How spectrum trading can revive telecom in India

With the Union cabinet clearing the long-pending demand for spectrum trading, the telecom sector is bound for a major shake-up. Through the sale of unused spectrum, fringe players struggling to cut losses may exit the sector, and the dominant players who claim to be starved of spectrum will emerge more powerful. Earlier, loss-making companies had only two options: enter into merger and acquisition (M&A) deals,  which have become rarer in an increasingly risk-averse market; or surrender their spectrum to the government and fold up operations — clearly an unviable proposition for those corporates answerable to shareholders and lenders. Ever since the 2008 round of licence and spectrum allotment — undertaken with the lofty aim to bring new players into the market and curb cartelisation tendencies — descended into a cesspool of scams, the telecom sector had lost momentum. From its pride of place as the mascot of the India growth story in the second decade of the post-liberalisation era, the mismanagement of the telecom sector had become a byword for crony capitalism. There was a turnaround in sentiment when the Modi government adopted a transparent regime of auctions. This has been helpful in the market discovering the competitive price.

With auctions becoming the norm, and those who acquired spectrum cheaply in the pre-auction era forced to pay one-time spectrum usage charges, a level-playing field has been created which will ensure that spectrum trading does not descend into rent-seeking. Last month, the government cleared spectrum sharing between telcos to address their complaints of inadequate spectrum. Taken together, these two measures indicate that the telecom ministry has put the sordid saga of scams behind it and is willing to heed bona fide industry demands. Loss-making companies holding on to scarce and valuable spectrum, but with little inclination or the ability to infuse fresh capital, makes for an unproductive situation. Debt-laden companies like Tata Teleservices, Aircel and Sistema are reportedly looking to exit from the Indian market. With their respective M&A talks reaching nowhere, spectrum trading is an opportunity to phase out those dragging down the sector.

But beyond financial imperatives, the effectiveness of the spectrum trading and sharing policy will be measured by its ability to consolidate the fragmented spectrum holdings. With rising data usage and the launch of 4G services, major operators are facing bandwidth constraints and grappling with dropped calls. Telecom regulator TRAI had recommended that the trading be capped so that no operator enjoys more than 50 per cent of the spectrum in a band and 25 per cent of the total commercial spectrum assigned in a circle. While this ostensibly prevents monopolies from developing, it will prevent trading between two dominant players in a circle. But the real supply-side constraint, which could limit the number of “trades”, is the likelihood of the spectrum on sale. The other constraint would be that of spectrum buyers not being contiguous and in matching bands. Such a scenario would not aid the consolidation of spectrum or solve bandwidth constraints. Besides the option of exiting, spectrum trading and sharing policy also offers loss-making companies the chance to pool spectrum, or scale down operations by selling spectrum in unviable circles and focusing on a few circles, and then hope to claw back into the game. The grim reality of the telecom sector is the huge debts incurred by these firms after ambitious pan-India launches and aggressive bidding in the spectrum auctions. Despite the size of the Indian market and the impressive teledensity, the reality is that most circles have space for no more than four telecom service providers to operate profitably. The exit of a few players need not be a bad development if the survivors can demonstrate robust growth. With the telecom policy finding its feet again, future spectrum auction rounds after this phase of consolidation, could still see the entry of new players.