During the past few months, the Indian telecom space has witnessed some key policy and regulatory moves which will go a long way in increasing stability and confidence in the sector. In one such move, the Department of Telecommunications (DoT) has released the much-awaited merger and acquisition (M&A) guidelines to facilitate arrangements among telecom service providers.

These guidelines have been notified at a time when the Indian telecom market, which has 10-12 operators per circle, is ready for consolidation. While the government initiated market liberalisation by removing the foreign direct investment cap for the sector in 2013 and granting in-principle approval for spectrum trading in early 2014, a clear policy framework to facilitate collaboration amongst players was needed. The M&A guidelines provide a road map for incumbents to acquire small operators in a bid to increase their spectrum holding while easing the exit route for struggling telecom players. Bharti Airtel’s recent acquisition of Mumbai-based Loop Mobile has set the ball rolling and M&A activity will gain momentum in the next two to three years. Also, there are reports of potential acquisition deals including Vodafone India’s takeover of the Tata Group’s telecom business and Sistema Shyam TeleServices Limited merging with Aircel. Moreover, Reliance Jio Infocomm Limited is reportedly considering the option of acquiring Videocon Telecom Limited to secure additional spectrum.

The following are the key highlights of the new M&A guidelines...

•A period of one year has been allowed for transfer/merger of various licences.

•If a licensee participates in an auction (and is consequently subject to a lock-in condition), and it proposes to merge with another licensee, the lock-in period will be applicable on the new shares issued to the resultant (transferee) company.

•Following the transfer of licences held by the transferor (acquired) company to the transferee (acquiring) company, the licences of the former will be subsumed in the resultant entity. The validity period of spectrum will remain unchanged subsequent to transfer of assets/licences by the transferor.

•Taking into consideration the spectrum cap of 50 per cent in a band for access services, merger of licences will be allowed if the market share of the resultant entity is up to 50 per cent in any service area. In case the merger or acquisition proposals result in the market share exceeding 50 per cent in any service area, the resultant entity should reduce its market share to 50 per cent or below within a year from the date of approval of the merger or acquisition.

•Further, the share in terms of both the subscriber base and adjusted gross revenue (AGR) of licensees in the relevant market will be considered for calculating the market share of the resultant entity. Both the wireline and wireless subscriber bases will be taken into consideration. Exchange data records will be used for determining the wireline subscriber base while visitor location register data will be used for calculating the number of wireless subscribers.

•If the acquired company holds a part of the spectrum (4.4 MHz or 2.5 MHz), which has been assigned against the entry fee paid, the acquiring company or the resultant merged entity will pay the government the differential between the entry fee and the market-determined price of spectrum from the date of approval of such arrangements on a pro-rata basis for the remaining validity of the licences. Meanwhile, no separate charge will be levied for spectrum acquired through auctions conducted since 2010. The spectrum usage charge on the total spectrum holding of the resultant entity will be payable.

•Since the auction-determined price of spectrum is valid for a year, the prime lending rate based on the State Bank of India’s lending rate will be added to the last auction-determined price to arrive at the market-determined price after one year.

•Post the merger in a service area, the total spectrum held by the resultant entity should not exceed 25 per cent of the total spectrum assigned for access services and 50 per cent of the spectrum assigned in a given band. For the 800 MHz band, the ceiling will be 10 MHz. Moreover, the relevant conditions pertaining to auction of that spectrum shall apply.

•In case the transferor and transferee have been allocated 3G spectrum through the auctions conducted in 2010, the resultant entity will be allowed to retain two blocks of 3G spectrum in a given service area, while complying with the spectrum cap of 50 per cent in a given band.

•If, as a result of the merger, the total spectrum held by the resultant entity is beyond the prescribed limits, the additional spectrum must be surrendered within a year of the merger approval.