market share cap for merged telecom entity raised to 50%

Written by fe Bureau | New Delhi | Updated: Feb 20 2014, 10:46am hrs
The department of telecommunications (DoT) has decided to allow an entity formed by the merger of two or more mobile service providers to have up to 50% market share in a circle. Moreover, companies holding 3G spectrum will be allowed to retain two blocks of the high-speed radiowaves per circle in any resultant entity following the merger, according to draft guidelines on M&A finalised by the telecom department.

We are working on a number of ways in which spectrum can be acquired. Auction is one way. M&A will serve as another way in which spectrum can be acquired, said telecom secretary MF Farooqui, adding the M&A guidelines will be out within a week or 10 days.

DoT officials also confirmed that the department is studying sector regulator Trai's recommendations on spectrum trading and they should be notified soon.

"Taking into consideration the spectrum cap of 50% in a band for access services, transfer of licences consequent to merger of companies shall be allowed where market share for access services in respective service area of the resultant entity is upto 50%," stated the draft M&A guidelines. Earlier, merged entities were allowed to hold only up to 35% in any telecom circle. "For determining market power, the market share of both subscriber base and adjusted gross revenue of licence in the relevant market shall be considered," said the draft rules.

Moreover, the cap for spectrum holding for the merged entity will be 25% of the total spectrum assigned.

However, in case of 3G spectrum, the draft rules state that in case two firms planning to merge have been allocated one block of 3G spectrum each in the 2010 auctions, the resultant entity shall be also allowed to retain two blocks of 3G spectrum in the respective service area.

Earlier, rules allowed the merged entity to retain only one block of 3G spectrum while the second block had to be returned to the government.

Companies will have to surrender spectrum after merging if the total holding of the resultant entity crosses the prescribed limit set by the government. For this, companies will get one year.

Farooqui said that since the M&A policy has been vetted by the empowered group of ministers (EGoM) on telecom, it will be finalised at the DoT level.

DoT has also received the Attorney General's comments on any M&A deal involving sale of equity that triggers the mandated three-year lock-in clause. This had been one of the contentious issues that the industry wanted clarity on since it could hamper prospective consolidation or mergers in the sector.

According to Attorney General GE Vahanvati, during a merger & acquisition (M&A) deal, a three-year lock-in period over sale of equity will apply only on the shares of the new entity. However, the outright sale of equity by any operator that participates in the forthcoming auction, and is thus subject to a lock-in condition, will not be allowed before the three-year period is over.

This effectively means that if Telenor, which bought fresh spectrum in the February auctions and thereby comes under the lock-in caluse, wants to merge with another operator, say Airtel, the new entity thus formed will not be able to make an outright sale of its shares before the 3-year period is over. However, since Telenor's shares technically cease to exist due to the merger, it will not breach the lock-in condition.

The draft rules also state the acquiring company will pay the difference between the entry fee and the auction-determined price for spectrum beyond 4.4MHz in the GSM band and 2.5MHz in the CDMA band if the spectrum was originally acquired by paying the entry fee. The differential should be paid to the government at the time of the merger. However, no separate charges will be required to be paid for spectrum acquired through auctions conducted since 2010. This move will also benefit incumbent players such as Bharti Airtel and Vodafone, who got spectrum by paying the entry fee.