2G spectrum verdict: Victim of policy paralysis

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2G spectrum verdict: Victim of policy paralysis

CARE Research has come out with its report on 'the 2G spectrum verdict- Victim of policy paralysis'. As per the research firm after cancellation of licenses, average number of operators will come down to around 9-10, though that some of the affected players would make a comeback in the next auction.

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CARE Research has come out with its report on 'the 2G spectrum verdict- Victim of policy paralysis'. As per the research firm after cancellation of licenses, average number of operators will come down to around 9-10, though that some of the affected players would make a comeback in the next auction.

• The Supreme Court has cancelled 122 licenses (98 GSM and 24 CDMA) of the 334 licenses in total. TRAI has been asked to come out with a mechanism to reallocate the licenses.

• Cancellation of license accounts for 413.6 MHz of GSM and 60 MHZ of CDMA spectrum, which is 31% and 21% of total allocated spectrum respectively. The government might decide to auction some or all of this spectrum.

• The verdict is a setback for foreign players in India as they had to suffer because of the wrong processes set up by government although they bought their stakes after the licenses were issued. Cumulative FDI in telecom sector stands at more than US$10 billion.

• The banking sector has a significant exposure to the telecom sector, estimated to account for nearly three percent of the overall loan portfolio of the banks. Lenders who have given loans to the affected players for network roll out bear some risk.

• Total number of impacted subscriber stand at 66.6 million which is 7.5% of total subscribers. The number will be still lower as active subscribers are about 70% of total subscribers. Most of these subscribers will migrate to other networks as Mobile Number Portability (MNP) is in place.

• Cancellation of licenses will reduce the number of players in each circle. Also if cancelled licenses and spectrum is auctioned at market price, it will lead to substantial costs to the players. This might lead to tariff hikes as rate per minute has halved from Rs. 1 at the end of 2007 to Rs. 0.5 at the end of 2011.

• Incumbent players will be the biggest beneficiaries of the verdict as it is supposed to reduce the competition in the sector. They might get additional spectrum from the cancelled licenses if they are allowed and decide to participate in the auction. They will attract the existing subscribers (7.5%) of the affected players.

• This judgement is expected to pave the way for rationalization and the emergence of stability within the sector through the reduction of competitive pressures and the emergence of a rational pricing structure.

The verdict
In a landmark judgement on February 02, 2012, the Honorable Supreme Court came out with a verdict on 2G case, cancelling 122 telecom licenses (98 GSM and 24 CDMA) issued in 2008 during the tenure of then Union Telecom Minister A. Raja of UPA government. The Supreme Court is of the opinion that the license allocation process was carried out in arbitrary manner causing loss to public exchequer. It also fined Uninor, Etisalat DB and Tata Teleservices Rs. 50 million each. Some of the other players are also charged with varying amount of fine. The spectrum issued along with the licenses will also be cancelled. The apex court has asked telecom regulator TRAI to come out with fresh recommendations on allotment of licenses through market-based mechanism within a span of two months. Services by the affected players will be active for a period of four months. The impact of this judgement is expected to be manifold and will be felt not just by the operators themselves but also the other stakeholders including the subscribers, lenders, the telecom equipment providers, passive infrastructure players and other allied sectors catering to the telecom sector. The primary impact however is likely to be on the operators. Government of India has so far issued 334 telecom licenses in 22 Licenses Service Areas (LSA) out of which 122 (about 36%) stand cancelled.

Limited revenue impact for the sector
The incumbents like Idea Cellular Limited and Tata Teleservices Ltd, are expected to be only marginally impacted as the circles where the licences were cancelled do not contribute significantly to the revenues and profits of both these companies. The other new entrants were in the initial phase of the expansion with substantially lower share of revenue compared to their incumbent peers. For Idea, the revenue loss from cancelled licenses stands at less 2% whereas total revenue loss from Idea, S. Tel, Uninor, Videocon Telecommunications and Etisalat DB stands at Rs. 8.24 billion which is 0.7% of all India Adjusted Gross Revenue (AGR) for the sector. We do not think this will be a permanent loss of revenue for the sector as subscribers will migrate to other networks. Below is revenue impact analysis for some of the impacted GSM players.

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To read the full report click on the attachment