Ind-Ra: Spectrum Trading to Aid Monetisation of Assets, Offer Exit Options

Spectrum trading is likely to aid consolidation in the telecom sector and allow for the monetisation of assets from unutilised service areas, says India Ratings and Research (Ind-Ra). The industry could see emergence of four pan-India players (Bharti Airtel, Vodafone India, Idea Cellular and Reliance Jio Infocomm), assuming they will retain spectrum in all licensed service areas (LSAs) while other players may maintain strategic regional presence by trading their spectrum holding in some LSAs. Currently, there are more than six to seven operators holding spectrum in each of the LSA, of which two to three hold a miniscule market share.

Spectrum trading can help operators choose LSAs where they want to retain their presence and grow market share, while exiting other LSAs. Trading of spectrum will also help unlock funds stuck in the form of unutilised spectrum, which can be better used to grow infrastructure in LSAs of strategic importance.

Therefore, spectrum trading can help in efficient allocation of this natural resource compared with auctions. Auctions have a price uncertainty, and escalations in bidding prices similar to the past may prove the acquisition of additional spectrum to be more expensive. The spectrum trading guidelines could also provide marginal players an exit from the industry. Videocon Telecommunications Limited and Quadrant Televentures Limited have witnessed limited market share in a highly competitive market.

The CDMA ecosystem in India has not picked up in the right volumes, which has left the 800MHz band underutilised. Ind-Ra does not expect much trading however in the 800MHz band at this stage, as this band is of strategic importance to roll-out 4G services. Therefore, some operators could either develop 4G services on this band or rather wait for the 4G services in India to grow, so as to get a higher valuation for their 800MHz holding.

India's pure-play CDMA player - Sistema Shyam TeleServices Limited may find itself on a back foot with the latest trading guidelines. The company only has 3.75MHz of 800MHz spectrum in eight LSAs (except for Rajasthan where it has 5MHz) which was acquired in the March 2013 auctions. Spectrum trading guidelines specifically mention that the spectrum acquired by the company in March 2013 can only be traded after it has made payment of the differential premium of the latest auction price compared with the 2013 auction prices. The difference is an average 2.5x the initial auction price, requiring a high upfront payment for the company.

Ind-Ra estimates spectrum trading to lead to a strategic exit by operators in some LSAs; Aircel may consider exit in Gujarat, Haryana, Kerala, Madhya Pradesh, Reliance Communications may look to monetise its underutilised spectrum in Jammu and Kashmir, North East and similarly Tata Teleservices may evaluate exit options for Himachal Pradesh and Rajasthan.

Ind-Ra does not expect the transaction tax of 1% of the transaction amount as transfer fee as a material deterrent for spectrum trading. The license fee and spectrum usage charges however on the transaction proceeds of the seller as part of the adjusted gross revenues could take away 12%-15% of the seller's proceeds.

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