After 10 days and 68 rounds of aggressive bidding, the high profile 2G spectrum auction concluded on February 13, 2014. Eight operators ? Bharti Airtel, Vodafone India, Idea Cellular, Reliance Communications (RCOM), Aircel, Telewings Communications (operating under the brand Uninor), Tata Teleservices Limited (TTSL) and newcomer Reliance Jio Infocomm Limited (RJIL) ? participated in it. This was the third 2G spectrum auction after the cancellation of 122 licences by the Supreme Court in early 2012.

The Department of Telecommunications had put on the block 385 MHz of spectrum in the 1800 MHz band and 46 MHz in the 900 MHz band. While spectrum in the 1800 MHz band was available for sale in all 22 circles, spectrum in the 900 MHz band was available for only three circles ? Delhi, Mumbai and Kolkata. The base price for spectrum in the 1800 MHz band was set at Rs 17.65 billion per MHz and for that in the 900 MHz band, it was set at Rs 3.60 billion per MHz for Delhi, Rs 3.28 billion for Mumbai and Rs 1.25 billion for Kolkata.

Gains for the government

After two failed attempts to raise funds from the 2G spectrum auction, the government struck gold this time. It earned over Rs 610 billion from the auction, far exceeding its expectations. At the set reserve price, it had anticipated raising Rs 410 billion. Of the total amount of about Rs 610 billion, it will receive at least Rs 182.73 billion upfront as the companies need to pay a quarter to a third of the winning price initially and the rest annually up to 2026.

The unexpected windfall will allow the government to bridge the fiscal deficit, which, in the first three quarters, inched close to the target for the whole year.

Operator interest

Leading telecom operators which had boycotted the previous two auctions, protesting that the minimum bid price was too high, participated enthusiastically in the recent auction. Spectrum in the 900 MHz band, which was in short supply, attracted more aggressive bids. For Bharti Airtel and Vodafone, winning airwaves in the 900 MHz band in Delhi, Mumbai and Kolkata was crucial as the Supreme Court had refused to extend their licences, which are to expire in 2014 and 2015 respectively.

Bharti Airtel won 115 MHz of spectrum for a total of Rs 185.30 billion. Apart from airwaves in the 900 MHz band in the Delhi, Mumbai and Kolkata circles, it won spectrum in the 1800 MHz band in Delhi, Mumbai, Kolkata, Andhra Pradesh, Tamil Nadu, Karnataka, Kerala, West Bengal, Madhya Pradesh, the Northeast, Odisha, Punjab, Rajasthan, Jammu & Kashmir, and Himachal Pradesh.

Idea Cellular spent $1.7 billion to buy spectrum in the 900 MHz band in Delhi and in the 1800 MHz band in the Delhi, Mumbai, Gujarat, Haryana, Karnataka, Maharashtra, Northeast and Punjab circles.

Vodafone India paid Rs 196 billion for retaining spectrum in the 900 MHz band in the three metros, and for purchasing spectrum in the 1800 MHz band in the Mumbai, Delhi, Kolkata, Karnataka, Kerala, Gujarat, Uttar Pradesh (East), Rajasthan, Haryana, Andhra Pradesh and Punjab circles. Of the total amount, about Rs 56 billion will be payable in 2013-14.

Marten Pieters, managing director and chief executive officer, Vodafone India, stated, ?We are pleased to have secured our business for the next 20 years in three of our most important circles by buying enough spectrum to continue our successful journey. We have also opened the door to the next generation of mobile technology ? 4G ? by acquiring spectrum in the 1800 MHz band in the places where we expect this market to take off first.?

Aircel won spectrum in the 1800 MHz band in the Jammu & Kashmir, Northeast, Rajasthan, Uttar Pradesh (East) and West Bengal circles while RCOM won spectrum in Mumbai.

Telewings Communications, the Indian arm of Norway-based Telenor, picked up additional spectrum in four of its six existing circles. These were Uttar Pradesh (East), Uttar Pradesh (West), Bihar and Jharkhand, and Andhra Pradesh. It also acquired spectrum in the new circle of Assam. The company?s spectrum acquisition entails an investment of Rs 8.4 billion and will enable it to enhance its voice and data capacity by 20 to 25 per cent. According to Sigve Brekke, head, Telenor Asia region, ?The Telenor Group has always stated that we have a long-term perspective on our investment in India. I am pleased that Uninor, through this auction, has strengthened its competitive advantage as a cost efficient operator.?

While the incumbent mobile operators spent top dollar to protect their turf against the competition and strengthen their data footprint, RJIL won enough airwaves to start offering voice services. A pan-Indian owner of broadband wireless access (BWA) spectrum, RJIL won 78 MHz of new airwaves in the 1800 MHz band in 14 circles, for a total amount of Rs 110.54 billion.

?With this acquisition, Reliance Jio will be the holder of the largest quantum of liberalised spectrum and with the longest residual spectrum life,? noted Mukesh D. Ambani, chairman and managing director, Reliance Industries Limited.

TTSL was the only company among the qualified bidders that did not pick up spectrum in either the 1800 MHz band or the 900 MHz band.

Price impact

Even as the auction was declared a success and operators managed to acquire spectrum in circles of their choice, industry analysts cautioned that the price paid for acquiring spectrum was too high and would negatively impact operator balance sheets. According to early estimates, Bharti Airtel?s debt is likely to go up by 33 per cent in 2014-15 while Idea Cellular?s will go up by a massive 179 per cent on account of the spectrum payout.

Comments Rajan S. Mathews, director-general, Cellular Operators Association of India, ?We are glad that the auctions are over and we feel that the government has emerged as the real winner. While the industry is relieved at the conclusion of the auction, there is also disappointment at the winning price points, which will determine the emerging competitive landscape. There are also concerns regarding the impact of the auction on the NTP 2012 objectives, especially those related to rural penetration, broadband for all, internet access, etc. It remains to be seen if the operators will have the financial resources to invest in networks and marketing after bearing the high spectrum costs. Also, in order to help the industry overcome this huge financial burden, the government should address the issue of the high tax/levy structure in the industry. We would urge the government to reduce the spectrum usage charge and the Universal Service Obligation Fund levy to 1 per cent.?

In a media statement, Pieters too emphasised that much of the money spent on the auction would end up as debt on the balance sheets of mobile operators. ?Such high industry indebtedness will hurt the operators? ability to invest in the roll-out of new technologies and invariably result in higher prices and lower service levels for consumers,? he stated.

Mobile operators, which are already struggling to cope with a huge debt burden, are likely to increase call rates to compensate for the higher spectrum charges. Already last year, Bharti Airtel, Vodafone India and Idea Cellular had raised their voice tariffs. Mobile companies have also been cutting back on the discounts they had previously offered to attract customers in the highly competitive market.

Nevertheless, the auction reveals that some correction is taking place in the sector with several uncertainties and regulatory challenges being removed. Analysts also agree that the robust participation by telecom companies, including foreign operators like Telenor and Vodafone India, reflects a positive sentiment towards the Indian market. For instance, Vodafone, despite being involved in a dispute with the tax authorities, will be increasing its stake in the country. The successful outcome of the spectrum auction should help the telecom sector regain its growth momentum.