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Corporate Sep 10, 2013

4 reasons why telecom regulator slashed spectrum base price so drastically

By Sindhu Bhattacharya

Why has the telecom regulator Trai slashed base price of spectrum so drastically? This may be music to the ears of telcos who perhaps were waiting for a massive price reduction before coming forward to place bids in the upcoming auction but why did the regulator side with them?

In the recommendations released earlier today, the regulator has sought to provide multiple reasons for why prices have been slashed so substantially. In doing so, it has also rubbished claims by one large telecom industry aspirant, who had vociferously opposed any reduction in spectrum base prices and had alluded to cartelisation among telecom companies in earlier auctions.

AFP

Trai chairman Rahul Khullar seems to have taken the bull by its horns while explaining the rationale of price reduction by such a huge margin. AFP

Trai has given four reasons to justify what it has recommended on the price front, but significantly, it has also joined the Department of Telecom in rubbishing claims of any cartelisation by incumbent telecom companies. Besides, it has also mocked the acrimonious debate over how much loss did the exchequer suffer after all 122 licenses allotted by former telecom minister A Raja were cancelled by the Supreme Court in 2012.

1) Dramatic changes in India's economic situation: Within the last one year, fundamentals of the economy have deteriorated, consumer inflation remains high and growth has stalled. Prospects of an economic revival are at least one to two years away.

2) Sector specific changes: The telecom sector has been going through financial duress over the past two years. Unrealistic pricing and indebtedness have taken a huge toll. Operating margins have fallen drastically. Some companies have negative operating margins; leave aside interest and taxation, they are not even able to cover depreciation and amortization charges. In this setting, the operators' willingness to pay for spectrum has been adversely impacted. Commercial banks' exposure to the sector has reached prudential limits precluding their ability (despite willingness) to further finance the sector. And, from a larger macroeconomic perspective, there is the serious prospect of non-performing assets in the sector if steps are not taken urgently to prevent this.

3) Spectrum prices already tested: Not once but twice. In the second auction, only one telco came forward to bid for CDMA spectrum and that too after a 50 percent price reduction; there were no takers for any other band. This is a reality that needs to be factored into the current exercise. Equally, the Authority is conscious of the need to avert any possible collusive activity. That said, it also needs to be accepted that reluctance to bid in auction with a reserve price does not necessarily represent collusive intent; if the reserve price is set too high, it may dispel all bidders.

4) Estimate of presumptive loss: This estimate has, in some measure, contributed to the pernicious atmosphere leading to the decision standstill. While no one questions that there was indeed a loss, the egregious estimates of losses that were initially bandied about to sensationalize the issue no longer carry credence. Within the Government, the lurking fears that motives will be imputed for any decision have had its own fallout. And, all of this has entailed real economic losses.

Trai Chairman Rahul Khullar is known for his frank views and he seems to have taken the bull by its horns while explaining the rationale of price reduction by such a huge margin. But the key question remains: will telcos come forward and make the next auction sucecssful, since complicated issues such as license extension, refarming of 900 mhz spectrum and guidelines on mergers and acquisitions are still under dispute?

by Sindhu Bhattacharya

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