Consolidation can bring in economies of scale in telecom
Indian telecom market has 8-10 operators in each circle. Only top 3-4 operators are earning profit. However, we do not have clear M&A guidelines that can help consolidation
 
India, like most countries, have issued separate licenses for landline (basic), cellular, internet service providers, satellite and cable TV operators, each with a distinct industry structure, terms of entry, and varying requirement to create infrastructure. However, this convergence that now allows operators to use their facilities to deliver some services reserved for other operators necessitates a re-look into the existing policy framework. No jurisdiction in the world has 10-12 operators; most countries have 4-5 telecom players and at some places even just two. For this to happen in India, stronger and clearer merger and acquisition (M&A) guidelines are needed.
 
The much awaited M&A policy for the telecom sector, was released by the government in early 2014, but it seems to have disappointed the industry for more than one reason. A significant problem in the sector is that a merged entity cannot have more than 50% market share in terms of both subscribers and revenues in any of the 22 circles. The ultimate objective is obviously to avoid monopolies, and the restrictive practices it can give birth to, but companies are complaining that it leaves big telecos with no scope for merger between them. 
 
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 revenues, and in three circles in terms of combined subscriber base, meaning they will be unable to explore any merger. 
 
We must definitely keep in mind that, although mergers and acquisitions might continue to create big corporate conglomerates, there is a need to draw a fine line to avoid dominance and curbing of unhealthy open competition by them. Companies are after all always interested in increasing their revenues and market share and no acquisition be allowed amongst major companies, as that will create absolute dominance. 
 
The market regulator must interfere and ensure that the interest of both the industry and consumers is protected. In 2011, the Justice Department of the US blocked AT&T’s proposed multi-billion acquisition of T-Mobile, a deal which was supposed to create the largest carrier in the country and reshape the industry. The Justice Department’s complaint, which clearly stated that T-Mobile places important competitive pressure on its three larger rivals, particularly in terms of pricing, a critically important aspect of competition. By removing significant competitive forces from the market, eventually affects the customers, who face higher prices, less product variety and innovation, and poorer quality services due to reduced incentives to invest than would exist absent such a merger. Similarly, the Competition Commission of India (CCI) should scrutinise it into important cases to ensure there is not cartelisation by telecom operators.
 
One of the other major dampeners is that the buyer will have to pay a heavy amount to the government in addition to what it would pay to the seller. The guidelines state that if a telecom company is acquiring another telecom company, which owns spectrum allotted by the government, the acquirer has to pay the price difference to the government. This nationwide spectrum is now worth at least Rs10,000 crore and it pushes up the cost of acquisitions in the sector. This clause affects only 57 licenses. These are Aircel (14), Vodafone (7), Idea (2), Tata (19) and Reliance (15). The M&A guidelines must not be faulted for the sake of these 57 licenses, because they are at fault and by increasing the decibel level misguiding the government. 
 
The new M&A guidelines also limit the exit options for new entry makers, and this suggests that they will need to revisit their strategies. These guidelines clearly state that there is a lock-in period of three years, during which the telecom company cannot sell its spectrum. Therefore, an acquirer will have to run the acquired company as an independent entity till the lock-in period gets over. It is understood that economic benefits of an acquisition can occur only after a merger. These circumstances have dampened the eagerness for mergers and acquisitions in the sector.  The telecom companies are urgently hoping for clarity in regulatory matters and rationalisation of taxes, since the new government has come in.
The industry has also been complaining about time-consuming procedures and delayed approvals by the Department of Telecommunications (DoT). 
 
The failure of the Bharti Airtel-Loop deal earlier this year reiterates what the industry has been saying for a very long time about the regulatory clarity needed for merger and acquisition guidelines to ensure that deals like these do not fall through and the customers are not left in limbo. However, when dealt with this case in particular, it never looked like a case of a typical merger. TRAI’s opposition in this matter probably reflects the confusion surrounding telecom mergers in the present system, but also the sudden shutting down of operations by Loop sends out a very negative image of the industry. There have been many mergers in the past and the licence/ spectrum transfer is probably the most essential part of the deal, given that spectrum is a finite resource and the demand is always high. The Loop sale should have been easy because the licence was not being transferred, and it was only the customer base and other assets mentioned when the deal was struck that were being transferred to Bharti Airtel. There is no doubt that ambiguity prevails in the current system but there is also a possibility of this merger being a bad business decision rather than a victim of policy paralysis at the government level. 
 
India's telecom sector is one of the most regulated industries, where cost of airwaves is far higher than that for its international counterparts, but then these spectrum prices are determined through a transparent e-Auction. The industry has been demanding lower base prices for airwaves, such that it can take telephony and data services to people countrywide. Telecom companies want the Indian government to not charge hefty upfront payments from the industry because of airwaves but should allow the industry to grow, which would bring higher profitability and, in turn, mean more taxes for the government. There is need of urgent consolidation in the telecom sector to continue in various forms, be it in terms of market consolidation, legal consolidation, network and asset sharing, etc. The new government should mainly focus on improving service quality and restoring investor confidence. Telecom companies remain hopeful that the new government will aid them in helping maintain 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.
 
Telecom has become an integral part of our daily life. The interest of the consumer must be kept at par with the growth of the entire industry. It is a given, that by keeping one side happy at the cost of the other will negatively impact the sector in the near future. Therefore, it is absolutely crucial to sustain competition within the sector. There are probably plenty of inadequacies and ambiguities in the laws and regulations, and in the powers of the regulatory bodies. But, it is essential that the regulatory bodies formulate boundaries for themselves and ensure that they manage to create a healthy and efficient business model for the telecom sector. There might be issues regarding overlap between competition policies/ laws and regulatory authorities. Regulation of an industry has three primary dimensions- technical, economic and competition, and there should be a strong framework to create systems to ensure overall co-operation in all these areas. 
 
(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.)
Comments
Veeresh Malik
6 years ago
This essay does not appear to put forward the point of view of the end customer - the small man or woman who pays the bills. For them, the more the competition, the better the deal. Simple as that.

Large corporate mergers and the rest are not priority.
Simple Indian
6 years ago
The telecom sector should have been accorded priority as infrastructure building sector, to make both GoI and private sector firms have a healthy partnership in developing the sector for far-reaching impact on overall economic growth. Communication, particularly IT-based, is key to growth of our economy in these times, and having a mobile service is key to better and faster communication at all levels. Govt can do a lot more by reviewing and revising its M&A policy and enable private sector firms consolidate for offering better services to the masses. Got could even incentivise private telecom firms to setup services in rural areas which lack much-needed mobile services, as State-owned BSNL is barely able to meet the demand or offer reliable services.
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