The spectrum reserve price of Rs 140 billion set by the government for the upcoming 2G licence auction continues to attract criticism from industry bodies.
Earlier, the Cellular Operators Association of India and the Federation of Indian Chambers of Commerce and Industry had termed the government?s decision of fixing a high reserve spectrum price as anti-industry.
Now, independent and professional investment information and credit rating agency, ICRA has also termed the reserve price of Rs 140 billion for the 2G auction steep.
According to ICRA, the reserve price of Rs 140 billion will have significant cash flow implication for the incumbent telecom operators as the prices discovered through auction would also form the base for future spectrum related charges. In its analysis, ICRA says that a key implication of the high reserve price set up by the Union Cabinet will be on the possible cash outflows for future spectrum charges like spectrum renewal fees and one time spectrum charge (if levied) for the existing telecom operators. Going by the high reserve price, the telecom operators might have to incur substantial cash outflow at the time of renewal of spectrum (starting earliest by 2014-2015 for Bharti Airtel). A one-time spectrum charge would be an additional financial burden for the telecom operators, although there is no certainty on levy of the same.
ICRA has highlighted following aspects in its detailed analysis of impact of reserve price decided upon by the government for the 2G auction:
On February 2, 2012, the Supreme Court of India had cancelled the telecom licenses awarded after January 10, 2008 (in 800 MHz and 1800 MHz) and ordered the Department of Telecommunications (DoT) to re-auction the cancelled licenses. A key prerequisite for conducting the auction was the determination of reserve price for both the spectrum categories. On August 3, 2012, the Union Cabinet approved the auction reserve price at Rs. 140 billion for 5 MHz pan-India spectrum (22 telecom circles) in 1800 MHz band.
While the auction reserve price has been decided so as to meet the August 31, 2012 deadline for conclusion of the auction stipulated by the Supreme Court, several auction modalities remain to be finalised. Some of these are ?issue of auction information memorandum, finalisation of rollout obligations. Thus, the timeline of August 31, 2012 appears challenging and is likely to be extended.
The upcoming auction would have long term implications for the sector in terms of deployment of technology (as the auctioned spectrum would be liberalized), competitive intensity, spectrum holding, and pricing power of the operators. This auction is likely to be used as market entering strategy by some new operators and strengthening strategy by the incumbent operators.
In the long term, high spectrum price would weigh heavily on the sector. The auction determined prices would form the basis for price to be paid by the operators for spectrum in future ? for renewal of spectrum or the one-time spectrum charge (if levied). Keeping this in mind, the operators would need to prepare their strategy for the next wave of growth for the industry, which is expected to be the data space, although it is likely to take some time to evolve
The high spectrum cost would impact the cost metrics for the operators, who are already burdened by highly leveraged balance sheets. This would exert pressure on the operators to hike the tariffs to recover the additional costs, however, the quantum and timing of the same remains uncertain.
Regulatory decisions remain to be taken on several critical issues such as spectrum re-farming, one-time spectrum fee, modalities for spectrum renewal etc, which would have significant bearing on the sector.
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