Govt ready; 2G auction to be successful: R Chandrashekhar

The Supreme Court on Monday extended the deadline for 2G spectrum auction by over 4 months to January, allowing telecom operators ample time to prepare for bidding. CNBC TV18's Siddharth Zarabi  caught up with telecom secretary R Chandrashekhar to get the details of the order.

Here is the edited transcript of the interview on CNBC-TV18. Q: Is this auction going to be successful?
A: We certainly do think that this auction will be successful. All arrangements are in place. We are going forward as per the schedule that we have indicated to the court. Q: Why do you say, it is going to be successful? In the run up to this we have heard a lot of feedback from the industry, both existing players as well as new entrants whose licenses stand quashed and who say the reserve price is too high. Even though the government has come out with a new payment plan which has some relaxations, they still feel that this is an auction which has been designed by the government of India to just maximise revenue and not look at the health of the sector?
A: Our information from a number of operators is that there would be participation, there would definitely be effective and vigorous participation. It is not just a question of the reserve pricing. If you look at the complete package, the deferred payment, the mortgage of spectrum and all of these put together, then it will be clear that what has in fact happened is that the government has struck a balance between the need to discover true auction price and make it manageable for the telecom service providers as well as the financial institutions. At the same time it aims to minimise any possible impact on consumers. Q: Who are these new bidders going to be? We have heard this from the TRAI chairman and now you also say that you have had feedback from industry that they will participate. Is this essentially the existing players or are we talking about completely new players?
A: There are three kinds of players. One is the existing players who need additional spectrum. Q: That would be the Bhartis, the Ideas, the Vodafones of the world?
A: Right. The second category would be existing players whose licenses have been quashed and who are still running their services on the basis of the extension time given by the Supreme Court for the operationalisation of the quashing order. The third category consist of players who don't have any license or any existing operations and who may be entering the market for the first time.
_PAGEBREAK_ Q: What you are saying is that foreign companies who don't have a presence in India are interested in bidding and the existing and the new players obviously are there. Is that what you are saying?
A: Basically what you are referring to is splitting the third category of new players into two, which is the domestic and the foreign. I wouldn't rule out the possibility of either of them being in the fray. It is not our intention in any manner to reduce competition or to shut out any intending bidder from the competition, whether foreign or domestic.
Q: Reliance Industries being sort of bandied around as one name which is interested, can you confirm that?
A: No, we are certainly in no position to confirm that, nor would we be in any position to confirm that until the list of registered users is firmed up. It's entirely up to individual companies to make their own decisions at this point. Q: Can you tell us whether any foreign company without naming it has indeed reached out to the government or any authority with regard to this option?
A: No foreign company has made any explicit enquiries from us directly. But as I said, there have been indications of possibilities and I wouldn't want to get into specifics. Q: I understand that, but yesterday when we were going through the information memorandum, we saw that there is one particular clause and this is slightly different from what happened in 3G auction where you allowed 100% foreign entities to first bid for the spectrum and then subsequently do all the compliances including finding a joint venture partner. The latest clause says 'a foreign company will have to form an Indian company to participate in the spectrum auction.' The concern that is coming out from here is that you have effectively tweaked the 3G eligibility and a company for instance, say a foreign company that wants to come will first have to find an Indian partner and it was also applied to a Telenor, Unitech kind of a situation where Telenor and Unitech are parting ways or trying to part ways and Telenor will now have to first find a partner, isn't that going to stop competition?
A: First of all, let me just briefly take you through the process through which these decisions were made. As you know, the Supreme Court's order was to conduct the auction on the lines of the auction that took place for 3G and BWA in 2010 and taking into account the TRAI recommendations.
So, in this case on February 3 which is a day after the judgment, we had asked the TRAI for their recommendations and the rest as you know is history. So, these conditions are based on the TRAI recommendations. This is a bit different from the 3G and BWA auctions.
There is a whole process after this, like there is a pre-bid with the time for queries and clarification on the queries and then the finalisation of the information memorandum. In any case a similar case would also follow for the NIA which is the legally binding document. Q: That's a very important point. Let's now come to the second issue. The certificates that are supposed to be attached with the bids which has been the standard procedure for 20 years, have a clause added which says that any company facing any sort of civil or criminal proceedings that are affects its business activities would not be able to participate in the auction. Is this clause going to prevent the new entrants whose licences stand quashed from being eligible to participate. Why has this clause been added?

