The big hope of consolidation in the telecom sector that the New Telecom Policy 2011 being drafted by the mandarins of the Department of Telecom (DoT) may have heralded could remain just that ? a big hope! The mergers & acquisition contours of the new draft policy, as suggested by an internal committee of DoT, recommend a lower market share and spectrum threshold compared with the current guidelines, putting paid to big-bang mergers that would have brought economies of scale to many beleaguered big players hit by dipping average user revenues and bare-bone price wars. At best, it would provide for acquisition of small players by telecom biggies and exit routes for new entrants who are finding the going tough in the market.
According to the proposals made by an internal DoT committee ? which need approval of the Telecom Commission and subsequently the Cabinet before becoming the final policy ? a merged entity cannot have a market share of 30% either by combined subscriber base or revenue. Currently, this cap is at 40% and has still not encouraged any big-ticket domestic M&A in the sector. Even more restrictive is the committee?s views on spectrum the merged entity can hold at 14.4 Mhz, which is again lower than the current cap of 15 Mhz.
The committee is also in favour of retaining the cross-holding norm that bars an operator from acquiring more than 10% in another operator within a circle. This acts as a barrier for any kind of gradual M&A where operators can pick up stakes like 26% or 49% in other operators and gradually consolidate.
Ironically, these recommendations run contrary to telecom minister Kapil Sibal?s assertion that the proposed M&A rules would be liberal and encourage consolidation in the sector.
If these recommendations are accepted, it would be impossible for, say, a Bharti Airtel to acquire big players like Idea Cellular, Reliance Communications, Vodafone-Essar, Idea Cellular or Tata Teleservices, because the combined market share by subscriber base would be in excess of 30%. Airtel has a market share of 19.93%, while that of RCom is 16.77%, Vodafone 16.77%, Idea 11.12% and Tata Tele 10.93%.
In opting for the cap of 30% in market share and 14.4 Mhz in spectrum, the DoT committee has gone by the sector regulator Telecom Regulatory Authority of India?s (Trai) recommendations of May 2010. The Trai had recommended the same because it wanted to prevent two big operators from merging to check the emergence of any dominant operator. However, it wanted to encourage mergers between a big and small operators. For instance, any of the big operators can easily acquire newer entrants like Uninor, Etisalat, Loop or S-Tel.
Analysts said that all the M&A guidelines would do is provide some kind of exit route to new operators, but beyond that will become static.
Since the new entrants who were given licences by former telecom minister A Raja in 2008 have only start-up spectrum of 4.4 Mhz, even the spectrum cap would not be breached.
Says Prashant Singhal of Ernst & Young: ?This cap of 30% subscriber base really has no meaning. If the government wishes to avoid the domination of a single player in the market, then this is clearly a step in the wrong direction. Subscribers don’t really mean much in today’s market dynamics; it is the number of active subscribers, the average revenue per user among active subscribers which determine the dominance.?
Stressing that M&A norms on these lines would be highly restrictive, telecom analyst and former CMD of VSNL, BK Syngal said: ?In this case, there would be no consolidation. In practice, this would translate into a small company dictating terms to a giant for selling 4.4 Mhz spectrum.
A better way would be to just lay down minimum number of players a circle can have and prescribing the minimum market share each of them must have.?