to the prominent investors have remained a subject of speculation. The terms, according to some commentators, would determine whether the investors were merely acting as dummy investors for Star, for a price.

Although the terms on which the deals were struck remain unclear, the fact that the company is capitalised only to the extent of Rs.1 lakh (a little over $2,000) appears rather odd, given the heavy costs associated with news gathering and broadcasting operations. Star's restructuring exercise turned controversial as it has highlighted the lacuna in the regulations. Indeed, more trenchant critics of the government's policy on foreign ownership in the media industry have argued that the loopholes were deliberately designed to allow foreign entities entry into news broadcasting. They argued that, after all, the spirit of the 26 per cent cap on foreign stake in news channels is designed to prevent the controlling stake from going into the hands of foreigners. One of the striking aspects of the March 26 regulations is that although it sets a 26 per cent limit on foreign holding in companies that run news channels, it failed to make it mandatory for the controlling stake to be in the hands of Indian entities or persons.

In fact, the norms issued on March 26 were in sharp contrast to the regulations that govern foreign holdings in newspaper-publishing companies in India. While the same 26 per cent cap on foreign ownership applies in the case of newspaper companies, unlike in the case of news broadcasting, the rules that relate to FDI in newspaper publishing companies stipulate that a controlling stake of not less than 51 per cent be in the hands of Indians. Star's complex restructuring effort is thus seen as a means to abide by the letter of a flawed regulation, while violating with impunity its spirit. In fact, media observers have pointed out that regulations in countries such as the United Kingdom and the United States examine foreign ownership in terms of de facto control rather than in terms of setting limits on the extent of ownership by foreign nationals and entities. In other words, the regulations explicitly rule out control by foreign nationals instead of setting limits to the stakes that they can take in news broadcasting companies.

The operations of Star India Pvt. Ltd in other areas, such as Direct to Home (DTH) and FM broadcasting, also threaten to undermine the regulatory norms for FDI. While FDI in DTH operations is restricted to 20 per cent, the government does not allow foreign investment in FM broadcasting. In both these areas too, Star has clearly violated regulations, at least in spirit, if not in letter. On May 9, angry law makers in the Rajya Sabha alleged that Star had resorted to a "corporate veil" to avoid regulations setting caps on foreign investment in DTH. On the same day, the Ministry of Information and Broadcasting issued a letter of intent to Space TV, Star's operating entity in the field of DTH. While the promoters of Space TV, two Star TV employees, held 80 per cent of the equity, Star itself held the maximum permissible limit of 20 per cent. According to some reports, Space TV's application, filed in April 2002, was rejected during Sushma Swaraj's tenure as I&B Minister as the application was not "forthright". In June, a vacation Bench of the Gwalior High Court, hearing a public interest petition filed against Star's DTH operations, commented that four Secretaries in the Union government (I&B, Finance, Home and Space) had failed to "decide on the basic eligibility" of Space TV.

In the field of FM broadcasting, Star manages Radio City although technically the licence is owned by an Indian entity, Music Broadcast Private Ltd, belonging to the Ispat group. Media reports also indicate that the funding for the broadcasting venture has been sourced from a Mauritius-based company owned by Rupert Murdoch. In effect, Star's corporate structure is built to satisfy equity norms in a superficial manner, rather than satisfy norms based on how and who exercises control over the company.

On July 11, six Indian broadcasters demanded "a level playing field" and alleged that the government had blatantly favoured Star. Forced into a corner, Prime Minister A.B. Vajpayee gathered his senior Cabinet colleagues on July 12 in a meeting to discuss the issue. Deputy Prime Minister L.K. Advani, Finance Minister Jaswant Singh, External Affairs Minister Yashwant Sinha, Law Minister Arun Jaitley and Ravi Shankar Prasad decided to "revise the uplinking guidelines". Meanwhile, Kumaramangalam Birla withdrew from the controversial venture - according to one version, as he was denied a controlling stake of 26 per cent in Star News' venture. The I&B Ministry is also reported to have written to Star seeking clarifications on a range of issues.

Meanwhile, Star News has been getting extension on a weekly basis, for permission to continue broadcasting. There have also been reports that Star has been attempting to render MCCSL a "shell" company, by transferring its main assets - studio, cameras and other equipment - to another group company, Touche Telecontent (India). The idea, obviously, is to cast MCCSL as a company whose sole task is to obtain the uplinking licence.

To observers who have been following the government's regulatory policy on foreign media companies, the contrast between print - particularly the newspaper industry - and the electronic media is stark. The regulatory controls on foreign investment in the print medium have remained stronger as Indian publishing companies have strongly opposed foreign investment. Although there have been divisions within their ranks in recent times, the longer history of the medium and the consequently stronger moorings that it has in India's national ethos have made it more difficult for the government to steamroll its way through. In contrast, these features are said to be absent or relatively weaker in the case of TV broadcasting, which, during its much shorter history, has been fed on the staple diet of the liberal agenda that has gained ascendancy in the past decade.