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Stage set for telecom shake-up

Stage set for telecom shake-up
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First Published: Tue, May 11 2010. 11 41 PM IST

Updated: Tue, May 11 2010. 11 41 PM IST
New Delhi: The Telecom Regulatory Authority of India (Trai) issued a series of far-reaching recommendations on Tuesday, easing the way towards consolidation and providing some clarity on spectrum allocation.
While some of the suggestions may be too ambitious to be implemented as they will require the reversal of several policies, Trai has asked the government to consider the recommendations, including a one-time fee from some telecom firms for spectrum they already have, in their entirety.
Trai has recommended that additional 2G (second generation) spectrum, frequencies used by mobile phone services, should not be auctioned just yet. “It is not feasible to subject the spectrum in 800-900-1,800MHz band to the auction process, considering that the amount of spectrum after meeting the obligation of contracted spectrum is very limited,” said J.S. Sarma, chairman of Trai, at a press briefing in Delhi.
The recommendations will have to be adopted by the department of telecommunications (DoT) before becoming a policy. The telecom regulator has also suggested that licences be delinked from spectrum and that telcos would have to apply separately for the start-up GSM spectrum of 6.2MHz.
Existing telecom firms with spectrum of more than 6.2MHz would have to pay a one-time fee based on 3G prices for the remaining years that they have licences.
This would be the per MHz price of spectrum discovered in the ongoing 3G auction divided by 20 (the number of years that the 3G auction is valid) and multiplied by the remaining years of the telecom operator’s licence period.
Assuming that the price for 5MHz of 3G spectrum in Delhi is Rs400 crore or Rs80 crore per MHz or Rs4 crore per year, an operator with 4MHz more than the contracted 6.2MHz in Delhi and with three years of its licence remaining could end up having to pay Rs12-18 crore.
Many of the older players such as Bharti Airtel Ltd, Vodafone Essar Ltd, Bharat Sanchar Nigam Ltd and Mahanagar Telephone Nigam Ltd hold around 10MHz spectrum in many key circles.
Shares of telecom firms fell on the Trai recommendation for a one-time fee. Idea Cellular Ltd declined 5.39% at the close of trading on the Bombay Stock Exchange. Bharti Airtel closed 3.41% lower and Reliance Communications Ltd 4.83% down.
Once the licence is renewed, the telco would have to re-apply for spectrum. However, a telco could buy out another with a licence expiring later and thus extend its tenure.
Trai has benchmarked the 2G price to 3G while saying that the two aren’t comparable.
“The authority is conscious of the fact that there are several views about deriving the true price of 2G spectrum,” Sarma said. “Keeping this in view the authority is separately initiating an exercise to further study the subject and will apprise the government later, but for the present the authority recommends that 3G prices could be adopted as the current price of 2G spectrum.”
Trai has also suggested that the licence renewal needs to be applied for 30 months prior to expiry.
A pan-India licence renewal will cost about Rs20 crore, equal to the entry fee, it said.
“The authority recommends that on renewal of the licence, spectrum held by a licence in 900MHz shall be replaced by assignment of equal amount of spectrum in 1,800MHz,” Trai said. A number of operators including Bharti Airtel, Vodafone Essar and Idea Cellular Ltd which got their licences in 1994-95 to 1997 will see their 20-year licences coming to an end in various circles.
“The central message of these spectrum management recommendations is that spectrum should not just be based on market price but also ensure that operators utilize spectrum efficiently,” Sarma said. “The excess spectrum in the market right now is valued at around Rs30,000 crore.”
DoT is unlikely to adopt all the recommendations though the suggestions on the renewal of licences may be implemented. Sarma has, however, written to DoT secretary P.J. Thomas asking that the recommendations be taken into consideration as a whole and that the government should avoid cherry picking proposals.
Trai has segmented the spectrum to be allocated into a priority system under which operators will get committed spectrum of 6.2MHz.
Over and above this, an operator would be eligible for prescribed spectrum of 8MHz in most cities with a population of more than one million and 10MHz for Delhi and Mumbai. This prescribed spectrum would be paid for by the operator at market prices. Operators moving from 4.4MHz to 6.2MHz would be given first priority after which come operators waiting for spectrum up to the prescribed amount. Those seeking initial spectrum will have last priority.
This puts new operators such as Uninor Wireless Pvt. Ltd as well as Tata Teleservices Ltd, waiting for spectrum in key cities such as Delhi, at a significant disadvantage.
Trai has also suggested that the spectrum usage charge be changed. The operator will pay 0.5% of adjusted gross revenue for every MHz up to 6.2MHz after which it would pay 1% for every subsequent MHz. Trai has recommended that this be with effect from 25 February.
On merger guidelines, Trai has recommended that any entity resulting from a merger should not have a market share of more than 30% and not more than 14.4MHz of spectrum. The merged entity will also have to pay for spectrum above the contracted 6.2MHz. Trai has chosen to remove the lock-in period in such instances.
“They say it (the recommendations) encourages consolidation, but if a telecom company has to pay for buying another and then has to pay for the additional spectrum, then why would the telco do it,” said a Mumbai-based analyst with a multinational brokerage firm on condition of anonymity as he is not authorized to speak to the media. “The cash levels in the industry are already at a low with the 3G auction among other things. The main asset of a telecom firm is the spectrum apart from its customers.”
The additional frequencies could shake up the industry, he said.
“The spectrum allocation increase from 4.4MHz to 6.2MHz is a positive for Reliance Communications (Ltd) and Idea Cellular as the boost in capacity could lead to some disruptive behaviour for Bharti, especially due to the added data ability that can be leveraged,” he said.
GSM mobile operators expressed their dissatisfaction with the report.
“We are very disappointed by the recommendations of the report,” said Rajan S. Mathews, director general of the Cellular Operators Association of India, which represents the GSM service providers. “The recommendations on spectrum pricing and allocation are going to have adverse effects on the roll-outs and teledensity as well as pricing which is not in the national interest.”
Trai has also suggested the refarming of 900MHz spectrum. Refarming would entail that the telcos give back the spectrum that they have so that DoT can account for it and re-allocate it.
Trai proposes to auction the 2G spectrum after refarming.
This spectrum held primarily by the older operators gives them a significant advantage due to its lower capex requirement. “Bharti is able to get significant savings on its capex since its business is primarily on 900MHz,” another Mumbai-based analyst said on condition of anonymity. “It is unlikely that it will give this back that easily.”
Trai has also recommended that sharing of spectrum be allowed but has ruled against the trading of frequencies.
“There are many good things about the recommendations,” said Syed Safawi, CEO of the wireless business at Reliance Communications, citing Trai’s suggestion that the license fee be cut to 6% of adjusted gross revenue; it is now as much as 10%. He said there was “some amount of disappointment” because “there is still no level playing field. They have not asked the operators to pay for additional spectrum given earlier, allowing them a significant amount of benefits.”
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First Published: Tue, May 11 2010. 11 41 PM IST