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2G Price Proposals Hit Telco Stocks

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The telecom regulator's proposal for a near 10-fold increase in basic mobile phone spectrum prices and switching of radio spectrum given to older carriers knocked down shares of leading operators on fears that the big potential payouts will further hurt an already bleeding industry.

Shares in top mobile operator Bharti Airtel fell as much as 7.5 per cent on Tuesday morning to their lowest level since July 2010, while fourth-ranked Idea Cellular fell as much as 9.8 per cent, before cutting some losses.

No. 2 Reliance Communications fell as much as 3.4 per cent.

The country's telecoms sector, the world's second-biggest by subscribers, has been battered by ferocious competition and a scandal over below-market price sale of lucrative mobile phone permits in a 2008 state sale process.

The Supreme Court has ordered 122 permits granted to eight operators in the 2008 sale be revoked in early June and asked the government to redistribute radioairwaves through an open bidding process.

The Telecom Regulatory Authority of India late on Monday recommended an auction base price of Rs 3622 crore for every megahertz (MHz) of nationwide spectrum in the 1800 MHz band, compared with a price of Rs 380 crore in the 2008 sale.

This would be a blow to companies such as the Indian unit of Norway's Telenor and Indian firm Idea Cellular and Tata Teleservices who are set to lose some or all their zonal permits after the court order, as nationwide spectrum of 5 MHz quantity would cost a minimum Rs 18,972 crore.

While the proposed starting price for the basic second-generation 1800 MHz band is 8 per cent higher than what operators paid for premium 3G spectrum in 2010, the regulator has suggested a base price of Rs 7244 crore per MHz for spectrum in the 800 and 900 MHz bands held by older operators.

The regulator also suggested that the government should carry out refarming, or switching of, spectrum bands "progressively at an early date". Such refarming is a global practice to resell more-efficient spectrum bands for premium services such as 3G.

But such a move could hit companies such as Bharti and Vodafone's Indian unit, most of whose existing bandwidth is in the more efficient 900 MHz band.

That bandwidth would be replaced with spectrum in the 1800 MHz band, which would increase their capital expenditure, or the companies would have to pay a heavy price to retain the 900 MHz band spectrum.

Goldman Sachs analysts wrote in note the regulator's proposals were negative for the older players as well as the newer entrants as it would "stretch their weak balance sheets".

The proposals would, however, put Reliance Industries that has access to nationwide 4G spectrum at an advantage as the regulator suggested holding auction of fresh 4G spectrum preferably in 2014.

The regulator's proposals are not binding on the government and a panel of ministers will decide on the spectrum rules.