 

 
A: I think the certificates for the 3G and BWA auctions also contained this standard. It has been made clear in the information memorandum that those whose licences are quashed would be treated as new entrants and therefore they are eligible to bid in accordance with the terms of the information memorandum.
  Q: Let us now come to the overall expectations. The reserve price seems to have been fixed at just shade under Rs 14,000 crore as far as the 1800 Mhz band is concerned. At this point of time is there any sense that you can offer us with regards to what is the index that you are looking at over this reserve price?
A: I would prefer to wait for the outcome. As I said there is every indication that there would be healthy and vigorous participation in the auction. We are talking about something in the range of above Rs 50,000 crore. That is the total bid amount.
How much would the government get that again depends on what option players prefer because in the deferred payment option people can, in the case of 1800 Mhz, pay 33% upfront and the balance in 10 installments after two year moratorium. Certainly we expect that the price which would be discovered would in fact reflect the market price of the spectrum. Q: The Supreme Court never asked or told the government of India the number of slots it could auction. All the licences issued as far as January 10, 2008 were quashed. You had that entire spectrum available for auction. The TRAI also didn’t exactly advise you on the number of slots. Why limit the number of slots because according to sources the government of India has created an artificial scarcity by limiting the number of slots that are going to be put up on auction?

 

A: In deciding the quantum of spectrum to be auctioned, there a number of factors that have to be taken into consideration. You are right, this is not something which the Supreme Court has fixed. The proposal that was put before the Empowered Group of Ministers (EGoM) was that 10 Mhz would be put for auction and in addition, contained a provision to top up 3.75 Mhz to ensure that a second new player did not get knocked out because of lack of spectrum and also to ensure that the entire 10 Mhz was sold entirely.

 

In deciding this quantum, apart from these two factors, what had to be kept in mind was the quantum of spectrum required for the purpose of refarming and the EGoM has decided that the provision for refarming should be made for all licences that are to expire between 2014 and 2016. Thirdly, companies enter the market with a certain amount of spectrum, but as their subscriber-base and as business grows, they will need more spectrum. I think it would be a legitimate expectation of any company that spectrum should be available to support growth. Lastly, in order to have an auction there has to be some balance between demand and supply.

 

Q: It is clear from the information memorandum at least that Delhi and Mumbai seemed to have a lesser number of slots and are more constrained for spectrum. Is that impression correct?

 

