No clarity on SUC, trading rules not specified
Apart from the more realistic base prices for spectrum that the Empowered Group of Ministers okayed, much of the recent enthusiasm about the telecom auctions has been centred around the new mergers and acquisition (M&A) rules as well as the rules for trading in spectrum—the two are related in the sense that if there are liberal trading rules, the need for M&As will be reduced somewhat. The government has done well to approve M&A rules that are more liberal and will allow even large players to acquire mid-sized firms—the combined market share that will be allowed for a merged entity is now 50% as compared to the existing 35%. More important, since mergers and acquisitions mean little unless they come with attached spectrum, the cap for spectrum for the merged entity has been raised to 25MHz from the current 14MHz. And within the crucial 3G band which is needed for servicing data needs of clients, the merged entity can hold 10 MHz as compared to a mere 5MHz today.
That’s where the good news ends since, for almost three months, the government has not been able to make up its mind on the crucial spectrum usage charge (SUC). While Trai was in favour of a uniform SUC of 3% not just across all spectrum holdings but also for all telecom services from voice to data, the telecom ministry was against this. By not taking a decision on SUC and, in a sense, opting for the status quo for now at least, what the government has done is to tilt the field against M&A. If a Bharti Airtel or a Vodafone is to buy an Aircel for instance, SUC rates will go up progressively for larger chunks of spectrum holdings, so the company will think twice before doing an M&A. More so when the government has also put in another deal-breaker clause that any M&A involving more than 4.4MHz of spectrum—this came bundled with the license—will have to pay an additional charge to the government. This charge will be the bid price for spectrum in the latest auction. Since most spectrum has been given out on an administered price, this means most M&As will have to be accompanied by another payment to the government. While that sounds like a good way for the government to get the full value of the spectrum, the problem is that firms with such spectrum have, over the years, also paid the government a lot of money by way of license fees.
Since more liberal trading rules will reduce the need for M&As, and they will also allow firms to be more selective in the sense they can now get just the 3G part of another telco’s business instead of the entire 2G/3G business, it is critical these rules be framed at the earliest. These rules, though, will also be held hostage to any decision on SUC.