Mumbai/New Delhi: India’s move to prevent or make it more difficult for Indian telcos to buy equipment from Chinese firms could lead to a trade dispute between the two countries and delay the launch or expansion plans of some of the newer entrants in the Indian mobile telephony market.

On 25 February, India’s department of telecommunications (DoT) issued, at the instance of the country’s home ministry, a note asking telcos to seek prior approval for equipment being imported into the country.

And the waiting period could be more than 30 days; forever, in the case of some companies.

“We are banning (imports from) those companies suspected to have links with the People’s Liberation Army," a senior official in the home ministry said.

“None of our POs (purchase orders) have been cleared since March. We have taken a hit of around $150 million (Rs669 crore today) in sales since the circular was issued. We have requested the government for a date and time to meet with senior officials, to find out the reasons and to clarify our stand." said a spokesperson for Huawei India.

Huawei, had $2.4 billion in sales from India in 2009 and ZTE had around $0.8-1 billion in the same year.

DoT’s move is likely to help at least two set of incumbents who were otherwise at the receiving end of fierce competition—established cellular operators (under fire from new entrants) and telecom equipment manufacturers such as Alcatel-Lucent and Nokia Siemens Networks.

On Tuesday, an official at DoT said that there was no “blanket ban". “We are looking at all equipment and these are checked by security officers on a case to case basis," added this person, who asked not to be identified as he is not authorized to speak to the media.

Meanwhile, China Daily reported that industry body China Chamber of Commerce for Import and Export of Machinery and Electronic Products has warned that the Indian restrictions may be in violation of international trade norms stipulated by the World Trade Organization (WTO). Both Huawei and ZTE are prominent members of the industry body, the paper added.

The Huawei spokesperson said going to WTO would be a “last option" and that the company wants to work “with the Indian government" to address the issue.

However, a commerce ministry official, who spoke on condition of anonymity, said that India could ban imports from any country under WTO rules on grounds of national security.

India is one the fastest growing mobile telephony markets in the world with around 10 million connections being added every month to the existing base of 584 million. This translates into a huge demand for telecom equipment. In the current year alone, analysts estimate that the Indian telecom equipment market could be worth between $10 billion and $12 billion.

Graphic: Ahmed Raza Khan / Mint

“All operators have written to the government saying that this new rule has made the process (of importing equipment) very tough and tedious," said an official from one of the older telcos, speaking on condition of anonymity. “The new operators are worst affected," he added.

A spokesperson for one of the new telcos, Unitech Wireless Pvt. Ltd, admitted that his company’s plans would be delayed because of DoT’s action. “The government has introduced new guidelines on equipment testing for the entire industry. We are complying with these guidelines, though this has somewhat delayed our roll-out. We support the government on this if it is in interest of national security, but we do want better clarity on process and timings," he added.

In 2008, India allowed new entrants to start offering wireless telecom services, effectively doubling the number of companies operating in most regions in the country from an average of five to an average of 10.

A large number of the new entrants were able to set up shop and start operations using cheaper Chinese telecom equipment, thus achieving cost savings of up to 30-40%, according to analysts.

An analyst said that the delay would also hit the new telcos financially. “As it is, they are on shaky financial ground and if cheap Chinese equipment supply is affected, their cost structures would be further impacted in an unsustainable way," said Kunal Bajaj, India director at technology and telecom advisory firm Analysys Mason.

On Tuesday, a senior executive at Huawei, who spoke on condition of anonymity, claimed that the company was the “victim of corporate rivalry". The Chinese company has 8,000 employees in India spread over 11 cities, including 3,000 employees in its research and development centre in Bangalore.

Huawei’s spokesperson said that the company’s president Ren Zhengfei had in December met with both home minister P. Chidambaram and home secretary G.K. Pillai to assuage any apprehensions that India had. “We have been told that next week we will be given time as right now the minister and officials are busy with parliamentary work. Senior company officials will meet them and address any issues they have."

The spokesperson added that the company is also setting up a six-member corporate board of governance consisting of “eminent Indians" to “guide the company’s operations" in India. He said the company hadn’t identified these people yet.

DoT’s order comes in the background of the ongoing 3G auctions, which are likely to lead to purchase of telecom equipment worth several thousand crore.

The Huawei executive said the company’s rivals have been unable to compete with it in the market and are using the government as a shield.

Mint had previously reported that apart from lobbying against Chinese imports, some telecom equipment manufacturers had also accused the company of intellectual property theft and dumping.

Sahil Makkar and Asit Ranjan Mishra in New Delhi also contributed to this story.