The 2G spectrum auction in the 1800 MHz band (used by GSM operators) began as scheduled on November 12, 2012 and closed two days later. The government received bids aggregating Rs 94.07 billion for 100 of the 176 spectrum blocks.
The auction proved to be a damp squib, eliciting neither enthusiasm from operators nor adequate revenues for the government. Based on the success of the 3G spectrum auction in 2010, when it had earned $12 billion, the government hoped to rake in Rs 400 billion from the spectrum sale. It achieved only a quarter of that target.
“We have sold only 42.37 per cent of the total airwaves that were put up for sale. The government will have to take some serious policy decisions, including whether the auctions should be rerun in the Delhi, Mumbai, Rajasthan and Karnataka circles at a lower reserve price,” says R. Chandrashekhar, secretary, Department of Telecommunications (DoT).
Videocon Telecommunications and Norway’s Telenor, which lost their pan-Indian licences when the Supreme Court revoked the 122 controversial permits issued in 2008, have won licences in six circles each. These operators will pay Rs 22.22 billion and Rs 40.18 billion respectively. Telenor has emerged as the highest bidder in the auctions.
Idea Cellular, which lost its licences in seven circles, has bought back airwaves and acquired a block of additional airwaves in Bihar. Incumbent operators Vodafone India and Bharti Airtel have won additional airwaves in 14 circles and one circle respectively.
According to industry experts, the high reserve price has been a key deterrent to operator participation. Service providers have been unanimous in their view that the bid price of Rs 140 billion for 5 MHz of pan-Indian spectrum was too high. This was almost seven times higher than the amount paid by carriers in 2008.
Only five operators – Bharti Airtel, Vodafone India, Norway’s Telenor ASA, Videocon Telecommunications and Idea Cellular – participated in the auction.
“The industry did not show significant interest with only a few players participating in the auction. The sector has been facing regulatory ambiguity and margins have been reducing on a quarter-on-quarter basis for several operators. This has impacted investments. Also, foreign players have not participated in the auction. A key reason could be the steep reserve base price set by the government,” says Romal Shetty, head, telecom, KPMG.
Prashant Singhal, telecom industry leader at Ernst & Young India, agrees, “The results clearly indicate that the reserve price was completely off the mark. In fact, it forced even interested operators to not bid for circles that they had committed to publicly. The government’s plan to generate Rs 400 billion has also fallen flat. It will now have to go back to the drawing board to discover a market-driven price for spectrum in the 800 MHz and 1800 MHz bands. Therefore, this was a big embarrassment for the government, but one could see it coming. It could have been avoided by setting a more sensible reserve price.”
In early November 2012, TTSL and Videocon Telecommunications withdrew from the bidding for 800 MHz spectrum, which is used to offer CDMA mobile services. Given the shortage of spectrum in this band, the government decided to auction three blocks of 1.25 MHz each in 19 circles. The reserve price for each block of 800 MHz was pegged at Rs 45.5 billion (about 1.3 times of the price of spectrum in the 1800 MHz band).
However, with no takers for 800 MHz spectrum, the government has postponed the auction for the same till a final decision is reached on the issue.
Meanwhile, with operators not bidding for key circles, DoT’s plans of imposing a one-time fee on excess airwaves held by operators are also likely to be derailed. The one-time fee was slated to bring in Rs 250 billion to the exchequer. However, determining the market price for calculating the one-time fee will not be possible due to the lack of bidder interest.
According to analysts, in the absence of a market-discovered price, the government’s options are limited to reducing the base price for spectrum in the 1800 MHz band for circles like Mumbai, Delhi, Karnataka and Rajasthan or holding another auction. However, these options may involve legal challenges from companies that participated in the recently closed auctions.
Telecom analysts also point out that the government’s decision to refund the licence fee paid by operators that lost their licences in 2008 may actually result in no net gain for the exchequer. As per DoT guidelines, only 33 per cent of the bid amount needs to be paid to the government in the first year, implying that it would earn only Rs 31 billion in 2012-13. The remaining amount will be paid over the next 13 years in 10 equal installments. As against this, the government will have to refund Rs 43 billion to operators for the entry fee paid in 2008.
Even as the government decides on its future course of action for the unsold spectrum, companies like Vodafone India and Telenor have expressed satisfaction at having won spectrum.
Vodafone’s official statement reads, “Vodafone India confirms that we have won spectrum in 14 circles in the 2G auction that has just concluded. We have always maintained that auctions are the best and the only transparent method for the allocation of spectrum. Our decision to participate in the 2G auction was aimed at securing additional spectrum in many circles where we have not received any new 2G spectrum since 2008. Our customers grew from 60 million to 153 million during this period.”
Sigve Brekke, executive vice-president and head of the Telenor Group’s Asian operations, notes, “We have won spectrum in the six most populous circles in India. These are also the areas where we have a strong base, and where we see the highest potential for continued growth and profitability. These circles will deliver on our financial target of achieving break-even in 2013.”
Industry Views
Prashant Singhal, Telecom Industry Leader, Ernst & Young India
The results of the spectrum auction clearly indicate that the reserve price was completely off the mark, with none of the operators pitching for the circles that they had committed to participate in. The government’s plan to earn Rs 400 billion has fallen flat and it will now have to go back to the drawing board to discover a market-driven price for spectrum in the 800 MHz and 1800 MHz bands. Therefore, this was a big embarrassment for the Indian government, but one could see it coming. It could have been avoided by setting a more sensible reserve price.
