2G scam fallout: A Rs15,000 crore jolt for telecom firms

The Telecom Regulatory Authority of India (TRAI) has urged the government to determine the price of extra 2G spectrum through auction if it cancels the licences of those who have not started operations.

In case the government does not cancel licences of new operators, it has suggested fall-back prices that would cost companies like Airtel, Vodafone, BSNL and MTNL a total of Rs15,000 crore.

The new prices, however, will not apply to those who hold only start-up spectrum and no additional spectrum, such as Reliance Communications, Tata DoCoMo, most of the new crop, and Idea in many circles.

New prices are being firmed up under the new telecom policy which abolishes the concept of ‘free spectrum’ and requires all operators to pay for the extra spectrum they have already been allotted, or any that will be allotted in future.

The comptroller & auditor general of India (CAG) was the first body to object to the distribution of free spectrum to operators as and when they achieved certain subscriber numbers, following which telecom minister Kapil Sibal scrapped the ‘free spectrum’ policy.

TRAI had, in May last year, advised against conducting auctions of 2G, or voice, spectrum, arguing that enough spectrum was not available for an auction to work. In the new letter, however, the regulator points out that since the government is moving forward on cancelling many of the licences issued by former minister A Raja, a large amount of spectrum would be freed up, making auctions possible.

“While making the recommendations in May 2010, the authority found auction to be not feasible... on account of the number of operators already existing... coupled with the low availability of spectrum and related issues,” TRAI said in its new letter to the department of telecom (DoT). It pointed out that since then, it had recommended action — including cancellation — against 74 operators.

“If these cancellations take place, the availability and requirement of spectrum would undergo a significant change... In that event, it should be possible for the government to auction the surplus spectrum and treat this auction price as the relevant price of extra spectrum,” it said.

The biggest negative impact of the move would be on old operators as new GSM operators such as Reliance and Tata DoCoMo do not have any “extra spectrum” over and above the ‘start-up’ spectrum they were entitled to.

It would also have a negative impact on any operator who wanted to purchase spectrum or licence in the future — including start-up spectrum — as the government has announced that ‘start-up’ spectrum will also be charged, but only for those who purchase from now on.

Both options suggested by TRAI are bad news for operators. While auction prices tend to stay high because of bids and counter-bids, the fall-back price suggested by TRAI in its letter are more than 1,000 times what was discovered in the 2001 auctions in some areas.  The highest increase in ‘fall-back’ price for extra spectrum has been in second and third tier circles like Madhya Pradesh, West Bengal and Bihar.

In Bihar, the new ‘fall-back’ price is 100 times the price discovered during 2001 auctions, while it is 1,350 times what it was in 2001 in West Bengal. On an all-India basis, new ‘fall-back’ prices — which come into the picture only if auctions cannot be held — are 17 times what they were in 2001.

The industry is likely to favour auctions, according to early indications, particularly if three or four licences are cancelled in each circle and there are only another four or five operators left to bid for the freed up spectrum.

Bharti Airtel would be hardest hit among private operators while BSNL would be the overall loser. The CAG had, in its report in November, pointed out that nine operators held a total of around 150 MHz of spectrum beyond the 6.2 MHz that was promised to them in their licences.

In response, Sibal said that all operators who hold spectrum above 6.2 MHz will have to pay for it. No existing operator will have to pay for the basic or ‘start-up’ spectrum, according to the new telecom policy announced by Sibal 10 days ago. He said Trai will suggest the way in which the pricing will be done and the current recommendation is seen as Trai’s response on that front.

The biggest chunk of spectrum beyond 6.2 MHz is held by state-owned BSNL, accounting for 61.6 MHz of the 150 MHz extra spectrum held by all operators. Going by the all-India average ‘fall back’ price of Rs4,572 for 22 MHz of extra spectrum, BSNL may have to shell out around Rs10,000 crore as one-time payment or surrender its extra spectrum. Similarly, Bharti Airtel holds 32.4 MHz of extra spectrum, but may have to pay only around Rs2,000 crore since the payment is for 20 years duration and Bharti has only 5-10 years left in many of its licenses. Vodafone holds 19.6 MHz of extra spectrum, followed by Idea and MTNL with around 12.5 MHz each.