2G spectrum: Reserve price high; auction maybe subdued, say experts

The Cabinet on Friday fixed a minimum or base price of Rs 14,000 crore for the Supreme Court-mandated auction of telecom spectrum. The Cabinet, headed by Prime Minister Manmohan Singh, decided to fix the reserve price at the lower end of the Rs 14,000-crore - Rs 15,000-crore band that was recommended by an empowered group of ministers (EGoM), official sources said.

A panel of experts comprising SC Khanna secretary-general, Auspi, Jaideep Ghosh, partner, advisory, KPMG, Mahesh Uppal, telecom analyst, Sanjeev Aga, telecom industry veteran, Mritunjay Kapur, MD, Protiviti and Kunal Bajaj, director-India, Analysys Mason explained to CNBC-TV18 the various aspects of the reserve price and its effect on the auction and impact on the telecom industry. Below is an edited transcript of the comments from the panel of experts on CNBC-TV18.  Q: The announcement of the reserve price of Rs 14,000 crore is a very important development. According to the Cabinet proposal, CDMA operators were to receive 1.3 times the valuation of Rs 14, 000 crore. What is your opinion? SC Khanna: The reserve price of Rs 14,000 crore is too high because we don't contribute towards the liberalisation of spectrum. The price for CDMA spectrum to be 1.3 times more than the normal spectrum is exorbitant. There is hardly any pressure on the CDMA spectrum and when the licences were given to Sistema Shyam, there was no takers for CDMA spectrum. Q: There are four slots that simply disappeared after the Supreme Court's cancellation order. It was expected that after the Supreme Court order the same number of slots or the amount of spectrum that was being cancelled would be handed out in an auction to provide a level-playing field for those whose licences were terminated and for others who were interested. Is the problem of artificial scarcity going to impact the auction? Jaideep Ghosh: I think in terms of the spectrum available, this was anticipated. I tend to agree that on a standalone-basis the reserve price seems to be definitely higher. The bidding for spectrum at the auction could be interesting. Q: What are your comments about the Rs 14,000-crore reserve price along with the fact that the charges for spectrum usage will not be a flat 5% as previously recommended by TRAI? Mahesh Uppal: Clearly this is an improvement - the price is almost Rs 4,000 crore less which is close to a billion dollars less. So companies should welcome it. But the high reserve price is likely to be exceeded in the auction when the bidding starts.
So companies would clearly be concerned about the new cost that they will be forced to work with - after being used to relatively cheap spectrum all these years.
Irrespective of the fact that it looks more realistic, the price is very high. So, companies would be disappointed because it is not a price or a cost that they can easily pass on to their consumers as the market is too competitive. The consequence of this high cost will have to be borne by the companies rather than consumers.
_PAGEBREAK_ Q: The issue of artificial scarcity raises its head regarding the creation of the number of slots. What mystery could have dictated this decision by the government of India? The government is hoping to maximise its revenues by letting out spectrum in small dribbles and looking at more revenue rather than public good? Sanjeev Aga: The first thing one must grasp is that you are going from one set of administered price of Rs 1,651 crore to another administered price of Rs 14,000 crore and in future, 1.3 times of Rs 14,000. So the whole thrust of the Supreme Court that it has to be market determined is completely absent.
So, you had a relatively low price which looked artificially low during a bubble period but is the best price that spectrum would fetch now. You are popping it up artificially by reducing slots from 6 to 2- putting up a reserve price and this is just another administered pricing. I think the whole thrust and the logic behind how spectrum should be price is completely lost. Q: What is your opinion? The consensus of our expert panel at this point of time is that the reserve price, although lower than what the TRAI had proposed, is still too high. Would you agree with that assessment? Mritunjay Kapur: Yes, this reserve price is still fairly higher than industry expectations. In the past, scarcity of the spectrum had not resulted in a price hike for consumers because the prices in telecoms have been going down. But with this price, we could expect some increases in rates in the near future. Q: In terms of the design and the specifics of the auction, are we likely to see a repeat of the 3G auction because the Supreme Court order used the word like the 3G auction. Is there any scope for any improvement or changes? Kunal Bajaj: It was the first experience for many operators who participated of going through that type of acuction. There were many overzealous operators because they were looking at 3G spectrum at that time as the only source of spectrum that they would have for a very long time to come.
But now, when the department of telecom is now talking about a spectrum roadmap where we have tranches of spectrum that are likely to be released over the next two years and about incremental spectrum and basically 2G spectrum even though they are calling it liberalised.
People will be more conservative. Two new entrants who are very serious about India, will make sure that they participate and get something out of this auction and the other players who are the incumbents will look at the calculations and say where do we need spectrum, where are we willing to pay how much and where can we actually trade off new spectrum for old spectrum and those calculations will make sure that this auction is just a lot more subdued.