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UPDATE 2-Canada telecom sector must stay Canadian-regulator

* CRTC head says ownership and control must be Canadian

* Urges higher foreign ownership limit of 49 pct

* Proposed new cap would ease current restrictions

* Says limit should apply to telecoms, broadcast sectors (Recasts with additional comment from hearings)

By Nicole Mordant

VANCOUVER, April 13 (Reuters) - Rules barring foreigners from controlling and owning majority stakes in Canadian telecom companies must be kept in place but should be simplified and updated, and competition encouraged, the country’s communications regulator urged on Tuesday.

Speaking to lawmakers in Ottawa, Konrad von Finckenstein, the chairman of the Canadian Radio-television and Telecommunications Commission (CRTC), said foreigners should not be allowed to own more than 49 percent of the shares of the likes of Telus Corp T.TO or Shaw Communications Inc SJRb.TO, nor be able to gain control of them.

Although the proposal keeps the industry in Canadian hands, it would in fact be a loosening of current rules that limit foreign ownership to 20 percent of a company’s shares and cap direct and indirect foreign control at 46.7 percent.

“In short, the challenge for you as legislators and for us as regulators is to strike the right balance to achieve liberalized foreign investment while maintaining Canadian control,” Von Finckenstein told a parliamentary committee.

The hearings come after the Conservative government said in early March that it wants to raise the investment limit on foreign ownership of domestic telecom companies to make the industry more competitive, create jobs and boost innovation.

The Telecommunications Act has long been criticized by some as overly restrictive and out of date. But others worry that if all barriers are removed, Canadian companies would be quickly snapped up, mostly likely by U.S. companies.

Von Finckenstein said Canada’s current rules were too complicated and did not address the reality of convergence between telecoms and broadcasting. Many phone companies now offer television services and cable and broadcasting firms deliver phone services.

He proposed that rules be simplified to just two: No foreign entity should be allowed to own more than 49 percent, directly or indirectly, of the issued voting shares of a Canadian communications company; and no foreign entity should have control of a Canadian communications company.

The rules should apply to both telecom companies and broadcasters, which are currently governed by different acts, and should apply to both incumbents and new entrants, he said.

This is not the first time the issue of relaxing controls in the communications sector has been studied by a Canadian government. Panels in the past have also proposed more relaxed rules but limited their application to new market entrants, von Finckenstein said.

Easing foreign ownership restrictions is contentious and there is no guarantee the minority Conservative government could push regulatory changes through a House of Commons where opposition parties control a majority of seats.

Canada’s closed-shop telecoms policy came into question in December 2009 after the government’s contentious decision to overturn a CRTC ruling to block Egyptian-backed Globalive from offering wireless service.

Ottawa decided that Globalive, which has received financial backing from Egypt's Orascom Telecom ORTE.CA, met ownership and control requirements.

Executives from the country's big telecoms companies -- Rogers Communications Inc RCIb.TO, Shaw, BCE Inc BCE.TO, Telus and MTS Allstream Inc, part of Manitoba Telecom Services Inc MBT.TO -- are scheduled to testify before the committee on Thursday. (Reporting by Nicole Mordant; editing by Rob Wilson)