Spectrum ceilings/charges will be crucial for this
If telecom stocks have rallied the way they have over the past few months—Idea by 40% in the last 4 months and RCom by 100%—it is because things finally seem to be changing for the sector, the latest being telecom minister Kapil Sibal’s statement that M&A norms would be announced by the end of the month. Prior to this, with the new lot of licensees getting out of business, tariffs started rising and, more recently, the government agreed that it would refer the matter of the base price for the 2G auctions back to the telecom regulator—this is critical since the new auctions will provide new spectrum for starved operators, determine the price they pay for the ‘extra spectrum’ they hold, and also pave the way for their existing 2G licences to be renewed.
The problem, however, is that the M&A norms recommended by the regulator aren’t too helpful. For one, they have restricted themselves to mere tweaking of the current norms. So, instead of the merged entity not being allowed to retain more than 15 MHz of spectrum, Trai’s recommendation is to increase this to 25 MHz. Given the manner in which data uses up spectrum—a 10-minute phone call uses a fraction of what a 10-minute YouTube video does—this is meaningless and, in any case, Trai’s own discussion papers show Indian telcos have a fraction of the spectrum their global counterparts have. The other norm, that the total market share of the combined firm cannot be more than 35% also ensures that none of the major telcos can merge. Given that no mature market has as many players as India does, there is no reason why the number should be so low. More so since Trai indicators such as the HHI index clearly show very low pricing power with the incumbents.
The other problem, even more serious, is the manner in which annual charges are levied. Today, these are levied as a proportion of total annual revenues, but the share of revenue rises as a telco has more spectrum. This may have made sense when the spectrum was handed out free or at a low price. But given how spectrum is fully priced in an auction, a ratcheting up scale like this puts a merged entity at a disadvantage vis a vis a smaller one with less spectrum. Unless these issues are dealt with in a satisfactory manner by the end of the month, the new M&A norms are unlikely to achieve what they set out to do, namely to make the industry healthier.