Telecom sector set to get back its ring

Written by Rishi Raj | Updated: Nov 8 2013, 11:04am hrs
With the Telecom Commission approving the reserve price, will the forthcoming auctions in January be successful

The Telecom Commission has broadly gone along the recommendations of the Telecom Regulatory Authority of India (Trai) while approving the reserve price for auctions in 1,800 MHz and 900 MHz spectrum bands. The increase in the base price18% for 1,800 MHz and 25% for 900 MHzis not exactly an increase as the Commission has not done any fresh computation nor has it taken the calculations done by an expert committee of the department of telecommunications. What it has done is converted the value of spectrum for each circle computed by Trai as the base price. Trai had kept the reserve price at 80% of the value. Thus, the Commission has revised the prices upwards by 25% in the 1,800 MHz band in eight circles of Delhi, Mumbai, Kolkata, Andhra Pradesh, Gujarat, Karnataka, Maharashtra and Tamil Nadu. For the remaining 14 circles, the Commission has gone ahead with the Trai recommended prices. Due to a hike in base price in the eight circles, the pan-India per MHz price of spectrum has gone up by 18% to R1,763 crore against R1,496 crore recommended by Trai. Similarly, in the 900 MHz band, the Commission-recommended price stands at R359 crore for Delhi, R327 crore for Mumbai and R125 crore for Kolkata compared to R288 crore, R262 crore and R100 crore, respectively, proposed by Trai.

Though the industry is a bit disappointed with the increase as it would have liked the Telecom Commission to stick to Trais reserve price rather than the value of the spectrum, still the change is not that drastic that it would keep it away from the auctions as it did in March 2013. The prices endorsed by the Commission are around 50% lower than prices fixed during March auctions as against 60% cut recommended by Trai.

Are there any other factors, apart from the reserve price, which would impact auctions

Yes, and thats the spectrum usage charge (SUC), where the Telecom Commission has not endorsed the uniform SUC of 3% for spectrum bought through auction and a cap of 5% for those allotted administratively. However, it has, in-principle, accepted its relevance and significance. After discussions with the finance ministry a decision on the same would be announced. If the decision to move towards a uniform SUC is taken before the auctions, it would see good participation in the 1,800 MHz band because here the operators have the luxury to keep away from the bids if the economics does not make sense to them. The problem is that the current SUC system is slab-based where it ranges between 3-8%the more spectrum you have, the more you pay. So, if the operators buy more spectrum, their SUC will go up. In the 900 MHz band, incumbent operators like Bharti Airtel and Vodafone dont have much of an option but to participate in the auctions because their licences in Delhi, Mumbai and Kolkata are coming up for renewal in November 2014, and to renew them they would have to mandatorily participate in the auctions as Trai has done away with reservation of any spectrum in this band. If they do not participate, they would have to buy spectrum in the 1,800 MHz band but that would lead them to reconfigure their existing networks in these circles, which would be a costly affair.

Apart from the base price, the Telecom Commission has also approved a new merger and acquisition (M&A) policy. What kind of change would that bring about

The new M&A policy is certainly forward-looking and in sync with market realities. According to it, now a merged entity can have up to 50% market share in a circle and retain up to 25% of the total spectrum assigned. The earlier proposal was to cap the market share at 35% and spectrum holding at 14 MHz. Further, merged companies holding 3G spectrum will be allowed to retain two blocks of the high speed radio waves per circle against one currently. The impact of these changes would be that mergers between big and mid-sized telecom firms can happen now, which would bring about the much desired consolidation in the market. However, the success of the M&A policy would once again depend on whether the government moves towards a uniform SUC regime, because otherwise they would have to pay more for having more spectrum, which would act as a disincentive.

Does it then mean that the telecom sector, which has been going through problems in the last five years, stands a chance of coming back on track or are there any other pending issues that need to be resolved

With these changes the telecom sector would certainly receive a boost but there are still some irritants that the government hasnt resolved. If these are resolved fast, the recovery would be fast, but if they are dragged for long, the recovery wouldnt be full-fledged. For instance, the Telecom Commission is adamant that it wants to hold auctions for the 800 MHz (CDMA) band also when Trai has recommended for no auctions because of low or no demand. The Commission has decided that it would once again seek a reserve price for this band. Trais view is that the government should consider the feasibility of creating E-GSM band, which basically means liberalising this spectrum in a manner in which even GSM operators can use this against only the CDMA operators currently. Since the propagation characteristics of the 800 MHz band are similar to 900 MHz, if the liberalising happens, then the government stands the chance of earning much more from its auction than now.

The second issue on which the government needs to take a decision fast (the matter was not before the Telecom Commission at its meeting on November 6) is on the proposal for a spectrum swap between the telecom department and the armed forces to free up 15 MHz of 3G airwaves in the 2,100 MHz band for commercial use. If the government is able to release 15 MHz of 2,100 MHz spectrum and auction it along with the 2G spectrum, its revenue accrual would increase manifold. Further, all the companies would be able to get 3G spectrum on a pan-India basis, which would resolve issues like 3G intra-circle roaming.

If the government resolves the pending issues, how does the regulatory environment change for investors in the telecom sector

Telecom, which was a showpiece sector of Indias reform process, ran into problems since 2008 when the then telecom minister doled out new 122 licences at rates discovered way back in 2001. Apart from not auctioning spectrum then, there were irregularities in the allocation of the licences, which finally led the Supreme Court to cancel these licences in February 2012. High debt, tariff war amongst operators and an uncertain regulatory environment robbed the sector of its sheen. Slowly, the government set out to put the house back in order. Now theres a policy in place that delinks licences from spectrum. In August, the government allowed foreign telecom firms to have 100% stake in their Indian ventures. The reserve price for auctions has also been tackled now. Once the government resolves the issues mentioned above, the regulatory environment would become conducive for businesses to function smoothly.