TRAI's recommendation of shifting to the higher frequency band of 1800Mhz would force all CDMA and majority of GSM operators to write off their investments and also pay additional money for the spectrum if they want to be in the business
Telecom companies, mainly Vodafone, Telenor and Idea Cellular, have raised concerns about the new recommendation from Telecom Regulatory Authority of India (TRAI) for spectrum charges and shifting to higher frequency bands.
According to a PTI report, Vodafone India has said a shift in the airwaves frequencies allotted to it to a higher band will put an additional cost burden of around Rs10,000 crore on the company which will then be passed on to consumers, leading to a tariff hike.
In a letter to telecom minister Kapil Sibal, Vodafone India's resident director for regulatory affairs and government relations, TV Ramachandran, said, “Vodafone estimates that apart from the write-off of existing investments, it will cost around Rs10,000 crore to replace its 900MHz with an 1800MHz network.”
Similarly, Norwegian telecom company Telenor said that it will be forced to exit India if proposal by the TRAI to auction airwaves at 13 times the price used in 2008 are accepted.
In its latest recommendation on “Auction of Spectrum”, TRAI has recommended that service providers using 800Mhz and 900Mhz spectrum band (being used for 2G CDMA and GSM service, respectively) to transmit signals for mobile and other wireless services should be shifted to higher frequency band of 1800Mhz after the licences come up for renewal.
The government should auction 5MHz of airwaves in the 1800MHz band and companies will have to pay a minimum Rs3,622.18 crore for every unit of spectrum, TRAI has said. This is about 13-fold increase over what the mobile operators paid in 2008 when the licences were given under the then telecom minister A Raja, when permits were bundled with 6.2MHz of 2G spectrum for Rs1,659 crore.
Mr Ramachandran said this investment in the company’s network could have been utilised for providing coverage to around 50,000 additional villages. “The investment to replace the existing 900MHz network will mean added cost burden for the operators which will translate into higher tariffs for consumers,” he said.
Another GSM service provider, Idea Cellular, at the time of TRAI’s consultation process has said that it will have to write-off Rs17,000 crore investment that the company has made in its network, if spectrum refarming (shifting) takes place.
Mr Ramachandran said Vodafone will have to install additional 20,000 telecom towers to provide similar level of coverage that it is providing using existing spectrum band. This will take around three to five years for the network to adjust with new frequencies, he added.
Telecom services providers have been protesting against TRAI’s recommendation on “Auction of Spectrum” which has recommended steep high reserve price for spectrum auction.
While the global GSMA body has said the recommended prices will discourage companies from participating in the auction, leading telecom services providers have indicated that the recommendation, if accepted, will lead to 25% to 30% hike in telecom tariff.
The finance ministry is toying with the idea of using Exchange Traded Funds to partly divest its holdings in public sector units. If handled with intelligence, this can energise the stock market, which has largely been shunned by Indian retail investors. Even the hair-brained Rajiv Gandhi scheme can be made to work this way
The Indian government is apparently toying with the idea of selling public sector units (PSUs) through an Exchange Traded Fund (ETF). This could be a game changer, not only for the beleaguered government which had failed to meet its divestment target of Rs30,000 crore (having raised less than half the amount), but also the for the retail investors and the way financial markets are run in this country.
Under this idea, a bunch of PSU shares will be transferred to the ETF. The investor would be investing in a fairly diversified portfolio of government stocks, without worrying too much about one or two underperformers. The ETF manager will then issue shares to the Indian public the same way mutual funds’ New Fund Offers (NFO) are launched. An exchange traded fund is a basket of shares that can be bundled together and traded just like any other share, on an exchange. Its valuation would be decided by underlying value of the basket.
However, this route by itself will not be very useful unless it is used intelligently. Very simply, the shares have to transferred to the ETF not with the purpose of maximising the take of a greedy government, but to leave a lot on the table for ETF investors so that they make some money and from the process start believing in investment in blue chip equities as a solid investment option.
