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India saw two failed auctions and three 'reserve price' revisions in less than one year. The first round of auctions, which held in November 2012, saw five operators winning spectrum in the 1800Mhz band, while the auction for 800Mhz band saw no participation. Subsequently, the March 2013 re-auctions for both the bands were again a let-down with only one player bidding for the 800MHz spectrum and no bids for the 1800MHz band.
It was against this backdrop that the telecom industry was eagerly awaiting the (recently released) Trai recommendations on spectrum prices in the hope that it would energise the sector. However, the recommendations were faced with yet another impasse with the Department of Telecommunication (DoT) raising objections over the steep reduction in reserve price and spectrum usage charges (SUC). DoT's counterclaims on various recommendations are bound to prolong the decision making and eventual clarity vis-a-vis the controversies clouding the sector.
With renewed attempts by DoT, Trai and the Telecom Commission are rethinking the recommendations, which may further delay the auction process. The extent of deliberations required to reach favourable ground with all parties involved may stretch for a significant time period with ambiguity prevailing for another 30-40 days.
This policy deadlock is bound to have a negative impact on the industry and the government. On the operator's side, this is bound to defer the investment decisions because of lack of clarity on the amount needed to be set aside for contesting in the auctions. At the government's end, it is likely to delay the inflow of revenue to the tune of approximately Rs 11,000 crore in the proposed January 2014 auctions. Two, from the perspective of the overall economic health of the sector, the deliberations, reconsiderations, claims and counter claims, policy paralysis, and general regulatory back and forth has contributed to a decline in the foreign investment into the sector. For instance, foreign investment inflow in the sector has dipped year-on-year and hit a major low with only Rs 1,650 crore FDI equity inflows in FY13. What is interesting to note here is that just three years ago the sector attracted Rs 12,300 crore worth of FDI equity inflows.
Whereas parts of Trai recommendations are progressive and forward looking, the points of contention raised by the DoT bear some merit and need to be addressed at the earliest.
First, while DoT and, subsequently, the Telecom Commission have questioned the cut in reserve price, the Trai recommended reserve price is far more favourable than what had been proposed in the earlier auction. The country has already witnessed limiting response in the last two spectrum auctions in November 2013 and March 2013. The lower reserve price is likely to attract better participation in the next round of auctions and there may even be a spurt of new players emerging in the telecom market.
Moreover, the reserve price set by Trai in its recommendations should not be understood as an indicator of the eventual market determined price for the upcoming 2014 auctions. With significant reduction in reserve prices proposed by Trai (47 per cent reduction in 1800MHz reserve price vis-a-vis November 2012 reserve price), undoubtedly the industry is bound to compete leading to fair price point discovery at the auctions. For instance, in the 3G and broadband wireless access (BWA) auctions in 2010, the market discovered price was much higher than the government-set reserve price. The government earned Rs 67,710 crore for pan India 3G spectrum, almost twenty times the set reserve price of Rs 3,500 crore. Similarly, the market discovered price for the pan India BWA spectrum (Rs 12,800 crore) was over seven times the government set reserve price (Rs 1,700 crore).
Another contended recommendation - the cut in the SUC - as recommended by Trai, is also positive for the sector reeling under financial pressure. Compared to other Asian counterparts India has one of the highest SUC. Indian operators are charged from 3 per cent to 8 per cent of adjusted gross revenue depending as SUC, while other Asian countries pay negligible or no spectrum charges - China (Rs 0.5 per cent of revenue), Malaysia (nil) and Sri Lanka (Rs 1.1 per cent of turnover).
The debate over Trai recommendations has led to some progressive arbitration as well.
First, the request from Telecom Commission for pan India price for 800Mhz and 900Mhz spectrum is justified because it would give clarity to operators regarding the expected net outgoes for acquiring or renewing their spectrum and will also help simplify the processes when the auctions for these spectrum bands are eventually announced.
Also, the Telecom Commissions's in-principle approval to Trai's recommendation of allowing spectrum trading is a significant step forward for the sector. As per Trai's recommendations, operators that have obtained spectrum through auction or paid the prescribed market value to the government should be allowed to trade spectrum. This is a progressive recommendation as it will enable operators to consolidate their fragmented spectrum holding, ensure optimal utilisation and allow specific reallocation of spectrum, which cannot be achieved only by mergers and acquisitions.
While Trai should to be applauded for comprehensive recommendations, it is imperative that the regulator along with other industry bodies takes concerted and timely action to resolve the outstanding issues highlighted by the government. From an overall perspective, the Trai recommendations, which at the outset seemed like a light at the end of the tunnel, turned out to be a mere mirage. The recent DoT deliberations may turn out to be a dampener in the medium term. This is not the first time this has happened in the recent years. Issues such as lack of clarity over 3G roaming agreements; controversies over the previous auction processes; and absence of specific roadmap for the business continuance of penalised operators are other on-going pain points faced by the industry.
The continued stalemate over regulatory issues takes away investor confidence and overall dynamism of the telecom sector. The Indian telecom industry, which was once a poster boy of India's liberalisation and forward looking economic and sectoral reforms, is in state of flux because of high taxes, low investor confidence and lack of regulatory transparency. It is imperative for the sector to regain its position as an exemplar in forward looking, positive, consumer friendly policies, that instil confidence in customers and operators and firmly accord to the sector its erstwhile glory and vigour.
Prashant Singhal
partner, member firm of Ernst & Young Global
partner, member firm of Ernst & Young Global
