A reasonable M&A policy is critical for the sector
Though the telecom sector is undoubtedly doing much better than it was a year ago, it is in danger of slipping into the danger zone once again as companies start ramping up their expansion—if the government sticks to its auction plans, the ramp up could start taking place within the financial year. In such a situation, the sector’s best hope lies in curbing the excessive competition that brought tariffs down to way below cost and in cutting costs. To some extent, the first part has been achieved with the Supreme Court cancelling the licenses issued by A Raja since, having got the licenses dirt-cheap, the companies lowered tariffs to unsustainable levels. Since this cancellation meant that customers weren’t deserting their network providers in droves—‘churning’, to use telecom jargon—telcos have been able to raise tariffs a bit and cut down dramatically on wasteful sales/promotion expenditure, though there is still a way to go on this.
The other area where significant cost savings can be made lies in spectrum usage. It is well established that spectrum efficiency increases dramatically once larger chunks are available to telcos—successive Trai papers have made it clear global spectrum levels per telco are many times higher than those in India. While their global peers have higher spectral efficiency thanks to larger spectrum chunks, Indian telcos have to make up for the loss in signals by adding to the number of telecom towers they put up—in other words, by adding substantially to capital costs and then operating costs to maintain each extra tower.
It is in this context that the industry has been asking for a liberal M&A policy for year since the current one remains restrictive. While what is being proposed is better, it is just marginally so. If an M&A takes place, right now, there is a 14MHz cap on 2G spectrum and a 5MHz cap on 3G spectrum—if the merged entity has anything more than this, it needs to be returned to the government. None of this makes sense, including the proposed M&A policy reducing the maximum share of the merged entity to a 35% market share, though Trai permission can be sought if the share goes up to 60%. At a time when the industry is growing by leaps and bounds, and will grow even faster once there is larger use of data, it badly needs more spectrum. A 25MHz of 2G spectrum and 5MHz of 3G spectrum rules out the merger of anybody but the really tiny telcos—the 3G restriction, for instance, means firms can’t expand and also restricts the ability of customers to use such networks. And, in any case, at a time when the government is looking at allowing trading/sharing in spectrum, these restrictions need to go. The alternative is a hobbled high-cost industry.