News reports suggest that the government has initiated talks with oil PSUs like IOC, ONGC, Gail and BPCL for a buyback of shares by them. This follows its move to reach out to VSNL whose board has already approved a buyback of 7 million shares (7.36 per cent of its equity).

As divestment is not possible in the current market scenario, buyback is not only the most logical step by the government but it is also the most economical. Yashwant Sinha, in his maiden budget speech, had mentioned that Rs 5,000 crore will be garnered from divestment. However apart from the Rs 250 crore divestment in Concor, there has been no further divestment. In order to cover up the short-fall of Rs 4,750 crore, the government has come up with the novel idea of divesting its stake through the buyback route.

However, in order that the divestment through buyback is successful the government will have to clear the buyback ordinance in the parliament within the next two days. This seems to be a tall orderconsidering the progress of the parliament during the last fifteen days.

As for the government stake in the companies that are being approached for a buyback--it holds 96 per cent in ONGC and Gail, 66 per cent in BPCL and 91 per cent in IOC. There is no doubt that the buyback will mean better prices for the scrips in future. The EPS will increase as a result and this would justify a higher discounting. The companies in which there is a future threat of divestment are unlikely to show any upward movement, as has been the case with Concor and VSNL. Investors would rather wait till the divestment process is complete before committing any funds as prices are likely to fall further in the near term.

Telecom

The Industry Group of Telecom, has suggested an increment in the licence periods for both the basic and metro cellular service providers. In fact the proposal envisages a 7 year extension for metro cellular operators (including a two-year moratorium), which would result in the licensing tenureincreasing from the current 10 years to 17 years. A similar proposal has been mooted for basic services to be extended from the current 15 years to 27 years. If implemented, the move should prove to be a godsent gift to the beleagured set of private operators in the telecom sector.

Taking the case of cellular operators--their annual licence fee obligation is computed as follows- Y/11 for the years 1 to 5 and 1.2Y/11 for the years 6 to 10, where Y is the total licence fee payable for a 10-year period. For example--Birla AT&T, which has rights to the Gujarat circle has to fork out a licence fee of Rs 1,794.1 crore payable over 10 years. Given the formula, the company would have to shell out Rs 163.1 crore annually for the years 1 to 5 and Rs 195.72 crore annually for the years 6 to 10.

Thus for most of the cellular circles, the high licence fee constitutes almost 80 per cent of the total project cost. The problems for the cellular operators are only multiplied by the fact that loans to telecom projects areof a seven-year maturity. All of which exerts tremendous pressure on the cellular operators to meet their licence fee obligations. As the licence fee payable is fixed, it is apparent that lenders to these projects would be wary. Acquiring adequate subscriber levels as well as putting relevant infrastructure in place has in itself kept the operators struggling.

This, in effect would put tremendous pressure on them to fund their operating losses for the initial four to five years. Buckled by the high licence fees it would take the cellular operators a minimum three to four years to achieve a positive cash flow position. Logically, the fixed cost per subscriber is inversely proportional to the number of subscribers. This would be quite high initially, as a small subscriber base would contribute less for bearing licence fees, equipment costs, interest and developmental charges. In which regard, any delay in the realisation of projected revenues would further delay cash flows thereby putting the lenders to theseprojects at a great risk. In this scenario, the lenders would be hardpressed to reschedule a repayment within three years.

Similar is the predicament of the basic service licences, where they are liable to pay licence fees over a period of 15 years as follows: Y/35 for the years 1 to 5, 2Y/35 for the years 5 to 10 and 4Y/35 for the years 10 to 15. Y being the total outstanding licence fee for the circle.

Here also, the extension would be welcomed due to the following reasons. The new basic operators are in the process of setting up their own infrastructure and backbone optic fibre networks which entails an enormous capital cost. This coupled with high licence fees (akin to an advance tax), clearly has the operators hardpressed to kick-off operations in time. Moreover, the basic operators would have to ensure 10 per cent of their total connectivity to the rural areas. With the recently proposed tariff revision norms by Trai being quite steep, the private operators could be hardpressed to garner subscribersin the rural areas. Therefore it is logical that any extension in the licence periods for telecom projects would go a long way in reducing the risks of lending, thereby releasing much needed funds to the cellular and basic operators.

Emcee (With contributions from Shishir Asthana and Percy Dubash)