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Run-up to NTP: TRAI recommendations on spectrum management and licensing

November 30, 2011
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The Telecom Regulatory Authority of India (TRAI) has responded to the issues referred to it by the Department of Telecommunications for the framing of the National Telecom Policy (NTP), 2011.

Spectrum management

As part of TRAI’s “Recommendations on Spectrum Management and Licensing Framework”, the regulator has suggested that the contracted spectrum remain at 6.2 MHz and 5 MHz for GSM and CDMA licences respectively. It has also reiterated that its earlier recommendation of a “current price” (determined by an expert panel) be used for determining the price of excess spectrum beyond the contracted spectrum. TRAI had earlier recommended that excess spectrum up to 8 MHz be charged at its recommended current price and beyond 8 MHz at 1.3 times the current price. TRAI has now stated that this additional charge is not appropriate since the experts have recommended only one price for all excess spectrum.

Mergers and acquisitions

With regard to mergers and acquisitions (M&As), TRAI has recommended that post-consolidation, the resultant entity can have a maximum revenue per subscriber market share of 60 per cent as against the earlier proposed 40 per cent. Companies with a revenue market share of up to 35 per cent will be automatically approved while those between 35 per cent and 60 per cent will have to be referred to TRAI for approval. The limit on spectrum holding by the combined entity will be 25 per cent of the total spectrum held in that service area. Spectrum sharing will also be permitted within this 25 per cent limit.

Further, TRAI has clarified that the prescribed limit of 2x10 MHz for metros and 2x8 MHz for other circles pertains only to government-assigned spectrum. It does not stop a licensee from acquiring additional spectrum by way of auction or through mergers.

Spectrum refarming

TRAI has reiterated that there is a need for spectrum refarming in the 800/900 MHz bands. It will, therefore, separately initiate a consultation process and then offer its final recommendations.

TRAI has also recommended that the government should mention the need for refarming in the NTP 2011 and the details thereafter can be worked out through a consultation process. Meanwhile, TRAI is considering limiting the auction of spectrum in the alternative 700 MHz band initially to those not holding spectrum in the 800/900 MHz bands, subject to the condition that holders of 800/900 MHz spectrum pay the market price for spectrum. This, according to TRAI, will establish a level playing field.

TRAI has also recommended that a specific fund for spectrum refarming be set up and that 50 per cent of the proceeds from spectrum, including the auction proceeds as well as the spectrum usage charges, should be transferred to this fund.

Other highlights

TRAI has reiterated its earlier recommendation on a uniform licence fee. It had suggested that the telecom industry should progressively move towards a uniform fee of 6 per cent of the adjusted gross revenue (AGR) over a period of four years from financial year 2013 to financial year 2016.

TRAI has also recommended incentives in the form of a progressive reduction in the Universal Service Obligation (USO) Fund component (which is currently 5 per cent of AGR) of the licence fee, starting with 0.5 per cent for the achievement of a two-year obligation and extending up to 4 per cent in the event of over 90 per cent coverage of all villages with a population of 500 to 2,000. TRAI has further suggested the renewal of licences for a period of 10 years as against the current term of 20 years.

As expected, the TRAI recommendations have elicited a mixed response. While happy that TRAI’s overall recommendation is positive, analysts and operators say that some elements of the proposal require further deliberation and clarity.

Telecom major Bharti Airtel, for instance, welcomed the regulator’s proposal for liberal norms with respect to M&As and spectrum sharing. Says Sanjay Kapoor, CEO, India and South Asia, Bharti Airtel: “Prima facie, I would say these seem to be very balanced recommendations. In particular, the spectrum sharing and M&A norms appear to be lucrative.”

TRAI’s M&A proposal, enabling the creation of companies with a maximum market share of 60 per cent, if implemented, is expected to facilitate the much required consolidation in India’s overcrowded telecom space. Most operators have welcomed this. Further, TRAI’s recommendation of stepping up the number of units from 14 (its earlier suggestion) to 25 per units of airwaves in a region that can be held by the combined entity after a merger is a positive move.

Operators also find the initiative to incentivise operators for rural rollouts an encouraging step as it will help widen the sector’s reach to the remotest parts of the country. “We believe that what the USO has not been able to do over the last many years, this single recommendation is capable of or has the potential to do,” says Kapoor.

However, according to market experts, the area in which operators are likely to feel the pinch is the six-fold jump in 2G spectrum prices, which will put a massive financial burden on them. With most of the old telecom licences up for renewal in the next three-five years, operators will have to bear a significant cost for spectrum as recommended by TRAI to renew licences. Besides, for incumbents like Bharti Airtel and Idea Cellular that hold excess spectrum, the TRAI recommendation of a one-time market-determined spectrum rate for each additional spectrum held beyond the 6.2 MHz limit will translate into Rs 45.71 billion (all-India) per operator. This will put an additional financial burden on the telecom service providers.

Also, the uncertainty over refarming of spectrum in the 900 MHz band remains a major concern, according to equity firm Prabhudas Lilladher, owing to increased capex requirements in the less efficient 1800 MHz band.

Undoubtedly, there are issues that will need to be ironed out. As minister of communications Kapil Sibal pointed out recently, “It will take time.” He added: “The [draft] policy I have already announced, as I had committed. The industry wants some more time to respond; we will give them time. Finalisation of the policy will happen in January instead of December.”

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