Trai proposal puts liability burden on sellers in telecom M&A deals

Experts are of the view that these reforms are too little, too late

In a bid to reform the merger norms for telecom licences, the Telecom Regulatory Authority of India (Trai) on Friday suggested that liabilities arising out of a deal would be the seller’s responsibility, as opposed to the buyer’s currently.

These recommendations are expected to streamline the merger & acquisition process and settle legal disputes in the telecom sector.

Though Trai may consider it a reformative step, experts are of the view that with only three private telecom players in the market, these reforms are too little, too late. Too few players mean barely any scope for mergers and acquisitions.

“These definitions and separation made sense when there were more players, but now such measures are of hardly any use as there are only three private players,” said an independent expert said.

These measures are mainly to curb anti-competitive issues, which may arise out of mergers and acquisitions in the sector.

Trai also suggested that both revenue and subscriber base would determine the overall market share of mobile and internet service providers (ISPs). It also proposed that for services like national and international long-distance telephony, only revenue would be considered for the market share calculation of ISPs.

It said that both number of subscribers and adjusted gross revenue (AGR) be considered for determining the market share in the case of services like access, internet, and VSAT (very small aperture terminal).

Only AGR should be considered for calculating the market share for other services, such as national and international long-distance calls, and resale of international private leased circuits, it suggested. The authority recommended guidelines explicitly mention that consequent upon payment of the market-determined price for spectrum, such spectrum is treated as liberalised, or technology-neutral.

It reiterated its earlier suggestion that if a transferor company holds part of spectrum, which has been assigned against entry fee, the resultant entity is liable to pay differential amount for the spectrum assigned against the entry fee paid by the transferor company, from the date that the DoT (Department of Telecommunications) approves the transfer/merger.

The sector regulator also suggested the one-year timeline, which currently allows for transfer/merger of licences in different service areas after the National Company Law Tribunal nod, should exclude time spent by companies in pursuing any litigation on account of which the final approval to a merger is delayed.

It said the guidelines on transfer/merger of licenses should not explicitly mention the spectrum caps and instead be linked to the relevant clause of the licence.

Trai’s recommendations on reforming the guidelines for transfer and merger of telecom licences came months after the telecom department in May 2019 sought its views on enabling simplification and fast-tracking of approvals. The suggestions range from market share mathematics to approval timelines, and other terms.

The regulator noted the guidelines must be seen in the backdrop of consolidation in the market (from 12-14 service providers a decade ago to only four operators now), the National Digital Communication Policy's thrust on speedy approvals, and the delay in mergers.

Currently, there are three private players — Bharti Airtel, Vodafone Idea, and Reliance Jio — and one public sector entity, Bharat Sanchar Nigam.

“The authority recommends that for computing market share of an NSO (network service operators) in the relevant market, the market share of the VNO (virtual network operator) parented with it should be added to the market share of NSO, if the NSO is a promoter of the VNO," Trai stated.

Virtual network operators can provide telecom services like mobile landline and internet, but only as retailer for full-fledged telecom operators.

"For the calculation of one year, that is the time period allowed for transfer/merger of various licenses in different service areas subsequent to the approval of the tribunal/company judge, the time spent in pursuing any litigation on account of which the final approval of a merger is delayed should be excluded," the regulator said.

This would protect the rights of a telecom operator to pursue remedies in the court and also ensure that the period of one year does not become redundant for no fault of the company on account of pendency of an issue before a court, one of the stakeholders cited by Trai had submitted.

Another provision of the acquisition guidelines, which provide an exemption from substantial equity/cross-holding clause for one year or more, should be modified such that the said exemption is provided only for a period until transfer/merger of the licence is taken on record by the licensor (telecom department).

THE SUGGESTIONS

The proposals are aimed at curbing anti-competitive issues that may arise out of mergers and acquisitions in the sector

• Trai suggests that both the number of subscribers and AGR be considered for determining the market share in the case of services like access, internet and VSAT
• AGR shall only be considered for determining the market share for other services like national and international long-distance calls, and resale of international private leased circuits
• The guidelines on transfer/merger of licences should not explicitly mention the spectrum caps, and instead be linked to the relevant clause of the licence