Government will have to take steps to provide cheaper spectrum: Nitin Soni, Fitch Ratings

But now, the number of operators have reduced. There have been more mergers. One of the solutions there has to be more mergers so that your poor, small companies do not remain because I do not think that the government should bail out the companies if there are far too many companies. They should have seen the business case when they entered the telecom sector. Everyone had told them that 4-5 is the maximum that the sector can afford

Latha: What is your sense? Is this because there has been too much of too many players and predatory pricing or can the government be a little kinder in terms of revenue share or in terms of interconnect rules? Is the government being too strict to the detriment of the industry?

Mathews: The reason we are looking to the government is because of the government is the licensor and we participate as the licensees. A full 30 percent or more of every rupee of topline revenue goes back to the government. So clearly it is in the interest of the government to also address this issue.

A good 40-50 percent of the debt is also probably held by the government as a result of payments due to the governments from the recent auction processes. So, it is very much in the interest of the government. The revenue that goes to them by licensees in spectrum that comes off of our revenue is also going back to them at about close to 11-15 percent. So again it is in the interest of the government to address the issue of the financial health of the industry. And that is why we are asking for that.

Of course, there are issues, as Mr Baijal pointed out vis-à-vis too many players that impacted the revenue stream that drove the tariff down. Yes, it still continues to happen, but the larger picture is clearly one where the government needs to step in because of the government's stake in the revenue stream of this industry.

Prashant: Just to stress on one point which is spectrum. Over the last many years, the government squeezed the availability or lack of availability as they put it, of spectrum to extract the maximum, top-dollar, which many thought was not correct. It was almost artificially created scarcity of spectrum. That now, has been reversed right? That was a very large source of borrowing for telecom companies although you had moratoriums, etc. You had to pay it over a long period of time, but still it was a large source of stress for telcos.

Baijal: Earlier, there was a spectrum squeeze, I remember. With all the telecom operators, the total spectrum that had been given was about 130 megahertz. In the last one year, this 130 has become 200 megahertz. Now, in all countries in the world, you can give 300-350 megahertz. It depends on how much you can re-farm, etc. vis-à-vis the other players. Now you have already gone from 130 to 200 megahertz.

One of the solutions is that this 200 megahertz should go to 300 megahertz. When that happens, the price of spectrum will automatically come down because whoever does the valuation of the spectrum looks at the demand and supply. So if more spectrum is put in the market, the price will surely come down and there, the government should not insist on a high income, because after all, the entire telecom sector, what has happened in the past is because of the growth in telecom, the gross domestic product (GDP) has gone up. Because of the growth in telecom, so many positive things have happened. So the price of spectrum should not be very high.

Now, you cannot control the price if there is an auction. However, if there is an auction, if you make good chunks of spectrum available, if you allow all kinds of sharing, etc. so that the spectrum is used more, then the price will not be very high. Currently, I said that about 200 megahertz has been distributed to the operators. I think the number should be 300 megahertz because if you have a higher number then the number of requirement of towers goes down, the number of call-drops goes down and it does a lot of good to the telecom sector. So more spectrum should definitely be made available and there are various methods to keep the price down despite an auction and those methods should be used.

Latha: You have, of course, multifaceted roles. You have run a telecom company and now, you are a law maker as well, you are on the non-performing loan (NPA) committee as well or the finance committee that looks into NPAs. What is your sense, first of all, the possibility of higher spectrum and maybe easier sharing rules is what the industry could want, but should the government step in at all or let the market take its due course?

Chandrasekhar: We must understand that the sector is not just consisting of two stakeholders that is the companies and the government. There is an independent telecom regulator and then there are consumers. If there is this argument that is being put out that the telecom sector is in distress or whatever the newest argument is, it is for the regulator to intervene because the mandate of the regulator under Telecom Regulatory Authority of India (TRAI) act is to make sure that there is orderly growth of the sector as well as consumers are benefitted.

So I have not seen any evidence except for the usual industry lobby saying we are in trouble, we need help, we need more spectrum. This connection between more spectrum and dropped calls, the connection between more spectrum and call quality is an erroneous connection. It is an argument that has been made and defeated on multiple occasions.

