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First Step To Consolidation?

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The proposed new merger and acquisition norms for telecom services companies have been a long time coming, and are music to those companies seeking an exit, but the competitive landscape may not change very much. For one thing, even if the small ones are bought out, consolidation could be limited, leaving four or five large players who may not want to give up their businesses.

The Telecom Regulatory Authority of India's (Trai) proposal — which has to be approved by the government — suggest that companies can have a market share of up to 35 per cent (and up to 60 per cent with Trai approval) and retain spectrum up to 25 Mhz (15 Mhz earlier). Is that enough scale for large players? Perhaps not; there will be acquisitions, but not mergers.

"We need more clarity," says Hemant M. Joshi partner, Deloitte Haskins & Sells. "The proposals have to be read along with the intent of the National Telecom Policy 2011." For instance, Trai wants to have the powers to decide if a merged entity exercises market dominance.

But the Supreme Court maintained recently that the power to determine the share of adjusted gross revenue (AGR) it gets rests with the government. That changes who determines market dominance. A top official in Department of Telecommunications said, "We have accepted a number of suggestions in principle, but we are examining it in detail."

"It is an opportunity to exit for companies that came in just for spectrum," says Kunal Bajaj, partner and director (India) at Analysys Mason. Telecom analysts say companies with acquisition plans will not find it hard to find resources. But here's the question: with most new players stuck in the 2G spectrum allocation scam, will acquirers take the risk of buying them?

Trai has done away with the limit of maintaining six operators in each circle, post merger. New companies planning to enter the country can pick up circles that large players find non-remunerative. Dual technology spectrum will be available to all, something that only Reliance Communications and Tata Docomo enjoy at present. For example, Sistema with an all-India licence that operates in code division multiple access (CDMA) could enter the global system for mobile communications (GSM) segment.

Spectrum hoarding could become history, since a merged entity will have substantial spectrum. "Hoarding will naturally become a disincentive with 25 Mhz, and opportunity to pick up more from open auction," says a Trai official. The proposals also indicate that price of additional spectrum will be market determined, through open auction. "But it does not clarify what will it be based, on 2G or 3G auction rates," says Joshi.

But all this could be moot; the government has rarely, if ever, accepted Trai's recommendations in total. "The DoT has the power to decide as per the Trai Act, we are not going to accept it as it is," says a Telecom Commission member. The merger and acquisition policy and its implementation have financial implications. What the government definitely does not want is another scam.

(This story was published in Businessworld Issue Dated 14-11-2011)