The Telecom Regulatory Authority of India (Trai) on 12 May submitted wide-ranging recommendations to the department of telecommunications (DoT) on licensing, 2G spectrum allocation and pricing, mergers and acquisitions etc. Our initial take is that these recommendations are unlikely to be implemented in totality in their current form, given their significantly negative implications for the incumbent global system for mobile communication (GSM) telecom companies. The recommendations are pro-new entrants, and pro-code division multiple access (CDMA) incumbents (dual technology operators), such as Reliance Communications Ltd (RCom) and Tata Teleservices Ltd.
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Trai wants GSM telecom operators to pay a one-time fee for the so-called “excess” spectrum (greater than 6.2MHz), based on third-generation (3G) auction prices. At current 3G bids, the one-time fee for Bharti Airtel Ltd and Idea Cellular Ltd works out to Rs4,000 crore and Rs1,200 crore, respectively, versus just Rs20 crore for RCom.
Further, Trai’s new formula for computing spectrum usage fee entails negative effect on earnings before interest, tax, depreciation and amortization margins of Bharti and Idea. However, there would be some relief if licence fee is also reduced as per Trai’s recommendation.
To curb revenue leakage due to differential rates of licence fee for various services or circles, Trai wants licensing finance (as a percentage of net revenues) to be brought down to a uniform 6% level by FY14 from the current 6-10%.
However, Trai says that Internet service providers, infrastructure and tower companies be charged licensing fee at 6% from nil currently.
Spectrum cap for merged entity have still been kept at rather low levels of 14.4/10.0MHz (GSM/CDMA). Further, merged entity should pay 3G-linked price for spectrum above 6.2MHz as well as a transfer charge at 5% of the difference between transaction price and total spectrum price.
The merged entity should not have more than 30% market share of subscribers or revenue in a circle. These norms would preclude any big-ticket mergers involving GSM incumbents, in our view.
The three-year lock-in on mergers and acquisitions involving new licensees in a circle is to be done away with, as per Trai. Other recommendations have been given on renewal of licences after 20 years, spectrum refarming as well as tightening of roll out obligations.
We believe belatedly charging for spectrum creates avoidable uncertainty in a sector already roiled by irrational competition.
Further, there seems to be little justification for using 3G bids for pricing 2G spectrum, as the former are driven more by scarcity and lack of a transparent spectrum road map. We maintain our view as cautious for the sector.
Graphic by Ahmed Raza Khan / Mint