DoT paves way for big-ticket mergers in telecom sector

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SummaryIn a move that would enable big-ticket mergers in the telecom sector, the department of telecommunications (DoT) has decided

In a move that would enable big-ticket mergers in the telecom sector, the department of telecommunications (DoT) has decided to allow an entity formed by merger of two or more mobile service providers to have up to 50% of the 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 post merger, according to draft guidelines on M&A being discussed by the telecom department.

These new amendments to the telecom merger & acquisitions (M&A) rules (final guidelines expected to be issued on November 1) are expected to give a big boost to consolidation in the sector. Analysts and operators say the industry can at best accommodate five to six players, compared to over 10 in some circles currently.

Currently, Bharti Airtel holds 28.4% market share in the mobile space followed by Vodafone at 23%, Idea Cellular at 19% and Aircel at 9.3%.

"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 upto 35% in any telecom circle. "For determining the market power, 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. Also, 50% of the spectrum assigned in a given band under 900MHz and 1,800MHz bands and the ceiling for the 800MHz band will be 10MHz, noted the M&A rules.

However in case of 3G spectrum, the draft rules states that in case two firms, planning to merge, had been allocated one block of 3G spectrum each in the 2010 auction, “the resultant entity shall be also allowed to retain two blocks of 3G spectrum in the respective service area”. Earlier rules had allowed the merged entity to retain only one block of 3G spectrum while the second block had to be returned to the government.

In the latest note, DoT has also stated that companies will have to surrender spectrum after merging if total holding of the resultant entity crosses the prescribed limit set by the government. For this, companies will get one year. Moreover, while the validity of mobile licences will be according to that of the acquiring company, validity of spectrum held by company being acquired shall not be extended.

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

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