A: That is correct regarding the quantum of spectrum for topping up. Our intent was to provide for up to 3.75 Mhz in three blocks of 1.25 Mhz each to guarantee that no amount of spectrum remains unsold. If the topping-up provision was not available, it's entirely conceivable that in a particular circle as against 10 Mhz you could have anything from 6.25 to 7.5 or 8.75 sold with the rest remaining unsold and a new company wanting 5 Mhz would be squeezed out of the market.   Q: A company for instance, say a foreign company that wants to come will first have to find an Indian partner and it will also apply to Telenor-Unitech kind of situation where Telenor and Unitech are parting ways or trying to part ways. Telenor will now have to first find a partner, isn’t that going to stop competition?
A: This is a bit different from what was there in the case of 3G and BWA auctions. There is a whole process after this, like there is a pre-bid with the time for queries and clarification on the queries and then the finalisation of the information memorandum. In any case a similar case would also follow for the NIA which is the legally binding document. Q: You are saying there is a possibility of changes being made to this clause?
A: Most certainly. Q: Is there any possibility at all of the deadline for the auction slipping beyond the last quarter of the current fiscal?
A: I wouldn't expect anything of that sort, not only because we have made all the preparations and all the arrangements and are fully on track, but also because the Supreme Court orders make it clear that we are unlikely to encounter any intervention from the courts. Therefore some of those factors which might have delayed the process perhaps wouldn't arise. So, long as factors which are not beyond our control don't arise, we are very confident that the auction will be conducted in accordance with that schedule. Q: After the 3G auctions were concluded, a lot of participants, even those who had actually bid very aggressively, subsequently said that the bidding was like playing blind in a dark room. Why did the government and the DoT not take into account feedback from industry with regards to formulation of the auction which had received blame for throwing up some very unrealistic numbers as far as the bidding was concerned?
A: We must remember, first and foremost, that the numbers in a bid are not thrown up by the auctiom, it is thrown up by the bidders. Q: They did not know what the other person was doing. Regarding the activity-level rounds, the participants' criticism was that there no clarity of the other bids. So, you were consistently over-achieving yourself to be in the race?
A: In any auction, every bidder does make a conscious choice. The dynamics of the auction allowed participants to correct or adjust their decisions in one circle based on what happened in some other circle. It was recognised that particular dynamic was quite effective in terms of realising prices. Q: Bharti Airtel, as one of the largest companies actually came out with a statement after the 3G auction that the auction completely upset the calculations of the entire sector?
A: I don't want to comment on what some company may have said after an earlier bid. The fact of the matter is that from the point of view of price-realisation, the 3G and BWA auctions were regarded as kind of benchmark and the auction process was very effective in terms of realising an appropriate or a sufficiently high price for the spectrum and secondly, the Supreme Court directive was also very clear that auction should be conducted as was done for the 3G and the BWA. Q: The expectations of the government in terms of revenue realisation, but not from the point of view of what is going to come in the bids. At the price that has been set as the reserve price and assuming that there would just be a marginal improvement on that, what kind of cheque would be handed over to the finance minister next January?
A: The reserve price for 5 Mhz is Rs 14000 crore. At the reserve price for 10 Mhz it would be Rs 28000 crore. If you take into account the toping up then it could go up by a certain amount. You cant predict exactly how much it would go up to, may be Rs 30000, may be Rs 35000 and all of this is at the reserve price.
Then you have the 800 Mhz, where 3.75 with a topping up of 1.25 is possible. Given that, that is in the rate of 1.3, that would be another Rs 14000-15000 crore. So, we are talking about something in the range of Rs 50000-55000 crore as the reserve price. 
That is the total bid amount. How much would the government get that depends on what option the participants prefer because in the deferred payment option participants can, in the case of 1800 Mhz, pay 33% upfront and the balance in 10 installments after a two-year moratorium. Q: So, you expect atleast Rs 10,000 crore to start with in the 1800 Mhz band?
A:  If you take 1800 Mhz, it would be one third of Rs 30,000 crore, which is Rs 10,000 crore. Similarly if you take the 800 Mhz, out of the Rs 15,000 crore, it would about Rs 4,000 crore. We are definitely talking about something over Rs 15,000 crore to come during the current financial year.
At the same time, since the deferred payment option carries interest whether each company or each successful bidder chooses or avails of the deferred payment option or not, would depend on the cost of raising funds that they will pay. If they think that it is cheaper to pay upfront the entire amount by raising the money from a cheaper source of funds then that is also possible. So, we are talking about anything between Rs 15,000 crore to over- Rs 50,000 crore. Q: What is the rate of interest that the DoT will charge for deferred payment?
A: This rate of interest would be determined in consultation with the RBI and the finance ministry and be linked with the PLR. Q: With this out of the way, it is clear that gradually some sort of stability will return to the telecom sector. What would you have to say about that?
A: I would certainly say it is more than creeping in. It is marching forward quite briskly. From the government and the industry point of view, there is a strong desire to remove any uncertainty in the sector.
Equally important is the facts that the new telecom policy- the National Telecom Policy 2012 - was approved in May. That sets the complete framework within which the sector would grow over the next decade or so. A number of landmark steps have been taken which would make a big difference in the sector. The spectrum that is being sold is liberalised. Operators are free to use any technology and introduce it at anytime.
So, there would be much more vigorous competition in terms of using the most appropriate technology and establishing the best possible prices. All of this would drive a number of changes in the market and I think that these set of measures would ensure that over the next three months, as the auction nears completion, that highly dynamic phase of growth begins in the sector. We certainly hope that the bidders can put their finger on the auction and create a scenario where the telecom sector move forward on the path of growth.