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Corporate Nov 24, 2012

How EGoM's poison pills may have killed 2G auction

By R Jagannathan

Did the recent spectrum auction fail because reserve prices were too high or because the auction terms were badly designed? Maybe even deliberately.

A note by senior lawyer Prashant Bhushan filed with the Supreme Court suggests that it may have been more of the latter.

While Bhushan agrees that the reserve price for spectrum (Rs 14,000 crore for 5 Mhz of all-India spectrum in the 1,800 Mhz band) was too high for current market conditions, he clearly suggests that there may have been an attempt to dissuade major incumbent telecom players from bidding at the auction.

The villain of the piece was not necessarily the high reserve price, but the high spectrum usage charges (SUC) proposed by the Empowered Group of Ministers (EGoM) led by Finance Minister P Chidambaram, and which included Communications Minister Kapil Sibal. SUC is levied on the adjusted gross revenues (AGR) of telecom operators.

As evidence, Bhushan says that the original reserve price suggested by the Telecom Regulatory Authority of India (Trai) included just a 1 percent SUC; but the Department of Telecom (in which one can read the hand of Sibal) insisted on 3 percent SUC, and Trai agreed to this.

Between them, the Communications Ministry, the EGoM and incumbents ensured the failure of the auctions for their own reasons.AFP

But this is where the plot thickens. The EGoM, while lowering the reserve price from Rs 18,000 crore to Rs 14,000 crore, included a poison pill whereby it stipulated that the SUC would be levied not only on the spectrum auctioned this month, but all previous spectrum held by operators. This made it unviable for Bharti and Reliance, among others.

Says Bhushan in his note to the Supreme Court: "This was a deterrent for the existing operators. It is to be noted that active participation of the existing operators only had made 3G auction successful."

What Bhushan implies is that the auctions flopped because the EGoM changed the plan and thus many of the big operators did not bid. Neither Bharti nor Reliance Communications bid at the current auction; only Vodafone and Idea did, and neither of them bid in the costliest circles of them all - like Mumbai, Delhi, Karnataka and Rajasthan.

The poison pill was simply this: the SUC cleared by the EGoM included a steady rise in revenue share depending on the total spectrum held after the auctions. Upto 4.4 Mhz, the SUC would be 3 percent; at 6.2 Mhz, it would be 4 percent; at 8.2 Mhz it would be 5 percent; at 10.2 Mhz it would be 6 percent, at 12.2 Mhz 7 percent, and at 15.2 Mhz and beyond 8 percent.

This is why Bharti bid only in Assam for a token presence. Bhushan's note points this out clearly. "Bharti has 10 Mhz (of) existing spectrum in Delhi, and (is) presently paying SUC at the rate of 6 percent. But, if it participates in this auction too and wins 5 Mhz spectrum, then this new spectrum will be added to the existing spectrum, and then it becomes 15 Mhz, and then the SUC is payable at the rate of 8 percent. This would mean, even for its existing revenue from 10 Mhz, its SUC goes up by 2 percent, which it has to pay not as one-time fee but annually for 20 years. This is a huge amount, and was a deterrent for the existing operators.''

With the Supreme Court expressing doubts over the procedures adopted for auctioning 2G spectrum, Bhushan note explains how the EGoM changed the rules of the game to discourage telecom companies from bidding.

The second poison pill was the government's failure to "liberalise" spectrum before the auction. Liberalisation of spectrum means operators can use allotted airwaves for any service - 2G, 3G, voice, or data. There were no bidders for 800 Mhz spectrum -relevant only to CDMA technology users like Tata Teleservices and Reliance Communications - because the government didn't liberalise this band despite Trai's recommendations. Tata and Videocon, who had initially expressed interest in this spectrum, withdrew at the last minute. Sistema did not bid because a curative petition it has filed in the Supreme Court is still to be decided.

Listing out the major reasons for the auction's failure, Bhushan's note says that teledensity was 23 percent in 2008 (when A Raja doled out his licences cheaply), as against the existing 77 percent. Between 2007 and 2012, more than 600 million untapped subscribers had already bought mobile connections. The number of potential new customers was reduced to only 40-100 million. Thus the market size has reduced and the government did not adjust the reserve price to the futuristic scenario.

"Even when in 2009 the 122 licences were resold (private auction), the company with spectrum only was valued at Rs 10,000 crore. Therefore, a reserve price of about Rs 8,000 crore would have been the right choice'', Bhushan says. (The private auction referred to in his note is the sale of equity by Unitech Wireless and Swan Telecom to Telenor and DB Etisalat).

But the clear villain of the piece was the EGoM's decision to include existing spectrum for levy of SUC at rising rates even on previously held spectrum. This made the auction unviable for incumbents who already held spectrum.

Bhushan also blames the existing operators, who had a vested interest in ensuring the failure of the 2G auctions. Reason: they were required to match the auction prices when their licences came up for renewal. The licences of a majority of GSM operators were due to come up in two years' time - that is, by 2014-15. So why will they bid for 2G spectrum and invite higher prices for their existing licences?

The implications are clear: between them, the Communications Ministry, the EGoM and incumbents ensured the failure of the auctions for their own reasons.

The Supreme Court is seized with the matter and will hear the matter again on 26 November.

by R Jagannathan

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