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Corporate Feb 3, 2012

2G scam verdict: How it hits companies, banks, IT vendors and you

By Firstbiz Editors

The Supreme Court's verdict in the 2G scam - to cancel all the 122 licences issued in 2008 - will affect more than just the companies whose licences were cancelled.

Here's a quick run-down of the various parties that will be affected by this decisive verdict.

Customers:
According to the Telecom Regulatory Authority of India, only 5 percent of the active subscriber base in India is likely to be affected by the cancellation of the licences.

Given that India has 894 million mobile users, close to 45 million subscribers will have to change their service providers if the affected telecom companies do not apply for new licenses. Porting out, however, should be relatively painless because of number portability.In addition, there's no need to take immediate action because the affected companies can operate on cancelled licences for four months.

Companies:
According to this Firstpost report, 11 companies have been severely affected by the Supreme Court decision. Nine licenses of Idea, three of Tata Tele, 21 licenses of Videocon, 22 of Uninor, 13 of Swan and 21 of Loop have been cancelled. In a report, Citigroup said the biggest losers of the verdict would be new entrants like Swan, Uninor and Sistema. Bharti Airtel and Vodafone are seen as the biggest gainers, no license of Bharti was cancelled.

Consolidation is inevitable, and an Angel Broking report pointed out that the numberof companies in the overcrowded sector could come down to 9-10 from 14. Reuters

More importantly, with the exit of some smaller players, pricing power returns to the incumbents. Already, media reports have said that companies are planning to raise tariffs - currently among the lowest in the world - by about 30 percent. The top mobile operators will now be able to raise prices with more freedom and without worrying about pesky competition.

Consolidation is inevitable, and an Angel Broking report pointed out that the numberof companies in the overcrowded sector could come down to 9-10 from 14.

Foreign Investors:
Foreign investors are understandably upset about the licence cancellations. Norway's Telenor, which has a joint venture with Uninor, whose licences were cancelled, said it might quit India and not even wait for new market rules to be announced in the wake of the court's decision. Other said government-controlled investors, like Russia's Sistema and UAE's Etisalat, would also think twice before making any further investments in India.

In the short term, the cancellation of the licences will dent investor confidence in the telecom sector, however, the Supreme Court's decision is a mighty attempt at breaking the nexus between businessmen and politicians, and is likely to help reduce corruption in the long term.

Banks:
Loans to the telecom sector account for 3 percent of the portfolio of the banking industry, according to this Firstpost story.Yes Bank has the maximum exposure to the telecom sector (5 percent of its total loan portfolio), according to CLSA. The report also said Canara Bank, PNB, Axis Bank, Bank of Baroda, Oriental bank of Commerce, SBI, Corporation Bank and HDFC Bank had more than 1 percent of their loan book exposed to the sector.

Not all of these loans will become problematic. Only those loans given in relation to the 2G license run the threat of becoming a bad asset. In that respect, Punjab National Bank probably has the most to worry about, as a CNBC TV-18 report said that it had lent to all the telecom companies whose licences were cancelled.

For now, most banks are trying to downplay the impact of the decision. SBI, for instance, said its exposure to the 2G licences was just Rs 1,100 crore for project expansions. Yet, the blow cannot be underestimated as it comes at a time when the asset quality of banks is already facing severe stress.

Telecom vendors:
More than a billion dollars in information technology outsourcing contracts hang in the balance. Several vendors, including Nokia Siemens, Ericsson, Huawei and Wipro, are likely to be affected since they have contracts with the affected telecom companies. For instance,Nokia and Siemens have contracts with Uninor, while Tech Mahindra has a contract with Etisalat, which was estimated to fetch $400-500 million, according to Business Standard.

According to Business Line, the biggest impact will be felt by Chinese vendor Huawei, which inked deals with practically all the newer telecom players.

Tower Companies:
Tower companies are expected to be marginal losers, according to a report by Goldman Sachs. The brokerage said demand for additional tenancies from the new smaller operators would be lost, leading to lower tenancy ratios.On the other hand, if the incumbents take over additional spectrum, there could be demand for additional tenancies from them, which could compensate, it added.

by Firstbiz Editors

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