New Delhi: Successful bidders at the upcoming auction of so-called third generation (3G) mobile phone services will be allowed to split their payment into two parts: one at the time the winning bids are chosen and the second when spectrum is finally allocated.

According to senior officials familiar with the process, a quarter of the payment would need to be made by the winners after the auction results are announced. The balance would have to be paid when the spectrum is allotted.

One of the main reasons for allowing bidders to pay in two portions is that it would level the playing field, giving bidders with smaller balance sheets time to raise three quarters of the money. Telecom companies with greater financial muscle would have a clear advantage if the entire payment has to be made upfront, one official familiar with the government’s decision said.

A fallout of the decision is that the finance ministry would receive far less than the Rs25,000 crore of revenue it had expected in the current fiscal on account of the 3G auction. The government had been hoping to use the auction proceeds to reduce its fiscal deficit, estimated at 6.8% of gross domestic product in the year ending March.

The government had been in a quandary after deciding to hold the auction this fiscal but to allocate the spectrum later, sometime in August, after the ministry of defence vacates the fourth slot of 3G spectrum needed for the auction.

The move to allow a staggered payment was one of the options the government had been toying with as a solution to the predicament it found itself in when it emerged that there were only two slots of 3G spectrum available for auction this fiscal.

The defence ministry is expected to vacate one slot in June-July and another in August in line with a memorandum of understanding it signed with the department of telecommunications (DoT) last year.

The defence ministry will vacate the spectrum as and when certain milestones are reached in the process of building an alternate optical fibre cable network by the state-owned telcos Bharat Sanchar Nigam Ltd (BSNL) and Mahanagar Telephone Nigam Ltd (MTNL).

Another option that the government was contemplating was to reduce the number of slots up for auction to the two available now and hold another auction at the end of this year or the beginning of next year for the rest of the spectrum.

An empowered group of ministers, headed by finance minister Pranab Mukherjee, decided last month to allow four private players in the 3G space, besides BSNL and MTNL.

3G spectrum would allow telecom operators to provide high speed data services on the mobile phone such as video streaming and video conferencing. The telcos would also get a large amount of capacity for voice services which are their core revenue earners at present and for which there is a severe shortage of spectrum. The 3G spectrum offers three-five times more capacity than the existing second generation (2G) spectrum.

“The main problem that the telcos were facing with having to pay the entire amount now is that the entire money, going into billions of dollars, would get blocked without them having anything to show for it," said a senior analyst with the Mumbai-based branch of an international brokerage firm.

“They are accountable to shareholders as they listed on the bourses and such a huge amount of money going away from the balance sheet is not a healthy practice," said the analyst who didn’t want to be named because he is not authorized to speak to the media. “There was no assurance that the government would allocate the spectrum when it is saying it would. The government does not have a good track record as far as this goes."

DoT is scheduled to issue the notice inviting applications (NIA) from potential bidders this week. NIA is the legal document that would have all the information needed by potential bidders for participating in the auction. The auction process is scheduled to start on 12 February and be completed by 5 March.