The new M&A policy is forward-looking and is in sync with market realities in a number of areas. 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 has the potential of bringing about the much-desired consolidation in the market.
Does this mean that consolidation will start soon
Unlikely. A key negative feature far outweighs the positives in the M&A guidelines. The industry has already expressed its unhappiness about it. The payment of additional cost to the government as per the February auction price in addition to the takeover target for 4.4 MHz spectrum will either deter M&A activities or make them costlier. This norm mandates that an acquiring company will need to pay to the government the difference between the entry fee and the auction-determined price for 4.4 MHz spectrum in GSM band and 2.5 MHz in CDMA band, if the spectrum was originally acquired by paying the entry fee of R1,651 crore. This means that while big players like Bharti and Vodafone can merge based on their market share and even retain a higher quantum of spectrum, they would have to pay around R8,300 crore to the government as the differential between the R1,651 crore they paid for 4.4 MHz spectrum in 2001 and the February auction prices. In addition, since these companies have a one-time excess spectrum charge to pay to the government, they would have to pay a bank guarantee for the amount due to the government till the outcome of the case which is currently before the courts. Under these norms, the viable options would be to acquire new entrants like Uninor, Videocon or Sistema Shyam who hold spectrum bought through auctions in November 2012. But acquiring these companies by any major incumbent makes little sense.
Why are companies opposed to extra charges
Apart from making the cost of acquisition steeper, companies have a problem with the principle applied behind this norm. This norm assumes that spectrum allocated to the company in 2001 or for that matter in 1994 was not market-determined. This is wrong. In 2001, licences were given after auctions so the R1,651 crore was charged for getting a pan-India licence along with bundled 4.4 MHz spectrum. In 1994 also, in the metros, there was a two-stage tender to allocate the licences. So, to assume that in 2001 spectrum was assigned at administrative rates and therefore the differential between that and todays auction determined price should be charged, is wrong.
Why, then, the government has gone about introducing this clause on differential charges
The feeling in the government is that if such a clause is not kept, companies would not participate in the auctions and rather acquire spectrum through M&As. However, this assumption is also fallacious since spectrum held by the companies would be put up for auctions as and when their licences come up for renewal, and they would anyway have to participate in the auctions to win it back.
Does it mean that no M&A would happen
M&As would happen but not in the plain-vanilla sense. Companies would come up with innovative ways to bring about synergies in their operations. The recent Bharti-Loop deal is an apt example. Loop, which has operations only in Mumbai circle, did not participate in the auctions and therefore its licence would not get renewed in November. Bharti and Vodafone have already won the 8 MHz spectrum it had in Mumbai. Still, Bharti bought its subscribers and towers for R700 crore to bolster its presence in the Mumbai circle. It did not buy the management or employees of Loop. Companies would wait for the government to notify the spectrum trading guidelines. Once that happens, companies would look at acquiring specific assets their target companies possess. For instance, companies like Bharti or Vodafone may look at buying 3G spectrum from companies which have it but are not able to monetise it properly. The M&A guidelines allowing merged entities to hold two carriers of 3G spectrum (2.1 GHz) facilitates such kind of trade in spectrum.
By when will the spectrum trading guidelines be announced
Since the Telecom Regulatory Authority of India (Trai) has provided for the guidelines, the government can notify it any day if it wishes to move forward expeditiously. According to the guidelines unveiled by Trai, spectrum trading between mobile operators will attract a 1% transfer fee on the transactional amount or prescribed market price, whichever is higher, and payable by the seller to the government.
While no prior permission would be required for trading in spectrum, companies need to inform the government about any prospective trade six weeks prior to the effective date of trade. The sector regulator also proposed that trading should be permitted only on a pan-LSA (licensed service area) basis. Spectrum cannot be traded for a part of a telecom circle. Moreover, trading is allowed only for those radiowaves that have been bought through an auction or paid for at market rates.