Spectrum trading opens up a range of possibilities for telecom firms

Almost exactly a year ago, Vodafone India’s former chief executive officer Marten Pieters had said that the Indian telecom industry was in a mess. The government was in no particular hurry to take corrective action. Now, it has finally notified the much-needed rules for trading in spectrum.

A shortage of spectrum has resulted in abysmal service quality in the country, and the ability to trade spectrum can materially alter the state affairs. The government had notified rules for spectrum sharing last month, although there have been hardly any takers for the facility.

Spectrum trading, on the other hand, opens up many possibilities. Many telecom companies are now defunct, while some have reduced operations considerably. Their spectrum can be sold to other operators, who can use it to address the congestion in their networks.

This one new guideline can trigger much-needed consolidation in the sector, especially since the norms for mergers and acquisitions aren’t exactly helpful. Also, importantly, while in the past, spectrum was made scarcely available by the government, leading to absurdly high bids during auctions, the additional availability will help improve the situation.

At the same time, competitive intensity between the top companies in the sector can increase further as newly acquired spectrum can be used to blunt the advantage of existing market leaders in some circles.

In addition, analysts at Bank of America-Merrill Lynch said in a note to clients that Reliance Jio Infocomm Ltd can potentially use the new norms to tie up with Reliance Communications Ltd (R-Com) and improve its network quality.

“A potential deal with R-Com—both post sharing and trading—would help Jio improve its network quality by getting good “in-building” coverage and launch VoLTE (Voice over LTE). In a scenario wherein Jio partners with R-Com post trading norms, we note that Jio could get access to contiguous 800 MHz of R-Com on a pan India basis (after R-Com liberalizes this spectrum).”

These new possibilities have got investors excited—R-Com shares jumped by nearly 12% on Tuesday—although it makes sense to wait for the contour of these deals.

For the larger companies, it looks like the new norms will lead to some give and take; for instance, it can enhance both consolidation and competition. More importantly, the fact that the government has finally gone ahead with this reform is a positive for the sector as a whole, and investors should be pleased.