As we cross the third anniversary of the ill-conceived 2008 telecom licensing policy, the chickens have indeed come home to roost. The sector is in a state that is reminiscent of its early days of struggle. Consolidation is an urgent, and unavoidable necessity.
Many routes by which this could be achieved have been discussed. Licence cancellation leading to release of spectrum for the remaining operators has recently emerged as a possible avenue, though one fraught with litigation. The Telecom Regulatory Authority of India (Trai) made a suo motu recommendation for the cancellation of 69 licences on 19 November. The department of telecommunications (DoT) examined the case and found only 15 licences deserved cancellation (12 from the Trai list and three others). The matter was sent back to Trai, which reiterated its earlier stand.
In order to avoid litigation and expeditiously facilitate the efficient use of spectrum, DoT is considering an offer whereby the licensees can return their licences and spectrum for a token reimbursement, with roll-out penalties being adjusted against the licence fees.
DoT is in effect stating that it will offer an amnesty to those whose licences stand to be cancelled, while offering to buy back their licences for a very little compensation. While the objectives of the scheme are laudable, it is unlikely to succeed because of its unattractiveness to the concerned licence holders, who can be categorized in a number of different ways.
Some of them have rolled out, while others are in the process of doing so. Some have been deemed illegal by both Trai and DoT, while others by only one of them. Some are even facing criminal proceedings. All the affected parties have raised foreign capital.
It is obvious that DoT cannot make its offer to those caught in a criminal investigation. The offer would appear to legalize their position, and draw the ire of the courts, and the public at large. The attractiveness of the offer to others depends on their estimation of their win probability in the courts. If they estimate even a small win probability, then they will not consider the offer. They will have much higher valuations than the pittance being offered by DoT, even after deducting the relatively minuscule legal fees. Since they have raised money at a much higher valuation than what they paid upfront for spectrum, they will do everything to retain that valuation to pay back shareholders, if nothing else. If they have rolled out, then they will also need to recoup those sunk costs.
Thus, it is quite possible that most of the concerned parties would not accept the DoT offer. Hence, DoT should reconsider its view on legality in the light of Trai’s reiteration of its earlier stand and take an independent call. It is within its rights to take a call which may be at variance with that of the regulator. Licences of those who are illegal as per DoT should be cancelled. Since the number of such licences is likely to be low, the resulting litigation, if any, will not be unduly burdensome to the industry. The sale of the spectrum surrendered would add to the coffers while at the same time provide a benchmark for the value of spectrum for the New Telecom Policy. When cancelling licences DoT should ensure its actions are seen as reasonable and transparent for the international and domestic investors. In the present climate of uncertainty, it is every department’s beholden duty not to come across as idiosyncratic or arbitrary in its actions.
As far as bringing about consolidation, Trai and DoT should focus on bringing a conducive spectrum sharing and mergers and acquisitions (M&A) environment, which will allow operators to gain from the efficiencies emerging from the consolidation of spectrum and physical infrastructure. One of the main features of such an environment would be a spectrum usage charge that is a low, constant value for different sizes of spectrum blocks so as to not distort the efficiency of spectrum usage through an increase in variable charges. In the case of sharing the spectrum, charges on each party should be deemed to hold only its own block of spectrum, not the combined block (as that would entail double counting of charges). In order to recoup some of the revenue lost due to the low licence fees, DoT could think of levying an upfront charge for M&A transactions involving new licensees. An upfront cost would be less harmful to economic efficiency than a higher spectrum charge. However, this cost should not be so high as to make consolidation unviable.
A sector gasping for oxygen desperately needs a new regulatory framework.
Rohit Prasad and V Karthik are associate professor and student, respectively, at MDI Gurgaon
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