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Killing M&As PDF Print E-mail
Monday, 24 February 2014 00:00
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Charging for spectrum makes them unattractive

 

By refusing to renew the 900MHz spectrum of telcos, that accounted for the most lucrative part of their business, the government forced them to bid outrageously in the just-concluded auctions. And since, from now to 2021, more 900MHz licenses will expire, telcos will have to participate in such auctions every year. If this isn't bad enough, the new M&A rules discourage M&As.

On the face of things, the rules appear reasonable by asking potential M&A firms to pay a free-market price for spectrum. If Telco A got 4.4 MHz of spectrum in 2001, and Telco B wants to buy it out, it will have to pay the market price of Rs 9,988 crore (from February’s auctions) minus the Rs 1,651 crore paid by Telco A in the 2001 auctions as entry fees. But if it is the case that firms should pay the market rate for spectrum, why should this apply only to firms engaged in M&As and not all telcos? If the argument is only those involved in M&As are making a profit from the sale of spectrum, the government gets its share of the capital gains through taxes anyway. More important, the government is wrong in assuming the price paid in 2001 was not a ‘market price’ – the government calls it ‘assigned’ spectrum. In both 1994 and 2001, auctions were held to determine who would get the licence – and since spectrum could not be bought separately in those days, the entry fee paid for the licence was nothing but the price for spectrum. But what about the spectrum given to operators beyond the initial 4.4 MHz, surely that was free? It was not since the government found another way to charge the telcos. Instead of charging them an upfront amount – like the Rs 1,651 crore for the 4.4 MHz – it simply increased the proportion of the annual revenues that telcos paid each year. In other words, it was simply a different way of financing – how does it make a difference if operators pay Rs 100 upfront in an auction or whether they pay Rs 10 every year by way of increased revenue-share-based licence fees?

The larger point is that no new policy – in whichever sector – should seek to overturn a previous policy. In telecom, the new policy on 900 MHz spectrum, for instance, decided there would be no renewal of license. If the same principle was to be applied to coal or iron ore mines, or to the Taj Mahal Hotel whose licence is up for renewal, no one would ever invest. It is precisely for this reason that, when Cairn India asked for its licences to be extended to enable it to extract the new oil discovered, the government had no hesitation in agreeing. If the telecom industry is to flourish, the rules need to be relooked.

 

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