Telecom Trouble

If you thought Indian telecommunication companies have already been through
their share of troubles in the ongoing third-generation auction, think again.
Going by the recommendations made by India's telecom regulator Tuesday, the
sector would do well to gear up to face some new challenges.

Adding to the already expensive affair of 3G bandwidth auctions, the Telecom
Regulatory Authority of India has recommended that GSM and CDMA operators with
more than 6.2 megahertz and 5 Mhz of second-generation bandwidth, respectively,
pay a one-time fee to keep the excess spectrum. The fee will be linked to the
ongoing 3G spectrum auctions.

Predictably, telecommunication stocks have taken a beating. By early
Wednesday afternoon, Bharti Airtel, India's largest mobile-phone operator by
subscribers, tumbled 8.1%, while peer Idea Cellular slipped 7.4%. The benchmark
Sensex was down 0.5%.

If implemented, the proposed one-time fee would be close to the prices of 3G
auction bids, according to Kim Eng Securities, and would further pressurize a
sector already mired by free-falling tariffs due to severe competition.

The government, which is seeking to lower its fiscal deficit, expects to
raise 300 billion rupees to 350 billion rupees (about $6.6 billion) from the
one-time fee on the 2G spectrum even as the bids for one pan-India slot of 3G
spectrum reached 140.26 billion rupees ($3.10 billion) Tuesday versus the
starting price of 35 billion rupees.

There seems to be little justification for using 3G bids for pricing 2G
spectrum, as the former are driven more by scarcity and lack of a transparent
spectrum roadmap.

Among the worst hit would be Bharti, Vodafone Essar and Idea. UBS estimates
Bharti would need to pay about 86.9 billion rupees ($1.92 billion), while Idea
would need to shell out 28.2 billion rupees ($622.5 million) for the excess
spectrum that the companies hold. The fee could lower Bharti's earnings per
share by 25 rupees and Idea's by 8.5 rupees, UBS adds.

The impact is lesser for Reliance Communications, part of the Anil Dhirubhai
Ambani Group, as it owns less than 6.2 MHz of 2G spectrum in all circles except
Bihar. The country's second-largest mobile phone operator by users estimates it
may need to pay anywhere between 150 million rupees and 200 million rupees for
the Bihar service area.

In addition to increasing the financial burden, the TRAI also recommended
that mergers and acquisitions be allowed in the sector, provided there are at
least six players after any deal in a specific service area. While the move is
meant to facilitate consolidation in a sector that's witnessing intense
competition, requirements such as a merged entity being able to own only 30% of
the total user base in a service area hampers the process.

This would mean that a company with a mid-size user base will need to
strictly acquire other companies that have a negligible market share. The
consolidation will naturally become restricted to smaller and newer players
thereby not really addressing the aim of consolidation within the already
crowded market.