After all, valuation has been the bane of the government’s divestment process. With unrealistic valuations, mostly benefiting merchant bankers, investors in past PSU initial public offerings have lost money—and have been put off further by the Indian stock market. The market has essentially shown that some of the initial public offers (IPOs) were overpriced, favouring the government and the merchant banker instead of the investor. The National Buildings Construction Corporation (NBCC) is down nearly 10% from its issue price of Rs106 and MOIL is down 29% from its issue price. This was also the reason behind the Oil and Natural Gas Corporation (ONGC) fiasco and other PSUs which are faring poorly. The government and merchant bankers did a poor job of valuing the company. The poor performance has put off many retail investors from investing in future offers.
ONGC’s follow-on issue was originally planned in the 2010-11, but was deferred as the company could not meet Securities Exchange Board of India’s (SEBI) norms. Once again, adverse market conditions put off its listing in 2011. And presently, the government had embarrassed itself when it priced ONGC at a premium instead of a discount. This prompted Life Insurance Corporation of India (LIC) to buy almost half of the shares on offer, with some sources saying it bought as much as 90% of the auction, as there were virtually no retail subscribers. Even Indian Oil Corporation (IOC) had to put out its follow-on offer, for similar reasons.
The current ETF idea seems to be on the lines of the way the Hong Kong government changed its financial markets. In August 1998, the Hong Kong government acquired a substantial portfolio of Hong Kong shares during a market operation. The Exchange Fund Investment (EFIL) was established in October 1998 by the Hong Kong government to advise it on the disposal of this portfolio in an orderly manner. When seeking to dispose of these shares, the Hong Kong government chose a stock neutral solution that would create minimal disruption to the market. An Exchange Traded Fund, the Tracker Fund of Hong Kong (TraHK), which met these requirements and added depth to Hong Kong's capital markets, was launched in November 1999 as the first step in the government's disposal programme. It has been a success since then. With an issue size of HK$33.3 billion (approximately $ 4.3 billion), TraHK's Initial Public Offering (IPO) was the largest IPO ever in Asia, ex-Japan, at the time of its launch. Since the IPO, approximately HK$ 140.4 billion (by 15 October 2002) in Hang Seng Index constituent stocks has been returned to the market through TraHK's unique tap mechanism, without market disruption. By taking a page out of TraHK, the Indian government will find it easier to not only find buyers, but also involve a large swath of the Indian investor population.
The benefit of adopting this route is that the government does not have to fear of disrupting the market the way it did for the ONGC auction. The Indian government could make it available only for domestic institutions and retail investors—n other words, the Indian tax payers. The government could just announce all the PSUs it wants to divest, well in advance by announcing a fair price. By garnering enough subscribers, it will not only manage to divest each PSU, but it will be able to divest all of them (or whatever it wants to) in just one single shot. In case of oversubscription, additional shares of ETF can be launched, thus make it more accessible than ever.
The mood of the country favours this as well. Moneylife has a direct evidence of this (neither the ministry of finance nor the market regulators engages with the savers). In a meeting of 300 people organised by Sanjay Nirupam, in 2010, for Moneylife Foundation, all hardcore investors demanded that this PSU share sell-off at a reasonable valuation is a great idea.
However, it will work only if the government allows more room for valuation, especially at the lower end of the spectrum, which will “guarantee” some returns and attract investors. After all, the owners of the PSUs are not the government, but the Indian taxpayers. In essence, the Indian taxpayers are keeping them afloat and therefore entitled to it at a fair valuation. Otherwise the ETF will not work for the same reasons the ONGC failed. The government could also club this ETF with the Rajiv Gandhi Equity Scheme, thereby giving first time investors a chance to enter the market profitably instead of being eaten up alive by the stockbrokers, aided by the TV channels.
Companies which are lined up for disinvestment in the current fiscal include Steel Authority of India (SAIL), Bharat Heavy Electricals (BHEL), Hindustan Copper, Oil India and Hindustan Aeronautics.
Manipulating research studies or media opinion or more investor meets will not increase...