Latha: That argument is there about spectrum quantity and call quality. But this is a question we are raising as just citizens. There is, for instance, one company, Reliance Communications, has nine times debt to its market cap. Likewise, even Idea Cellular, another player with more spectrum and almost 42 percent of the market after the merger with Vodafone, even that has about two times debt to its market cap. The point is, this is public sector debt, either as tax payer or as depositor or as investor. This may become a public problem. So, should the government intervene?

Chandrasekhar: I think that is the argument for all bad loans. The case that you are making is that banks have lent recklessly or that the amount of debt that a bank or a consortium bank has allowed a particular entity to accumulate is disproportionate. Now, why the tax payers should come out and bail out a bank that has practiced bad lending practices or why the government should bail out a telecom company that has now burdened itself with a lot of debt when it can go raise equity or it has not shown evidence that it cannot raise equity. I fail to understand.

Latha: I take your point that there will be several people who will have to be blamed for this. But why I am narrowing it down is that at the moment, there could be a too-big-to-fail syndrome. Whether we like it or not, if a Rs 45,000 crore debt were to turn bad, several banks will have to be capitalised. Therefore, like the government intervened in steel by trying to help setting up a minimum import price (MIP). You could accuse even over there that probably there was gold plating of some steel companies. But nevertheless the problem would have been a public problem. So, we are asking this question. Should the government intervene in some fashion and what could that fashion be?

Chandrasekhar: Let us carve out this problem. I accept your contention that there is a looming problem in this sector as is many other sectors because of the disproportionate amount of debt that has been put on the balance sheets of these companies. So point accepted. Now the only question left is when we are moving to a regime of insolvency and we are moving to a regime where promoters are going to be changed to cure the distress of debt or to cure the NPA. When you talk about government intervention, should the government intervention be a bail out or should the government intervention be of a nature that allows these enterprises to move to sustained viability with or without these promoters.

Latha: The latter.

Chandrasekhar: I am not disputing your contention. I am completely of the opinion that there cannot be any shortcut, band aid solution that involves public money and public assets at this stage because that is talking about moral hazard of a kind that will sweep across, cut across all other sectors.

Prashant: To put it in another way, leaving the direct intervention at this stage aside, which you are against, would you agree that the government has been, not this government but over the last many years, has been kind of myopic with the sector as Mr Baijal was also making the point? The multiplier effects from the telecom sector were many, the multiplier effect on growth, etc. but the sector was squeezed via spectrum, via revenue share, etc. Now does the government need to take its foot off the pedal there in some way?

Chandrasekhar: If you are making an argument that the government should start dispersing subsidised spectrum, there will be a serious outcry from a lot of people who consider this a public asset and say that monetising a public asset should be to the benefit of the public at large, whether it is a coal mine or spectrum or gold mine or land. The pendulum has swung away, over the last decade to giveaways to where public wants real value of that public asset realised.

Now in the event, the real value is not realised because there is an argument that public interest is served then that public interest has to be quantified. Now the public interest in this case could be that you will then keep rates low and you will bring in government and the regulator into rate administration, tariff administration which again the industry does not want. So there is no free lunch.

Latha: Do you think this is the mistake the Indian industry made, too many players and too much predatory pricing? But how is it run in other countries? Can the government do something to make the burden easier?

Soni: Let me share few paradoxes in our Indian telecom industry. The first is, you have the most expensive raw material which is spectrum, among the most expensive in the world and you have the cheapest tariff of USD 2 which is one of the cheapest in the world which is the last quarterly average revenue per user (ARPU) for Bharti.

Second paradox that you have is government leases you an asset and then also asks for a revenue share from the income you are generating. So it is like they are leasing you an apartment, but then they also want revenue share from the income you earn every month.

The third paradox is that you have such an expensive 3G and 4G spectrum but the data adoption in India has been so poor that it lacks even some of the South-east Asian countries. Forget comparing about Singapore and Hong Kong, compare it with Indonesia or maybe China or Philippines. The average usage on mobile data per month per user for market leader Bharti is about 1 gb right now. So, that is too low. So, all these factors have contributed to a lot of problems for specially the smaller telcos.

