Telecom merger and acquisition norms unlikely to be eased

Telecom merger and acquisition norms unlikely to be eased

New Delhi: India’s telecom regulator is unlikely to recommend any significant changes easing the tough norms relating to mergers and acquisitions in the sector, regardless of lobbying by phone firms, according to a senior Telecom Regulatory Authority of India (Trai) official.

Trai is likely to submit its recommendations to the government by the third or fourth week of January. The regulator will also comment on sharing and trading of airwaves, limiting the number of service providers in a telecom circle, auctioning of second generation (2G) spectrum, and delinking spectrum from licences.

One big regulatory concern is that larger telecom firms may end up buying smaller rivals based on the spectrum they hold rather than the overall business of the target firm, said the Trai official, who didn’t want to be named because he isn’t authorized to speak to the media.

“One company should not be allowed to buy another company based on the spectrum that they have," he said. “The spectrum was given to them in order to grow the sector and they should do that before selling out. That is why things like the roll-out obligations and lock-in for promoter equity were introduced."

The roll-out obligations mandate that mobile phone operators cover at least 10% of the district headquarters in their licensed areas within the first year of receiving a licence, and 50% within three years.

“This clause was specially implemented to the licensing agreements with the new operators after it was felt that many would buy the licence and then sell out for higher valuations based on the spectrum that they are allotted without actually creating a business," the official said.

There is also a clause on the lock-in of promoter equity, put in by the government to prevent so-called fly-by-night operators from entering the country’s telecom sector.

Norway-based Telenor ASA, the world’s seventh largest phone firm by customers, announced in October 2008 that it would invest Rs6,120 crore for 60% equity in Unitech Wireless in an all-cash, four-tranche deal, extending its reach to India, the world’s fastest growing and second-ranked mobile phone services market by users. This was later increased to 67%.

Earlier in September last year, the second largest Arab telecom company by market value, Emirates Telecommunications Corp., or Etisalat, announced that it had agreed to buy a 45% stake in Swan Telecom Pvt. Ltd for cash up to $900 million (Rs4,221 crore now).

“There has been no decision as yet. But it is unlikely that we will change much for now. Maybe some things here and there," said a second Trai official, who also requested anonymity because he is not authorized to speak to the media. “A decision will be taken in the next eight-nine days," he said.

The department of telecommunications (DoT) committee on 2G spectrum, chaired by Subodh Kumar, additional secretary, DoT, had recommended in its report completed in May that 2G spectrum should be auctioned, as is done in most countries, and not allocated as per the subscriber-linked criteria, as is done currently. It also recommended that telecom companies be allowed to buy, sell and transfer spectrum for a fee.

The committee, which included representatives of the government, Trai, telecom technology experts and industry executives, was formed in June 2008 to resolve a number of controversies surrounding the government’s 2G spectrum allocation policy. DoT sent the report to the telecom regulator on 7 July asking for its recommendations on the 2G spectrum report.

In earlier recommendations, Trai had suggested that in case of windfall gains, 50% of the profit should remain locked in with the company for use towards building infrastructure and 50% should be directed to the licensor or DoT.

The present policy governing mergers and acquisitions for India’s telecom service operators does not allow the number of players to go below four in any telecom operating area or circle.

In addition, the market share of any merged entity cannot cross 40% in any circle by both subscriber and revenue. Spectrum trading and sharing is not allowed at present and crossholding restrictions limiting the equity held by an operator in another operator in the same circle to 10% are also applicable.

After a merger or acquisition has taken place, the combined entity has to return the excess spectrum unless it fits the eligibility criteria for the combined quantum of spectrum.

The three-year lock-in clause applies to the promoter and promoter group’s equity, which cannot be divested for three years.

“Despite some of the companies that acquired licenses last year for Rs1,651 crore and then sold stake to global companies at substantial premiums, it does not appear to be a direct concern, as long as the capital is locked in the business venture," according to a report prepared by Sachin Gupta and B. Roshan Raj, analysts with Nomura Singapore Ltd, on Trai’s ongoing consultations on the spectrum management.

“The regulator appears to think this premium is perhaps necessary for them to expand, and hence investment remains a key criterion for them," the report adds.

“We also think that the government is contemplating ways of getting a share of the M&A (merger and acquisition) cut, especially if deals are done at large premiums just for spectrum. It could be in the form of capital gains tax, etc," says the report.