Dial M for M&As

Industry will welcome them but consumers should be wary

The telecom industry is likely to welcome the Telecom Regulatory Authority of India’s (Trai’s) latest recommendations on mergers and acquisitions (M&As) in the sector but consumers may have cause for anxiety. The new norms certainly mark a major relaxation on the old ones. For one, they allow the merged entity to retain up to 25 per cent of the spectrum available with all operators in the circle in which the merger takes place against the earlier retention limit of 14.4 MHz (the rest was to be returned to the government). Under the new norms, Trai officials’ calculations suggest operators will be able to retain at least 2 to 3 MHz more. In an industry in which the pricing and availability of spectrum have been the focus of considerable controversy – a former telecom minister is in jail mainly for alleged corruption on this account – this relaxation can be considered a more realistic recognition of, and an effort to staunch, the kind of opaque transactions that have caused some telecom executives to spend time in jail. Also, once the price of spectrum is linked to market realities – and the magnitude of the current telecom controversy suggests that no government will repeat the mistakes of the 2007-08 licensing debacle – this spectrum-retention recommendation will go a long way in facilitating M&A activity in this business.

If there is cause for concern, it is the fact that the new norms also potentially open the door for buyouts among larger incumbents that could result in a market share of 60 per cent for combined entities. This, again, is a significant relaxation of the limit of a combined market share of 30 per cent for the merged entity under the old norms. But the 60 per cent definition of dominance is open to question. From the industry’s point of view, this certainly opens up the playing field for some much-needed consolidation. Indeed, India is something of a unique market in allowing seven or eight operators per circle, almost twice the global average. So it is no surprise that new operators who were granted licences in 2008 account for less than five per cent of market share and have garnered negligible revenues despite acquiring spectrum relatively cheaply. But it is also true that the 60 per cent limit does not rule out, say, the merger of two dominant players in a circle — say, Airtel and Vodafone or Idea and Vodafone. Should this matter? It should for a customer. Any utility business is essentially a “sticky” business inasmuch as the customer is unlikely to switch service provider with the same alacrity as she does for a detergent or coffee brand. It follows, therefore, that a utility service provider who owns 60 per cent of a market is unlikely to be as customer-friendly as one who has 30 per cent. The fact that M&As above the 30 per cent market share threshold would be subject to government approval is also undesirable; it opens the door for the kind of lobbying that has done the industry little good so far. And finally, the new M&A recommendations raise the eternal question: if Trai is making these recommendations, what role does the Competition Commission of India play?