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Consolidation in the telecom industry has failed to gather momentum in the country, with onerous rules holding back larger companies from purchasing weaker rivals. Photo: Pradeep Gaur/Mint
Consolidation in the telecom industry has failed to gather momentum in the country, with onerous rules holding back larger companies from purchasing weaker rivals. Photo: Pradeep Gaur/Mint

Telecom M&A guidelines to be placed before cabinet by 27 February

New rules a significant liberalization of the existing policy; number of operators to come down, says report

New Delhi: The much-awaited mergers and acquisitions (M&A) policy for the telecom sector is likely to be presented before the cabinet for approval by 27 February, taking the world’s second largest telecom market by users, where frequent tariff wars and massive debt pile-ups have left many telcos struggling, a step closer to industry consolidation.

The new rules are a significant liberalization of the existing policy, given the need for increased investment in a sector, a senior department of telecommunications (DoT) official said.

Consolidation in the telecom industry has failed to gather momentum in the country, with onerous rules holding back larger companies such as Bharti Airtel Ltd, the nation’s largest telecom company, and Vodafone India Ltd, the second biggest, from purchasing weaker rivals. The total debt of the telecom sector in India is around 2.5 trillion on revenues of around 1.8 trillion, according to the Cellular Operators’ Association of India, a lobby group.

Policies related to the sector have been eased in the past three months, with the government allowing foreign companies to fully own local operators and spectrum sharing and trading, and creating a unified licence for all telecom services. Since the rules were changed, Vodafone Group Plc has announced that it will spend 10,141 crore to buy out minority stakeholders in its Indian unit.

On Tuesday, Bharti Airtel announced that it was acquiring the assets of Loop Telecom, which operates in Mumbai, in a transaction valued at around 700 crore. Analysts see this as the first sign of consolidation in the sector.

The new M&A norms are keenly awaited, especially after the spectrum auction concluded on Thursday.

The number of “operators will come down to six or seven from 12 as the bottom six telcos look to exit, lacking sufficient spectrum and financial muscle to remain viable," a 18 February report by Fitch Ratings Singapore Pte Ltd said. “Consolidation will improve operating profitability and cash flow, and return pricing power to the larger operators in the medium term. The spectrum auction clearly spelt out the telcos’ pecking order by financially crowding out smaller operators from the industry."

After the wave of consolidation, only six or seven telcos will remain, including the existing top four Bharti Airtel, Idea Cellular Ltd, Vodafone and Reliance Communications Ltd, along with a new entrant Reliance Industries Ltd, the report said.

According to the draft of the new rules, the acquiring telco will not have to pay the full market price for the assigned 4.4 megahertz (MHz) start-up spectrum, for which the entry fee has been paid. Instead, the acquirer has to pay the difference between the price paid for start-up spectrum and the market price. The older telcos have start-up spectrum, allocated according to an earlier policy where they paid an entry fee ( 1,658 crore for pan-India) for the licence and spectrum. In 2012, DoT came out with the third National Telecom Policy (NTP 2012) delinking spectrum from the licence. The DoT official cited above said the government was looking at waiving the market price payment of start-up spectrum altogether, a move that could save the telcos thousands of crores and make acquisitions far more lucrative. This could not be independently verified.

“Auction is one way of acquiring spectrum. We are working on a number of ways in which spectrum can be acquired. M&As will serve as another way in which spectrum can be acquired," DoT secretary M.F. Farooqui said on Wednesday.

According to an internal memo of the draft rules, reviewed by Mint, the total money payable to the government for spectrum acquired by a telco when it buys another will be calculated taking into account the number of years of the spectrum validity remaining. The market price will be based on the last auction price, adjusted for interest.

Other rules included in the draft are that a telco can hold a maximum of half the spectrum in a particular frequency band in a circle (or service area), and not more than one-fourth of all air waves available in that area. The merged entity would also have to reduce its market share to 50% within a year’s time.

In the 800MHz band, the ceiling will be 10MHz, and for 3G spectrum in the 2,100MHz band, a telco can have two blocks of 3G spectrum, or a total of 10MHz.

In order to ascertain market share, the telco’s subscriber market share of mobile and fixed line users as well as its revenue market share will be taken into account, the note said.

The new norms will also allow telcos to extend their operating licences through acquisitions, a key issue given many of them will start seeing their 20-year licences expire starting September. According to the note, the date of the validity of the two licences after a merger or acquisition will be the one with the longer validity.

The Fitch report names the Tata group (Tata Teleservices Ltd), Loop Telecom, Sistema Shyam Teleservices Ltd (that runs the MTS brand of mobile services) and Videocon as possible acquisition targets.

“They suffer Ebitda (earnings before interest, taxes, depreciation, and amortization, a measure of operating profit) losses, have significant debt and are operationally stretched. They also lack sufficient cash to support data-related infrastructure investments," the Fitch report said.

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