Telecom: regulatory risk rears its head

Telecom: regulatory risk rears its head

Shares of telecom companies have underperformed for the past few years because of the regulatory overhang in the sector. Incumbent operators such as Bharti Airtel Ltd and Idea Cellular Ltd have been hit owing to the policymaker’s stance of encouraging competition. Since end-August 2007, when the telecom regulator issued recommendations to increase competition, shares of Bharti have underperformed the Nifty index by 39% and those of Idea have underperformed by 54%.

On Wednesday, investors were reminded once again that regulatory risk in the sector hasn’t subsided. The telecom regulator has recommended charging higher prices for spectrum from telecom operators. The companies that will be most affected are incumbents such as Bharti, Idea and Vodafone Essar Ltd, because of a differential pricing mechanism for spectrum assigned to firms beyond the start-up level of 6.2 megahertz. If the recommendations are implemented, Bharti would have to bear a tab of around Rs4,000 crore and Idea roughly Rs1,500 crore.

Relatively new telecom operators do not hold spectrum above the start-up level, and so the impact on them would be minimal. Of course, as and when they expand operations, they, too, would have to bear a similar cost for additional spectrum.

Shares of Bharti and Idea fell sharply on Thursday, though they recovered a large part of the losses by the end of the day’s trading session. Based on their closing prices on the National Stock Exchange (NSE), they lost Rs3,600 crore and Rs500 crore, respectively, in market cap.

Some analysts fear that the impact of the new spectrum pricing norms won’t be limited to the above figures. The concern is that as and when wireless licences start coming up for renewal, there will be a large fee even for the start-up spectrum. Of course, the recommendations aren’t explicit about this, but given the regulatory twists and turns the sector has faced, there’s a possibility of a charge being imposed for licence renewals.

Given these regulatory uncertainties, it’s no surprise that telecom shares were under pressure on Thursday. Though the decline doesn’t seem much based on end-of-day prices, a majority of the transactions happened at much lower prices. Based on the weighted average price of all transactions on NSE, Idea and Bharti shares fell 6.1% and 3.4%, respectively.

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