Media Statement, Vodafone India
Vodafone India confirms that we have won spectrum in 14 circles in the 2G auction. Our decision to participate in the 2G auction was aimed at securing additional spectrum in several circles for which we have not received 2G airwaves since 2008.
Vodafone firmly believes that the entire spectrum that is currently unused (800 MHz, 900 MHz and 1800 MHz) should be put on auction at the same time with a much lower reserve price. The spectrum auction should be held simultaneously for all service areas. In addition, to ensure a level playing field, all operators should be allowed to bid for all spectrum bands. Spectrum usage should be technology-agnostic and the government should follow the Telecom Regulatory Authority of India’s (TRAI) advice to do away with staggered spectrum usage fees, which are higher for operators who require additional spectrum. This does not make sense if spectrum is bought in an auction and is already paid for. The spectrum usage fees should be flat and only represent the charge for administering spectrum. TRAI has advised to put this at 1 per cent of revenues.
Jon Fredrik Baksaas, Group President and Chief Executive Officer, Telenor Group
I am very pleased that the Telenor Group has acquired the necessary spectrum to provide mobile services in India, as a continued presence in the country is important for our growth strategy. The new licences provide clarity to customers, operators and partners after a long period of uncertainty. We are looking forward to a more predictable and stable regulatory environment.
Sigve Brekke, Executive Vice-President and Head of the Telenor Group’s Asian Operations
We have won spectrum in the six most populous circles in India. These are also the areas where we have a strong base, and where we see the highest potential for continued growth and profitability. These circles would deliver on our financial target of achieving break-even in 2013.
Rajan S. Mathews, Director-General, COAI
The 2G auctions have ended on a flat note, and the Cellular Operators Association of India (COAI) observes that the results have been exactly what the industry had predicted. COAI had stated that the high reserve price would ensure limited participation in the auction and indicated that the bidding would be extremely muted, with no bidders for several circles. The auctions have concluded as per the predictions.
The key reason for this kind of a response was the artificially high reserve price. The second factor is that the majority of bidders were operators who lost their licences and were compelled to participate in the auction despite the high prices and the limited availability, in order to maintain their customer base, sustain businesses and to protect their investments. Finally, limiting the spectrum available for auction added to the uncertainty and fear of “irrational bidding” for several potential bidders. The artificial scarcity created by holding back spectrum, combined with the high reserve price, dampened any enthusiasm for aggressive bidding by the operators. In fact, only about 35 per cent of the total spectrum (only 27 per cent in terms of the reserve price) put up for auction was actually bid for.
Himanshu Kapania, Managing Director, Idea Cellular
In the recently concluded 1800 MHz spectrum auction, Idea Cellular was declared the winning bidder in the Tamil Nadu, Odisha, Assam, Northeast, Jammu & Kashmir, West Bengal and Kolkata circles. It also secured an additional slot of 1.25 MHz spectrum in the Bihar circle. The auction was held under unusual circumstances. Four years after the launch of full-fledged operations in the abovementioned service areas, Idea was faced with a Hobson’s choice. However, we still participated in the auction, which we may not have considered in a start-up situation.
Recent government approvals
Cabinet approval for EGoM recommendations
For the efficient utilisation of spectrum and to facilitate the proliferation of telecom services in the country, the cabinet has approved the following recommendations of the empowered group of ministers (EGoM):
• No one-time charge to be levied for holding spectrum up to 4.4 MHz (GSM).
• For all spectrum held beyond 4.4 MHz (GSM), a one-time charge will be levied prospectively on existing operators at the 2012 auction-determined price. The charge will be applicable from the date of commencement of the first quarter following the date of the cabinet decision.
• For spectrum held above 6.2 MHz, a one-time charge will be levied retrospectively from July 2008, based on the auction-determined price. This charge will be payable from the date of the commencement of the first quarter following the date of the cabinet decision.
• The licensees will be given the option to surrender spectrum beyond 4.4 MHz (GSM), if they do not want to pay the charge.
• The licensees will be allowed equated annual instalments for the remaining validity period of the licence (in a way that the last instalment will be payable not later than 12 calendar months prior to the expiry of the licence) at an interest rate of 9.75 per cent as approved by the Ministry of Finance in the case of the new successful bidders for deferred payments. The licensees will also have the option of full upfront payment or prepayment of one or more instalments.
Cabinet approval for spectrum sharing and intra-service area mergers:
• Spectrum sharing without any additional charge will be allowed between telecom service providers (TSPs) that have paid for spectrum beyond 4.4 MHz (GSM) as recommended without any change in the terms and conditions of their licence. Both TSPs will have to pay a spectrum usage charge at the slab rate applicable on the combined spectrum held by them.
• Where a transferor (acquired) company holds spectrum against the entry fee paid, the transferee (acquiring) company (that is, the merged entity) will be required to pay the government the differential between the entry fee and the current auction-determined price on a pro-rata basis for the remaining validity period of the licence(s).
• The cabinet has decided that licensees that were not awarded initial spectrum even after paying the requisite fee will be allotted 4.4 MHz spectrum after the completion of the auction, subject to its availability.