UAE-based Etisalat’s valuation of new telecom licensee Swan Telecom has established a fact. The poster boy of reforms — Indian telecom — stands defaced, with a weak government unable to stop regressive steps by its ministers. The Swan deal can adversely impact the 3G market auction next.
Illustration: Jayachandran / Mint
This is the first acquisition in a new 2G licensee by a foreign player. It places a $2 billion valuation on a company that has zero experience in telecom and whose sole strength is its entry ticket for a bit more than half of India’s attractive 2G mobile telephony market — that it had bought for $350 million just nine months ago. And advantage Swan — a six-times valuation based on those licences — is all thanks to precious spectrum handed to it at a steep discount by telecom minister A. Raja.
Mint included, observers of the sordid sale of new licences bundled with radio spectrum in a highly prone to manipulation queue since last year have repeatedly argued for auctioning the spectrum at a market-discovered price instead. The premium for that spectrum would then be netted by the exchequer, instead of non-serious players — there are several in the fray. No less than the Prime Minister’s Office had raised questions after the finance ministry and the Central Vigilance Commission had declared Raja’s objections invalid. Yet, none could get him to budge. With the Swan deal showing how the market actually prices spectrum, the UPA government’s woeful lack of courage to curb manipulation of policymaking stands fully exposed. It has thereby failed to contain rent-seeking behaviour that cost the exchequer $10 billion.
Note that the Swan sale is for a minority stake: The rules allow acquisition up to 74%. Other sales, of higher stakes, could mean even better returns for doing nothing more than standing ahead in the 2G queue, amplifying the exchequer’s loss. The unfolding saga of the 3G spectrum auction supports this expectation. Foreign players will be in a sellers’ market of new 2G licensees, looking for even bigger windfalls. The potential foreign investors face a double-edged sword. They either pay up for an empty 2G licence on paper or buy out one of these spectrum-wielding licensees at a high cost — it’s an entry barrier for their 3G plans either way. It may make sense to wait for clarity on which of the licensees get 2G spectrum and where, rather than take on the now riskier 3G bidding.
Regulatory credibility is being sadly eroded. But it is also curious why the opposition is silent about the UPA’s passive complicity in the spectrum saga, knowing well how utterly wrong it was.
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