Intense competition has helped Indian telecom users enjoy some of the world’s lowest tariffs
Auctions have raised prices of spectrum to unacceptable levels. This is bound to hurt rollout if the auctions are designed to maximise revenues instead of consumer good
There are about 10 to 12 telecom companies in each of the country's 22 telecom circles. Such intense competition has helped Indian users enjoy some of the world’s lowest tariffs. However, no country has so many players in any service area. Such competition has brought immense pressure on the finite amount of spectrum that must be shared amongst India’s numerous operators. There is therefore, a strong case to facilitate consolidation in the sector to bring in economies of scale and efficient use of resources. However, efforts towards consolidation must serve goals of the sector, not individual players.
The Mergers and Acquisitions (M&A) policy for the telecom sector, was released by the central government in early 2014. It envisages that the merged entity cannot have more than 50% market share in terms of both subscribers and revenue in any of the 22 circles. The guidelines also state that if a telecom company acquires another licensee, which owns spectrum allotted by the government without an auction, it must pay the difference between the price it paid to the government and the price determined through an auction.
Based on the official data released by the Telecom Regulatory Authority of India (TRAI), the top two companies in the market, Bharti Airtel and Vodafone India, together cover over 50% in 15 of the 22 circles in terms of combined revenue, and in three circles in terms of combined subscriber base, meaning they will be unable to explore any merger.
The industry’s response to the M&A policy is lukewarm. However, this might overlook the fact that the provisions significantly impact only 57 licenses whose holders obtained spectrum without auctions. These are: Aircel with un-auctioned spectrum in 14 circles, Vodafone in 7, Idea in 2, Tata in 19 and Reliance in 15.
The M&A guidelines reflect an important consideration that holders of administratively priced spectrum will not be able to sell it for profit. The guidelines cannot not be faulted if they are unwelcome to holders of spectrum which was awarded without the bundled spectrum being auctioned.
The additional cost for un-auctioned spectrum that M&A guidelines impose on some players serves to avoid monopolies, market abuse. Companies are misrepresenting this to suggest that the M&A policy offers no scope for merger.
The market regulator, TRAI, is therefore, right to interfere to protect the interests of both the industry and consumers. This is akin to regulatory practices elsewhere. In 2011, the Justice Department of the United States of America blocked AT&T’s proposed multi billion acquisition of T-Mobile USA, a deal, which would create the largest carrier in the country and reshape the industry. The Justice Department argued that T-Mobile would place significant competitive pressure on its three larger rivals, particularly in terms of pricing, a critically important aspect of competition and would eventually raise consumer prices, reduce product variety and innovation, and hurt quality of services by reducing incentives to invest than would exist absent such a merger.
The new M&A guidelines also limit the exit options for new entrants. They envisage a lock-in period of three years, during which the telecom company will be barred from selling its spectrum. This means that acquirer will have to run the acquired company as an independent entity during the lock-in period. This too has dampened interest in M&A.
The telecom companies await clarity in regulatory matters and rationalisation of taxes by the new government. The industry also wants the Department of Telecommunications (DoT) to reduce the time lost in processes and approvals. The failure of the Airtel-Loop is a reminder of the seriousness of these concerns even if the merger per se is not typical of the M&A activity expected in the sector.
The Loop sale should have been easy because it was not the licence but the customer base and other assets that were being transferred to Bharti. There is no doubt that ambiguity prevails in the current system although of the merger might have a bad business decision rather than a victim of policy paralysis at the government level.
Telecom sector urgently needs market consolidation, legal consolidation, network and asset sharing, etc.
Telecom companies recognise the importance of a long term clear, stable, development oriented and investor friendly policy regime, which recognises the long term nature of the investments and long project maturity requirements of the telecom sector. Access to spectrum is a key concern in India’s telecom sector which is driven by wireless technologies. Auctions have raised prices of spectrum to unacceptable levels. This is bound to hurt rollout if the auctions are designed to maximize revenues instead of consumer good.
Indian telecom consumers have benefitted from the intense competition in the sector. It is absolutely crucial to sustain it. There is an urgent need for a framework that effectively reconciles technical, economic and competition concerns. The current M&A policy does exactly that.
(BK Syngal is former CMD of erstwhile Videsh Sanchar Nigam Ltd (VSNL). He is a B Tech (Hons) and M Tech from IIT, Kharagpur, C Eng (UK), MIEE (UK) and Sr MIEE (US). He is also a member of the London Court of International Arbitration.