Cancellation of 2G licence a relegating development for sector

The Supreme Court has delivered a landmark verdict by cancelling all 122 telecom licences the government issued in January 2008. The judgment by the country’s apex court will have broader ramifications and is likely to have a ripple influence on the entire telecom value chain and derivatives of the sector, including passive infrastructure providers, value-added service providers and OEMs. The cancellation of the 2G licence is a relegating development for the sector, and could cost India Inc $8-10 billion annually, which is currently in circulation by the 122 licensees.

In the past decade, India has witnessed a considerable rise in foreign direct investment. During the last decade, FDI in the country increased at a compound annual rate of 28 per cent to reach $37.2 billion in FY10. Telecom is among the leading sectors attracting FDI, accounting for 8.1 per cent of cumulative FDI equity inflow, but the climate is likely to take a big blow from the outcome of the Supreme Court’s decision. It will generate negative market sentiment and waning investor confidence and the sector will witness substantial erosion in foreign investments by international operators.

The affected players have a combined subscriber market share of 9-10 per cent, and around 80 million subscribers are likely to be distressed. The cancellation of licenses will impact around 10,000 jobs in the sector, approximately 4,000 direct and 6,000 indirect jobs.

The decree of the apex court, though, is a big positive for the incumbents who were under pressure due to hyper-competition in the market, crunched spectrum and declining average revenue per user, quarter on quarter. The decision will reduce competition in the sector and with fewer players in the market, which would lead to hike in rates in the short term. The incumbents in the past four months have already raised rates by 20 per cent.

Apart from the hike and reduced competition, approximately 540MHz of 2G spectrum could become available (10-15MHz in each circle), and the auction mandated by the court would fetch the government billions. All the same, it would be a big negative if the government benchmarks 2G spectrum auction price to 3G. The service providers are already under huge debt burden from the 3G auctions, due to which the demand for 2G spectrum might be muted.

The regulator has been asked to release the regime for the auction process in the next four months, but an auction might not be able to create much excitement in the market. It would, in return, lead to uncertainty for the next four months for the companies involved. The price of the auction fixed by the regulator would be critical in order to keep serious players attracted.

Prashant Singhal
Partner in member firm of Ernst & Young Global
Views expressed are personal