The Hindu Business Line : An FAQ on the ongoing telecom tussle

One fine morning, not long ago, Hutchison Telecommunications International Ltd (HTIL) announced its intention to exit the Indian telecom scene. This was to happen by selling the 67 per cent stake that HTIL and its associates hold in Hutchison Essar Ltd (HEL). Those in the race to buy Hutch's stake are many, including Essar, Vodafone, Reliance Communications Ltd (RCL) and Maxis.

The tussle has been seeing fast-paced developments, such as Vodafone, the world's largest mobile phone company, commencing to study HEL's books as part of its due diligence exercise. Here is a quick FAQ on the issue, based on information gathered from industry sources, especially for those who would like to catch up.

What is the right of refusal we have been hearing about?

Under the agreement between Hutch and Essar (which holds 33 per cent in HEL), Essar has a first right of refusal. This right of first refusal applies only where Hutchison is to sell its stake to any Indian bidder. Resultantly, a winning bidder would have to wait for consent from Essar to buy HTIL's stake or would have to bid higher to match the bid.

How big is HEL?

HEL has 22 million subscribers and has licences in 16 circles. HEL has received letters of intent for launching services in six more circles.

Will RCL benefit from the deal, were it to come through to its advantage?

Reliance has applied for licences to be a pan India GSM player. Reliance is considering Hutch as it will get an instant entry into the 16 circles where Hutch has licences.

Is there a limit on stake one can have in a competitor company?

Yes, as per the current regulatory framework, an operator cannot take more than 10 per cent stake in a competing company in the same circle. Clause 1.4 (ii) of the UASL (unified access service licence) provides that a company/legal person cannot have `substantial equity' holding (that is, equity of 10 per cent or more) in more than one licensee company in the same service area. This will be the first restriction, if RCL were to make a bid for Hutch. For, it would then be an operator having 10 per cent or more equity stake in a competing company. As a result, Reliance might be compelled to buy the entire 100 per cent shareholding in HEL and go for a merger of the licences.

Do merger guidelines come in the way too?

Clause 6 of the Merger Guidelines issued by the TRAI (Telecom Regulatory Authority of India) in January 2004, and accepted by the DoT (Department of Telecommunications), stipulates that the combined/ merged entity cannot hold more than 15 MHz of spectrum in Metro and A category circles and 12.4 MHz spectrum in B and C circles. This was done as spectrum is a bottleneck for mobile operators who face network problems, poor voice quality and so forth. What this would mean to players in the race is that after the proposed merger, in case the merged/ new entity holds more than 15 MHz of spectrum in Metro and A category circles, then the merged/ new entity would have to surrender spectrum in such circles where it crosses the limits under the guidelines.

Does law protect consumers against a monopoly situation?

Yes, the guidelines also deal with market dominance and stipulate that the total market share of the combined entity cannot exceed 67 per cent in any circle. India is a hot bed for telecom M&A, as it is one of the fastest growing telecom markets in the world. To ensure that monopolies do not emerge as a consequence of this growth, Clause 5 of the Merger Guidelines says that any merger, acquisition or restructuring, leading to a monopoly market situation in the given service area, shall not be permitted. Monopoly market situation is defined as market share of 67 per cent or above within a given service area, as on the last day of previous month. Subscriber base shall be criteria for computing the market share. The new combined entity (on the basis of published figures) is however not likely to exceed 67 per cent in any circle. The highest market shares, of RCL, are: in Kolkata (53 per cent), Gujarat (52.2 per cent) and West Bengal (51.7 per cent).

Any other restrictions in the guidelines that are relevant now?

All intra-service mergers and acquisitions (M&A) as well as transfer of licences are allowed subject to there being not less than three operators providing access services in service areas to ensure healthy competition as per the existing guidelines. As per Clause 4, a licensee can transfer or assign a license agreement only with the prior written approval of the licensor (DoT), which is granted on certain terms and conditions and if otherwise there is no compromise in competition in providing telecom services.

What are the points that DoT will consider?

Mergers have a major significance in the case of access services since these services provide the basis for control over the end users. The DoT must consider all applications for merger, and in doing so must ensure that there is no abuse of dominant position in a service segment which is fundamental to the growth and affordability of telecom services. The DoT must examine/ consider whether the merged entity becomes a Significant Market Power (SMP) which according to the TRAI would be an operator who has a market share greater or equal to 30 per cent. Also, it would be studied whether the merged entity enjoys a dominant position whereby it can operate independently without taking into account competition and ultimately consumer/ subscriber interest. The approach that DoT should adopt is to measure market power, by measuring market concentration, i.e. whether the dominant position will restrict services and lead to anti-competitive behaviour (like predatory pricing). Ultimately the DoT must be satisfied that there is `effective competition' in the market.

Can DoT grant its approval ultimately?

Taking into account all relevant factors to ensure there are no adverse merger effects, DoT may grant approval. The TRAI, in its recommendation on Intra Circle Mergers and Acquisitions, has stated that it also reserves the right to intervene. This will be an additional safeguard to protect public interest/ consumer interest. In case DoT, after considering the application and the attending facts, is satisfied that the proposed merger will affect competition and consumer interest, it can withhold the permission/ approval.

What are the statutes that come into play?

Apart from the regulatory requirements/regime outlined above, mergers in the telecom industry will also be subject to various laws such as: The Companies Act, the MRTP (Monopolies and Restrictive Trade Practices) Act, SEBI (Securities and Exchange Board of India) Takeover Regulation (applicable to listed public companies), the Competition Act 2002 (when notified), the Indian Telegraph Act, FEMA (Foreign Exchange Management Act) and guidelines (where shares have to be issued and allotted to foreign entities), and the Income Tax Act (with regard to carry forward of losses of acquired company, capital gains on sale of shares by Indian shareholders/ foreign shareholders). The applicability of these laws will have to be examined on the facts of each case.

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