TRAI must find answers to many tricky questions

With the cancellation of 122 second generation (2G) telecom licenses granted to 8 companies in 2008, the ball is now back in the TRAI’s (Telecom Regulatory Authority of India) court.

The Supreme Court of India, last week, cancelled these licenses and directed TRAI to formulate policies to re-auction the telecom spectrum (air waves) freed, estimated to be around 540 Mhz, through a transparent process. TRAI, on its part, has already initiated the action by inviting feedbacks from all stakeholders to create a consultation paper.

Though the process has began within two days of the apex court verdict, telecom experts believe that auctioning spectrum will take long as the TRAI will have to grapple with many issues linked closely with all players in the industry.

One thing is certain that unlike in earlier cases, in 2003 and 2008, when the spectrum was sold bundled along with licenses, this time around, the license and spectrum will be offered separately. New players as well as the players who lost their licenses due to the SC ruling will have to first buy licenses in circles of their choice or pan-India, and then buy spectrum by bidding for them. The plan to separate spectrum from license has also been clearly stated in the draft National Telecom Policy 2011, released in October last year.

Pricing paradox

The trickiest issue TRAI is facing relates to the pricing of spectrum. The telecom regulator will have to first fix a base price for the bidding to take place leading to final price discovery. As per the present rule, telecom companies have to pay Rs 1,651 crore for a pan-India unified access service (UAS) licence that comes bundled with 4.4 Mhz of spectrum.

According to a news report, TRAI may now have to fix the minimum price for pan-India 6.2 Mhz spectrum at Rs 10,972 crore, nearly seven times of the 2008 price, because it had recommended such a price in a communication to Department of Telecom (DoT) in November 2011.

But, given the fact that the telecom boom in India is already showing signs of maturity with extremely low profit margins and low incremental growth, such pricing plan looks not only lofty but also impossible at this juncture. Experts believe that the demand for the new spectrum will be muted as the irrational exuberance in telecom industry has greatly waned.

The net revenue growth of the industry, for example, in the quarter ending September 2011 was only 2.67 per cent over the same quarter previous year and the average revenue per subscriber was only Rs 93 a month, one of the lowest in the world. As the teledensity in urban India has already reached 160 per cent and the national average is 76 per cent, there is little scope for getting new customers.  

The other reason is that among the eight players who lost their licenses, only four are serious players and are likely to bid for new licenses even if the prices are high. Uninor (a joint venture between Norway’s Telenor and Unitech), which has lost licenses in all 22 circles where it had rolled out its services, is almost certain to bid to get the spectrum.

The company has already invested Rs 6,100 crore in equity shares and another Rs 8,000 crore in corporate guarantees for bank borrowings, besides being an aggressive player in the Indian telecom market. Similarly, Sistema Shyam Telecom (a JV between Russia’s Sistema and Shyam Telecom), which markets its service under the MTS brand and has lost all 21 licenses, is likely to bid hard to get spectrum in all circles it operates.

The Aditya-Birla group-owned Idea Telecom, the fourth largest player in the country, will certainly try to regain spectrum in all 9 circles it has lost. Similarly, Tata Teleservices will bid for 3 circles it lost.

Fringe players

But four players among the eight who lost licenses are unlikely to make a serious bid to get spectrum. These companies, Videocon, Loop Telecom, Etisalat DB and STel, are not at all serious about their telecom ventures as they are yet to roll out their network in a meaningful way. Their subscriber base is tiny, together these four companies, according to TRAI data, had 14.49 million subscribers at the end of September 2011 accounting for only 1.6 per cent of country’s total mobile subscriber base of around 900 million.

In fact, a few of these players entered the telecom fray in 2008 with the hope to cash in by selling the stake. Cancellation of their licenses will now give them an exit route with the return of license fee from the government. A few months ago, one of these four, had approached the government to take back licenses and return the fee. Said a Mumbai-based telecom expert, “If the government returns the license fees, it (cancellation of licenses) will be a blessing in disguise for such players who could not rope in foreign partners.”

The TRAI will certainly recommend allowing completely new players to bid for spectrum. But given the highly uncertain future of the industry and poor profitability, it is unlikely that any new player will enter the Indian telecom scene.  It is unclear if TRAI and the government will allow incumbent players like Bharti Airtel, Vodafone, Reliance, BSNL, Idea and Tata to bid for additional spectrum in the next round of auction.

Since these players together control around 86 per cent of the mobile telephony market, putting them on the same platform with the new players will be unfair competition. These players with deep pockets can outbid new players or drive the price high to further strain their financials, opine experts.

Incumbent players

But another school of thought states that even when the incumbent players are allowed to buy more spectrum, they will not bid hard because they have recently bought 3G (third generation) spectrum which is yet to be fully utilised by them. Though these companies paid heavily for 3G, the government collected Rs 64,000 crore by selling the spectrum in 2010, most are using them for voice as the more-lucrative data traffic is yet to catch on.

Experts also believe that big players like Bharti and Vodafone are unlikely to quote high prices because the new auction price can become the benchmark price for renewing their existing licenses and spectrum when they come up for renewal in 2014.

Moreover, since these companies have also acquired a huge amount of free 2G spectrum, the government policy earlier allowed additional free spectrum linked with customer acquisition, they will have to fork out large sums of money as and when the government makes them pay for the extra spectrum. 

Auction of new spectrum can also be delayed as Uninor and Sistema are likely to appeal to a larger Supreme Court bench for reconsidering the cancellation verdict. There could be further litigation and consequent delay to get refund of license fee from the government as aggrieved parties may also ask for refund of capital expenditure made in their business.

Clearly, there are too many issues and possibilities that the regulator has to tackle before it prescribes the auction procedures.

The government at the Centre, on other hand, also needs to ensure that its policies are fair to business. Its image as a provider of stable industrial policy has already taken a huge beating and it cannot goof up again on policy matters.