And this problem has been compounded by the recent entry of Jio which has invested USD 25-30 billion and offered an unprecedented free services for six months which again has never happened in any part of the world and treating their investment as a startup. That has accelerated the consolidation and that is why the smaller telcos are facing heat. We downgraded Reliance Communication today to CCC as we think that now the default is a real possibility as the liquidity is so stretched that they have just Rs 14 billion cash and the short-term debt is Rs 400 billion.

Prashant: You are in favour of some sort of intervention or let us call it help from the government. What exactly are you looking for?

Mathews: Those couple of items have been very clearly articulated by TRAI itself and Nitin put it very well by saying you have really taken two bites of the apple. One you have got your payment upfront for spectrum and you continue to start taking 11-14 percent by way of revenue share which should have stopped.

So what we are asking for, as TRAI has recommended, reduce the licence fee from its present 8 percent to 3 percent, reduce the spectrum usage charge from its 3-4 type of percent to 1 percent, adopt the definition of adjust gross revenue (AGR) which excludes non-telecom related revenue and perhaps look at some other factors like a moratorium on the debt repayments. We have a two year moratorium, perhaps that can be extended to five years and given a repayment over the life of the spectrum as is done.

I just want to highlight one other thing vis-à-vis practice in other parts in the world. Very seldom, if at all, do you see spectrum being taken back from an existing operator. Usually spectrum is given in perpetuity. So here is another instance where you have this recurring issue. So those are the things the government can address without any 'subsidy'.

Latha: I doubt the moratorium would be something that the government can do because that would mean several other industries would also ask and in any case, that looks like a moral hazard. But last thoughts from you. There are steps that Mr Mathews has pointed out. You also argued that cheaper spectrum would be a national advantage considering that we are going to move all our payments to telecom and to the digital mode, we would need healthy spectrum. Your thoughts therefore? As Rajeev Chandrasekhar said, cheaper spectrum should also come with price controls.

Baijal: If I examine what Mr Chandrasekhar said and what the Cellular Operators Association of India (COAI) Chief Executive said, I agree with both. The problem with the government is that the government always is answerable both ways. Industry is not doing well, you must see that industry does well. If the operators have not done well, you are the government, you are the sovereign and therefore, you have got to help them. Here another hazard is, you pointed out which is very true that you do not give any relief to the industry. Then you land up recapitalising the banks.

However, it has to be realised that no country in the world had 11-13 operators. That was an anomaly, it should not have been allowed to come. But however, it came in, so let us forget it. That anomaly has to be sorted out by allowing easy mergers so that you come to an optimal number. Second, if you have more spectrum, your network is healthy and if your network is healthy then everyone gains. And therefore, I said, when India had given 130 megahertz, I used to shout even then that 130 megahertz is bad, everywhere you have the same amount of spectrum. You can give 300 megahertz in all countries if the spectrum is properly re-farmed.

And if there is enough spectrum to go around, then of course, the price will not go up. So these sensitive issues have to be played on the razor's edge. I agree with all the views which have been expressed, but there has to be a view of the sovereign and of course, the regulator is an independent body, but regulator also recommends to the government. So government ultimately takes the view and I do feel that the industry needs help and the industry needs some restructuring.

Prashant: For companies that you track and you rate, are any in any serious, imminent trouble?

Soni: As I mentioned, we have downgraded Reliance Communications to CCC and we think that a default is a real possibility given their liquidity is quite stretched. Apart from the weaker telcos, Tata Group and Aircel and all the weaker telcos are really in trouble.

Latha: Your idea of a solution?

Soni: Government will have to definitely take steps for a cheaper spectrum, remove all this revenue sharing or maybe lower it, remove the universal service obligations from the telcos, it is no longer needed. I think the national industry structure has corrected now, we will soon have three strong players and at some point of time, the pricing power will come back as Jio will raise tariffs at some point of time.