FLAG Initiates Arbitration Against VSNL

LONDON and MUMBAI, India -- In response to misleading articles, which appeared recently in the Indian media, FLAG Telecom said today that it never has, and never would, undertake any business activity that was unlawful or illegal. FLAG strongly rejects any suggestion to the contrary.

The facts are that:

A)Access to capacity into India is being restricted, and has been restricted for years. A recent CompTel/ASCENT press release reporting anti-competitive practices named India as one of twelve nations engaged in such activity. Please see press release extract below*.

B) FLAG has ready availability of capacity but, because access to the cable landing station is controlled by VSNL, it cannot give the assurances that customers require when purchasing to meet their critical needs for ready access and interconnection. For this reason, and the cost charged by VSNL for interconnection, FLAG is unable to offer the value for money services it has always wanted to provide and that the Indian and international customers deserve.

In addition, significant capacity could be added, at FLAG's expense, within a few months. This would further increase the value offered to customers through lower prices.

C) FLAG has been negotiating in good faith for many years with VSNL, the Indian Government and TRAI, to enable it to provide access to all existing capacity and allow the addition of capacity to the FLAG Europe Asia (FEA)cable at Mumbai.

D) FLAG has so far been thwarted by the monopolistic behaviour of VSNL, which controls all cable landing stations on the West coast of India and refuses to allow access and interconnection of FLAG traffic at Mumbai. This has the inevitable effect of denying international carriers and consumers the choice and the services they need and, more importantly, causes damage to the Indian and global economies.

E) In order to exercise its rights, FLAG has been forced to initiate arbitration proceedings against VSNL, under the provisions of the Construction and Maintenance Agreement, to uphold FLAG's right to access the available capacity on the FEA cable and carry out an upgrade on the FEA cable at the Mumbai landing station.

*Reference to India in the CompTel/Ascent press release dated 17 December 2004:

India has proposed to maintaining an extremely high licensing fee and annual fee for international services licenses, with only minimum changes. These fees constitute a violation of India's GATS obligations with respect to domestic regulation. In the past, CompTel/ASCENT has pointed out the discriminatory nature of the access deficit charges (ADC), which are assessed on international service providers and their customers, but not domestic providers. TRAI, India's regulator, indicated that the ADC will be reduced beginning Jan. 1, 2005, with the goal of phasing out the surcharge within the next three years. Until that time, the ADC is inconsistent with India's GATS Telecom Annex obligations. Access to submarine cable capacity controlled by VSNL, India's dominant operator, remains a significant problem. VSNL refuses to provide access to full capacity (current and upgraded) on certain submarine cables in the hopes of forcing service providers to purchase capacity on a submarine cable wholly-owned by VSNL."

FLAG Telecom Group Ltd.