|Tuesday, 20 September 2016 05:14|
Expect the unexpected in next month's auction
Given the Rs 15,028 crore of earnest money deposit (EMD) by seven telecom companies for October’s auction, conventional wisdom is that this could be the mother of all auctions, not just in terms of the amount of spectrum on offer but also in terms of the money the government will raise—the fact that more money has to be given upfront than in the past only adds to this. If you take an EMD-to-reserve-price ratio of even 12%, you can theoretically get bids of around R120,000 crore—if you assume no one bids above the reserve price, a likely possibility given, in most circles, the supply is greater than the demand. Before doing this, however, it may be worthwhile to look at the ratio of the EMDs made at the beginning of the last few auctions to the amounts actually used up. In 2015, the EMDs for the top six telcos added up to R19,211 crore while the EMDs used up were just R9,414 crore, or a ratio of under 50%—Bharti used up 63% of its EMDs, Vodafone 53% and RJio just 20%. In the auction before that, roughly 75% of EMDs got used up, with the ratio as high as 97% for Idea. The fact that there are no spectrum-renewal circles this time around, along with the fact that RJio’s aggressive pricing has shaken up the industry’s financial projections, suggests that the auction could be more subdued than in the past, with telcos just bidding to plug gaps in their networks—Vodafone, for instance, has launched 4G services in just nine circles while Idea needs to buy 3G spectrum in 10 circles.
In order to buy all spectrum bands—of 5 MHz size—telcos need around 60,000 points, and roughly 60% of this is required for the 700 MHz band. But, going by the EMD RJio has put in, and the points this correlates to, RJio has put in a lot more money than is required for all the non-700 MHz spectrum—in other words, it will bid for the 700 MHz band. But will it? The auction rules are quite clear: If a telco, like RJio for instance, is among the top three bidders in a round and the supply of spectrum is greater than the demand—this means auction bids will not rise in the next round—it cannot change its bid and move out of the 700 MHz band. In other words, an RJio will have to buy the 700 MHz band at the hugely inflated reserve price. While RJio has the money to afford to buy 700 MHz spectrum, given it will take 2-3 years to get mobile phones in this band, why would it want to bid right now—more so when, should the auctions fail, the government will reduce the reserve price and re-auction the 700 MHz slot? A similar problem of getting trapped could occur in the 2100 MHz slot where there are four slots of 5 MHz available in most circles while the demand is lower. This is not to say that telcos will not bid for the 2100 MHz slot, but the competition will be lower than in the 1800 MHz slot and any bidders that want to buy 700/2100 MHz spectrum will have to be very sure of what they want and be prepared to get locked in at the reserve price in the first round itself. That means telcos may not bid for the 700 MHz slot, and it also means the auction may not stretch into as many rounds as some of the earlier ones in the frequency bands that have a lot of spectrum and/or have a very high reserve price.