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Spectrum Scam | Star sector plagued by uncertainty

Spectrum Scam | Star sector plagued by uncertainty
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First Published: Tue, Jul 12 2011. 12 33 AM IST
Updated: Tue, Jul 12 2011. 12 33 AM IST
New Delhi: A sector that was once the symbol of all that was right in one of the world’s most happening economies has, in recent months, come to embody all the worst aspects of doing business in India.
Between 2000 and 2010, the number of mobile telephony connections in India rose from 1.88 million to 752.19 million, but the business, now worth an estimated $27 billion (Rs 1.2 trillion) by revenue, runs the risk of imploding. The cause: a lethal cocktail of corruption, competition, regulation and debt.
Vodafone Group Plc could pay a tax of $5 billion if a case it is currently fighting against the tax department in the Supreme Court goes against the company.
On Saturday, the Enforcement Directorate (ED) accused directors of Etisalat DB Telecom India Pvt. Ltd of violating foreign investment rules in transactions worth $1.6 billion.
ED and other agencies are continuing their investigation into the allocation of spectrum and licences to telcos in 2008. Already, several telecom executives, one parliamentarian, and a former telecom minister are in jail awaiting the investigation’s completion. Meanwhile, everyone is waiting for the telecom ministry to unveil its New Telecom Policy 2011, which will replace the previous policy of 1999 and change, if experts are to be believed, every aspect of the telecom business.
For companies already labouring under the weight of debt incurred on account of intense competition (especially in 2008 and 2009) and payments towards spectrum to offer data-rich third generation (3G) services—most telcos have launched these at least in some parts of the country—the timing couldn’t be any worse. As of 20 May, the exposure of Indian banks to telcos stood at Rs 97,731 crore, up from Rs 63,606 crore a year ago. The banks, analysts said, have all but stopped new loans, but can’t help but lend more to telcos to which they have already loaned money.
“This is public money. If the name of a company is coming up again and again in these controversies, should we risk this money by lending to the sector?” asked K.R. Kamath, chairman and managing director of Punjab National Bank, a state-owned bank. Kamath said telcos that aren’t being investigated over the 2008 spectrum allocation, and to which banks have loaned money, will continue to get money; “Otherwise, you will risk your existing loan exposure,” he explained. As for the others, the telcos being investigated, will have to “be given a clean chit” before banks lend to them.
Multiple investigations—by ED, the Central Bureau of Investigation, the Comptroller and Auditor General of India, and the joint parliamentary committee—and some telco executives being in jail don’t bode well for the business, said Hemant Joshi, partner at audit firm Deloitte Haskins and Sells.
Joshi added that the lack of clarity on new rules, which are expected soon, is also hurting the business. The rules will define the pricing and allocation of spectrum; the penalties for out-of-turn allocation; and the dos and don’ts of telecom mergers. The New Telecom Policy could also shed light on rules governing the renewal of licences; most first-generation telcos, including market leader Bharti Airtel Ltd, are on 20-year licences that expire in 2014. Bharti’s spokesperson declined to comment for this story.
“The present M&A (mergers and acquisitions) policy is not conducive to consolidation as a merged entity cannot go beyond a certain market share or certain amount of spectrum,” said Kunal Bajaj, partner and India director at consulting firm Analysys Mason (India).
Last week, Idea Cellular Ltd saw the company suffer a reversal in its legal battle with the department of telecommunications on its 2008 acquisition of Spice Communications; Idea and Spice have six common markets.
“Then there is also no clarity on the future of the licence and spectrum they have, penalties and charges they may need to pay and the long inconclusive court cases that can have a significant impact on the sector,” Bajaj added.
In the absence of any clarity, telcos are having to plan for the worst.
“There is no clarity in terms ofhow the government plans to implement the changes in policy and no one knows. Internally, we have prepared for the worst-case scenario and best-case scenario. Our only contention is that the policy has to offer a level-playing field and be pro-consumer in approach,” said Mahesh Prasad, head of mobility at Reliance Communications Ltd (R-Com).
R-Com’s bigger challenge—apart from the fact that three of its executives are among those jailed in connection with investigations into the 2008 spectrum allocation—is debt. The company had aroundRs 31,525 crore of debt on its books as on March 2011. Prasad said R-Com expects to fund its operations through internal accruals. In the last fiscal, this amounted to around Rs 9,000 crore (earnings before interest, tax, depreciation and amortization) and R-Com announced that its capex guidance of Rs 1,500 crore will be funded through internal accruals. The company signed a deal in March with China Development Bank for a loan of $1.93 billion, largely for equipment financing and Prasad said its free cash flows are adequate to fund operations. The company may need to raise money soon, said an analyst at a multinational brokerage on condition of anonymity.
Some of the newer telcos have been hit especially hard by the decision of the banks to go slow on lending, Bajaj said. “Long-term bank funding has come to a virtual standstill. This is a serious situation that is affecting the entire industry,” said Rajiv Bawa, chief corporate affairs officer at Uninor. He said operations are currently being funded through equity from parent Telenor Group and short-term bank loans.
“Banks have completely halted long-term financing and only do project-based financing for the telcos—especially the new ones. The firms are also facing a major issue when it comes to short-term financing as that is not coming very easily; nor is the refinancing of existing debt,” said Rajiv Sharma, telecom and media analyst with HSBC Securities and Capital Markets (India) Pvt. Ltd. “The operators can’t go to the capital markets either as they don’t yet have a business ready for the market.”
The only good news for telcos is that the debilitating price war of 2008 and 2009 seems to be behind them.
“Over the last two-three quarters, the irrational moves of the operators have subsided and there have been no major tariff interventions,” said R-Com’s Prasad. Still, the number of operators remains the same and “there is significant competition” he added.
That’s something that will remain till the telecom ministry articulates a new M&A policy.
Dinesh Unnikrishnan in Mumbai contributed to this story.
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First Published: Tue, Jul 12 2011. 12 33 AM IST