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BW Businessworld

Devil Is In The Details

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India continues to be one of the fastest growing telecom markets in the world. As a consequence of this explosive growth, it has attracted a large variety of telecom operators, both domestic and foreign, making India the most competitive markets with an average of 8 operators per circle (against an international benchmark of 4-5 operators). This has hampered the growth as telcos operate with thin margins and high debt; which further restricts the scope of infrastructure investments in the sector.

In October 2011, National Telecom Policy 2012 outlined the broad contours of the future telecom ecosystem of India. However the specific details of the policy in terms of implementation plan and time frame are still awaited eagerly by the industry.

There has been excessive discussion back and forth on Mergers & Acquisitions between the regulatory bodies. Several proposals have been put forward for the cap on market share and spectrum holdings of the merged entities. The main objective behind the M&A regulation in present market conditions should be consolidation in the hyper-competitive telecom industry without hampering level playing field.

Although the broad M&A guidelines have been released in pieces, the devil is generally in the finer details that would come later. According to the draft guidelines spoken about, in the event of any consolidation, the final entity will have to pay the market price for spectrum after adjusting for the administrative price it was allotted for. Even in case of 3G and BWA, the resultant entity can retain upto two blocks of spectrum and surrender the rest. The proposed norm, which requires operator to pay market determined price for acquired spectrum, leaves little incentive for the GSM operators to go for any possible mergers and discourage consolidation activity at large.

Relaxed M&A norms can ease out the competition in the industry, weed out non-serious players, improve the profit margins of the players and bring greater efficiencies, hence improving the market economics. Government’s approval for 100% FDI has already opened doors for foreign investment and improved the sentiment of the sector positively.

The 3G intra-circle roaming pacts formed by the operators are a proof of co-operative competition to ensure service continuity for the 3G users beyond operators’ primary circles. Moreover it led to efficient use of spectrum and operators were able to leverage existing infrastructure to provide services more efficiently. However retrospectively the Government regarded the FAQs (where 3G roaming was permitted) as non-legal part of document. This is clearly not in the interest of the end consumer. Such policy uncertainties create serious issues and the whole business model of operators goes for a toss. It restricts the operators from innovating, deploying newer technologies and gaining from economies of scale. The high spectrum costs led to high 3G tariffs which is primarily responsible for poor uptake of 3G services in the country. Had the Government facilitated greater economies of scale and scope, the operators would have passed on the cost savings to the end consumer in terms of lowers tariffs. The voice revolution could have been replicated in data.

All this is adding to the uncertainty currently surrounding the telecom sector and diverting the attention and focus of operators away from their core business and hence operators are unable to formulate long-term business plans.

It is very important that the regulator adopts an open and reasonable market policy and allows the market forces to play out. The Government needs to articulate a crystal clear policy otherwise operators would not risk themselves and no meaningful M&A can take place.

Hemant Joshi is a Partner with Deloitte Haskins & Sells