The union cabinet has put an end to the ambiguity over fixing the base price for the forthcoming 2G spectrum auction. It has set the reserve price for 5 MHz spectrum at Rs 140 billion, indicating that every MHz of airwave in the 1800 MHz band will cost a minimum of Rs 28 billion.

The cabinet has also decided to fix the reserve price for spectrum in the 800 MHz band used by CDMA operators at 1.3 times that of the 1800 MHz band. This implies that for companies like Sistema Shyam TeleServices Limited, the reserve price for 5 MHz CDMA spectrum will be Rs 182 billion.

Based on the Telecom Regulatory Authority of India’s (TRAI) recommendations on spectrum pricing, the cabinet has also fixed the spectrum usage charge at 3-8 per cent of a service provider’s annual revenue.

In a bid to compensate for the high base price, the government has asked operators to pay only one-third of the auction price upfront. Following this, operators will get a two-year moratorium and can pay the rest of the amount in 10 annual instalments, allowing them to pay the entire amount over a period of 12 years.

In its recommendations on spectrum pricing in April 2012, TRAI had suggested a reserve price of Rs 181.1 billion and a flat spectrum usage charge of 3 per cent. This evoked sharp resistance from telecom operators who maintained that such a high base price would adversely impact the already beleaguered telecom industry.

Consequently, an empowered group of ministers (EGoM), under the direction of Finance Minister P. Chidambaram, announced a bid price of Rs 141 billion for 5 MHz spectrum in the proposed auction. This is 22 per cent lower than that recommended by TRAI.

In the past few months, the EGoM has also taken important decisions such as allowing spectrum mortgage and stated the terms of payment and roll-out obligations of operators after buying spectrum.

While some industry experts support the high base price for spectrum given that scarce resources should not be sold cheap, telecom companies believe otherwise. Service providers are naturally dissatisfied with the spectrum price, which is seven times higher than the 2G spectrum base price during the 2008 auctions.

According to Rajan Mathews, director general, Cellular Operators Association of India (COAI), representing the GSM lobby, the high base price is unreasonable. It will adversely impact the business viability of operators and pose challenges in raising funds from banks, adding to the funding woes of the sector. Moreover, it will result in higher tariffs, thereby impacting the government’s ambitious plan to ensure affordable telecom services in rural areas.

“The high reserve price can impact tariffs by as much as Re 0.30 per minute and will result in an additional debt of Rs 3,250 billion, which the operators will have to raise for funding their bids. Banks do not have that kind of funding bandwidth,” says Mathews.

“Forget Rs 140 billion, there is no business case even if the reserve price was set at Rs 16.5 billion per MHz. Idea is losing Rs 1.7 billion per quarter in each of the seven circles where our licences were quashed by the Supreme Court,” remarked Himanshu Kapania, Idea Cellular’s managing director, in a leading business daily.

Telecom operators had been requesting for an 80 per cent reduction in the reserve price recommended by TRAI, which would otherwise have led to a hike in mobile tariffs. Even at the current price “operators will be left with no option but to pass on the spectrum costs to customers, leading to higher tariffs,” notes a senior official of a leading telecom company. “This will adversely impact the health of the industry.”

Recently, the Federation of Indian Chambers of Commerce and Industry (FICCI) joined the operators in expressing disappointment at the high base price fixed by the government. In a media statement, FICCI noted that it believed this stand was anti-consumer and would hurt competition in the sector. It would force telecom companies to increase tariffs and substantially increase entry barriers for new entrants. It would also impact the government’s objective of attracting foreign investments in the country and positioning India as a preferred investment destination. FICCI has, therefore, urged the government to reconsider its decision.

The operators’ concerns are understandable. Paying such a high price for spectrum could result in increased tariffs. Also, they will face difficulties in arranging funds in the current scenario.

On the other hand, as an industry analyst points out, “Since only 13 blocks will be auctioned initially, it will add up to about Rs 500 billion, which the industry should be in a position to raise.”

Meanwhile, GSM operators such as Bharti Airtel, Vodafone, Idea and Aircel are reportedly examining legal options regarding five key policy decisions linked to the spectrum sale. These include “discrimination” in terms of payment of airwaves secured in the auctions and spectrum usage charges between GSM and CDMA telecom operators.

If the matter is taken to court, there is a high chance of the 2G spectrum auction getting delayed. Given that the auction is crucial for companies like Uninor and SSTL, which can offer their services till September 7, 2012 as per the Supreme Court order, the EGoM is considering a revision in the spectrum auction timeline.