Shares of incumbent telecom operators Bharti Airtel Ltd and Idea Cellular Ltd rose sharply on the possibility that the government may clamp down on new operators. Bharti’s shares rose by over 6% on the National Stock Exchange, while shares of Idea rose by over 3%. Compared with their lows earlier in the month, these companies’ shares have risen by 18% and 9%, respectively. On the contrary, shares of Reliance Communications Ltd (RCom) have fallen by as much as 28% in the past one month.

The reasoning is quite simple: the investigations related to the spectrum allocation scam and the government’s statements since seem to suggest that the new operators would be affected.

Graphic: Yogesh Kumar/Mint

It’s only when large players such as RCom, Tata DoCoMo or, to a lesser extent, Uninor engage in consolidation that the overcapacity situation will change. No one seems to be expecting that to happen. The sharp rise in the share price of incumbent operators, therefore, can be attributed to investor sentiment, rather than any material impact on their fundamentals.

What’s more, the heat on new operators is a reminder of the regulatory risk in the sector. It’s foolhardy to assume that incumbents would always be in a relatively favourable position on regulatory issues. The sector continues to face regulatory risks on issues such as licence renewal fees. Besides, with mobile number portability round the corner, tariffs could come under pressure all over again. This would affect the post-paid segment, which has so far been rather resilient. As a result, the financial performance of telecom operators can be expected to be subdued. Likewise, the shares of these companies should be range-bound and, considering that they have risen at a time hen the markets have been correcting, they may well come under pressure in the near term.