India’s Union cabinet on Wednesday approved rules that will allow telecom operators to buy and sell unused spectrum among themselves, a move that may spur consolidation in India’s fragmented telecom industry and also help improve service quality by reducing the number of dropped calls.
The new rules will allow operators such as Reliance Communications Ltd (R-Com), which has failed to get the necessary airwaves in the last three auctions, to acquire spectrum outside of the auction system.
It will also pave the way for struggling telcos to exit the business.
“It would provide bigger players who have congested networks to buy new spectrum and improve the quality of service for customers. They do not have to wait for the spectrum auction to get additional spectrum. It will give agility and flexibility to operators,” said Hemant Joshi, a partner at Deloitte Haskins and Sells Llp in India. “All in all, it is a good move for consolidating the industry. Companies entering into trade agreements will have to only inform the government and no approval is required.”
Telcos will have to inform the government 45 days before the transaction and will have to pay 1% of the transaction amount as trading fee, according to the new guidelines. The tenure of the spectrum licence will stay unchanged.
The telcos last week requested the government to keep the trading fee low, as otherwise it would amount to double taxation and act as a deterrent.
“The government has given a liberal policy for spectrum trading and along with spectrum sharing, it would go a long way in improving and innovating communication services in India,” Joshi added. “This is a very positive step leading to ease of doing business in India.”
Currently, there are around 11 telcos in the country, compared with the five that is considered healthy for any market. This, coupled with the scarcity of spectrum for communications services and fears of radiation from telecom towers, has led to poor service quality, especially in cities such as Delhi and Mumbai.
Telcos are facing pressure from the government to fix the call drop problem, with the latter saying that there is enough spectrum in the country.
The new rules, however, only permit trading of airwaves that have been acquired through an auction or if the operator has paid the market value to acquire them initially, the government said. Operators can only sell spectrum after two years of ownership and will need to clear all dues before any transactions.
The Telecom Commission, the highest telecom policy decision-making body, approved the spectrum trading guidelines in June, and submitted them to the cabinet for approval, almost a year-and-a-half after the telecom regulator first submitted its recommendations to the government.
The most immediate impact of the new rules is expected to be on the ongoing merger talks between Russia’s Sistema-controlled Sistema Shyam Teleservices Ltd, the owner of the MTS brand, and Anil Ambani Group’s R-Com.
The new rules are likely to help R-Com continue to operate its network after the company’s right to use spectrum ends. R-Com will see much of its spectrum expiring in the coming years.
Existing telecom merger and acquisition rules do not allow a merged telco to hold more than 25% of spectrum across the country and 50% in one circle.
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.
These articles were first published on Livemint.com