Killing M&A

Forcing telecom operators to pay market prices for old spectrum will prevent much-needed consolidation in the sector.

It is common knowledge that the telecom sector in India is ripe for consolidation, having too many players, many of whom are bleeding. Mergers and acquisitions (M&A) are in the interest of not only operators seeking to exit or aiming to become bigger, but also consumers who can expect better services from financially stronger entities. Nor is consolidation likely to result in reduced competition, given that out of the 13 service providers, at least half have long-term stakes in the sector. There is a case, therefore, for the Centre actively encouraging M&A in telecom.

But going by reports on the Department of Telecom’s proposed M&A norms, the Centre seems set to impede consolidation. Take the rule requiring companies that buy out existing operators to pay the ‘market price’ for spectrum held by the latter. This is like permitting one real estate company to acquire another, but minus its land bank. Real estate firms are valued primarily for the land they own. Similarly, a Bharti or Vodafone will be interested in buying out a struggling operator especially for its spectrum. Subscriber base doesn’t matter so much; network infrastructure is even less of a concern when one can hire telecom towers. The Centre’s argument is that the existing operators were allocated spectrum under the old first-come-first-served policy at much lower rates than discovered through auctions. And that in the event of acquisition, the benefit from the price differential would accrue to the operators (both the acquirers and the acquired) who may share it in a proportion commercially determined between them. In sum, neither should be entitled to this windfall and the way to ensure this is by making the acquirer pay the difference to the Government.

The logic is flawed because it virtually assumes that the earlier spectrum allocations were illegal. First-come-first-served was, indeed, the policy until the Supreme Court judgment of February 2012 ordered all airwaves henceforth to be auctioned. The earlier policy allowed Vodafone to buy out Hutchison Essar’s assets in India without having to pay anything extra for the latter’s spectrum. The Government cannot insist that airwave rights bagged by operators under the old policy, valid for 20 years, be subject to auction-based pricing now. It can do so only on expiry of the validity period. Nor does the Government stand to ‘lose’ any revenue, since we are talking here of airwaves that were already allocated and having a residual validity of not more than 10 years. Any ‘windfall’ for operators is further limited by spectrum in this case being reserved only for offering 2G services. By making M&A unattractive for operators, the Government will ensure that the real losers are the telecom sector and the economy.

Published on October 28, 2013
This article is closed for comments.
Please Email the Editor