New Delhi: A ministerial group headed by finance minister P. Chidambaram on Monday decided to reduce the spectrum usage charge to a maximum 5% of adjusted gross revenue for telcos successful in the spectrum auction next month—addressing one of the key issues that had remained unresolved ahead of the sale.

The lower rate is expected to have some impact on government revenue in the long term, but the decision was made to attract investments, telecom minister Kapil Sibal said after a meeting of the ministerial group.

The group also kept the usage charge at the current 1% for companies that have broadband wireless access (BWA) spectrum.

Analysts say the move brings clarity ahead of the auctions and offers something for everybody.

“The spectrum usage charge regime announced today offers a reasonable compromise for all the main stakeholders. Government may see fiscal revenue slip a bit in the first year, but long-term revenue should go up as industry revenues continue to grow," said Mohammad Chowdhury, head of the telecom practice at consulting firm PricewaterhouseCoopers India.

“Major operators who currently pay around 8% spectrum usage charge will see relief from the new guidelines as more and more of their spectrum holdings qualify for the lower 5% threshold, and those who bought broadband wireless access spectrum earlier remain unaffected." he said. The clarity would help telcos as they prepare their strategies for the auction, he added.

Telcos pay 3-8% of their adjusted gross revenue as spectrum usage charge. Adjusted gross revenue refers to the revenue that directly accrues to a telco, excluding taxes and interconnection charges that go to other telcos. The ministerial group’s decision brings some relief to older telcos such as Bharti Airtel Ltd and Vodafone India Ltd that have large amounts of spectrum and pay as much as 8% as spectrum usage charge.

The group also decided to retain the usage charge of 1% for BWA spectrum holders such as Reliance Jio Infocomm Ltd after the attorney general opined that it would not be legally tenable to change the rules given in the notice inviting applications for the 2010 spectrum auction.

This means the telcos with broadband spectrum and other airwaves in other bands will have to show separate streams of revenue for the various services.

In its September recommendations on the valuation of spectrum, the Telecom Regulatory Authority of India had suggested a uniform usage charge of 3%, an issue that divided the industry nearly immediately.

An analyst said he’d like more clarity, though. “The clarity has been brought out only in respect of spectrum acquired through auction. Nothing has been said for spectrum acquired through M&A (mergers and acquisitions). Partial clarity will not be sufficient to make auction successful," said Hemant Joshi, a partner at Deloitte Haskins and Sells.

Joshi added that the new regime could significantly hit the profit and loss accounts of older telcos. His reasoning is that these firms pay an average of 5-6% of their adjusted gross revenue as spectrum usage charge, without “major upfront payment for acquisition of spectrum."

The new regime keeps their payment at the same level but “with substantial upfront payment which would not only dent cash flows but also income statement in the form of interest and depreciation cost", he said.

The spectrum auction begins on 3 February and has eight confirmed participants. Tuesday is the last day for the telcos to withdraw their applications.

The ministerial group’s decision will go to the cabinet for final approval though it is unlikely there will be any change.