During 2014, the Telecom Regulatory Authority of India (TRAI) made a concerted effort to reduce uncertainty in the sector and allay industry concerns. Among the key steps it took was its recommendations on mergers and acquisitions (M&As) and spectrum trading and sharing. However, these are yet to receive clearance from the Department of Telecommunications (DoT)/the cabinet.

The new government, though, cannot be faulted entirely for the slow progress on various regulatory issues given that it has been in office for only six months. On the other hand, it has been fairly proactive in taking new initiatives, such as the Digital India programme, and taken measures to expedite the implementation of the National Optical Fibre Network (NOFN) project, which has now been integrated with the Digital India programme. Meanwhile, DoT is likely to soon receive spectrum in the crucial 2100 MHz band from the defence forces under a swap agreement that had been in a logjam for several years.

tele.net takes a look at the key policy and regulatory developments over the past year…

M&A norms still lacking clarity

Even though TRAI had made recommendations on M&A norms in 2013, DoT finalised the guidelines only in early 2014. These guidelines have not been implemented yet, as cabinet approval is awaited. Given this scenario, many expected deals have not come to fruition with service providers choosing to adopt a wait-and-watch policy.

However, it is not just the implementation of the final norms that is affecting consolidation in the industry. The regulatory approval process is turning out to be a major hindrance as well. For instance, Bharti Airtel called off a deal to acquire Loop Mobile’s assets, despite a definitive agreement having been signed, citing delays in approval from the regulatory authorities as the reason. The deal would have enabled Loop Mobile to repay its debt, as well as provided an exit route to its investors.

The cancellation of the Airtel-Loop deal has raised fresh concerns over the government’s claim of reducing regulatory uncertainty and also impacted investors who have been looking for an exit route. In addition, it has affected the decision-making of potential foreign investors and companies that were planning to foray into the Indian telecom market.

The industry is of the view that some provisions in the new M&A norms act as a deterrent to potential deals, particularly when at least one of the entities is an incumbent. As per the new guidelines, the merged entity cannot have more than 50 per cent of subscriber and revenue market share in a circle. Given that some incumbents already have a significant revenue and subscriber market share in a few circles, their inclination for M&A deals is unlikely. Also, with additional spectrum holdings, the merged telecom company would be required to pay a higher spectrum usage charge. This is already being disputed by the industry. If the government approves the proposed regulations, consolidation will remain unlikely.

Spectrum trading and sharing guidelines await approval

In July 2014, TRAI gave its recommendations on spectrum trading norms after discussions with industry stakeholders. It suggested that operators be allowed to trade the spectrum acquired through the auction process, or administrative spectrum for which the company had paid a market-determined price. However, spectrum leasing was not suggested by TRAI, though it subsequently agreed to reconsider this after assessing the impact of spectrum sharing on industry dynamics. In addition, as per the recommended guidelines, an operator that buys spectrum from another company would be prohibited from trading it for two years.

TRAI also recommended that spectrum trading be permitted only on a pan-circle basis, implying that it cannot be traded for a part of the licensed service  area (LSA). In case the spectrum assigned to the seller is restricted to a part of the LSA by the licensor (DoT), then after trading the rights and obligations of the seller for the remaining part of the LSA with regard to the assignment of that spectrum would also stand transferred to the buyer.

During the year, the government also issued recommendations on spectrum sharing, according to which two operators will be permitted to share spectrum in the same band and circles only if they both have a licence there. In addition, an operator can share the spectrum it has acquired through an auction or the administrative mechanism only if the other telecom company has also acquired airwaves via the same process.

The industry views these guidelines as stringent and has urged the government to reconsider them. The onus is now on the government and TRAI to once again consult industry stakeholders and issue a final set of norms that addresses their concerns.

Tax issues

While the new government had promised to fast-track tax dispute cases, implement a stable tax regime and end “tax terrorism”, the limited action on its part has been creating confusion in the industry. During the year, there was little progress in the tax dispute regarding Vodafone’s acquisition of stake in Hutchison Essar from Hutchison Whampoa in 2007. While the retrospective amendment to Indian tax laws in 2012 was damaging in itself, the continued delay in resolving the case is making matters worse. In another instance, Nokia was not permitted to transfer its manufacturing facility to Microsoft as part of a deal between the two entities because local tax authorities had frozen the asset owing to irregularities in Nokia’s reported revenues.

The slow and lacklustre progress in tax cases in India is adding to the concern of foreign investors, and addressing this issue is vital to attracting foreign investment.

Supreme Court permits 3G ICRs

One of the biggest positives in 2014 was the Supreme Court’s verdict that allowed telecom operators to enter into 3G intra-circle roaming (ICR) agreements. As per these agreements, telecom operators can offer 3G services even in circles where they do not hold a licence.

This positive ruling by the apex court has come as a major relief for the industry, which has been disputing DoT’s ban on these agreements. The industry has been of the view that no operator can win a licence in all 22 circles due to the aggressive bidding resulting from the scarcity of 3G spectrum. Operators need to partner with one another to offer these services. The industry further contended that ICR agreements lead to effective utilisation of 3G spectrum as well as improved data services. These views were supported by TRAI, which termed it a Catch-22 situation.

After the apex court cleared the decks for 3G ICR agreements, operators have been extending their 3G network coverage, which will earn them higher data revenues. This will increase the licence fee and spectrum usage charges paid by operators on account of higher gross revenues, thereby resulting in a win-win situation.

Spectrum swap agreement – A key achievement

Another key achievement of the telecom ministry and DoT during 2014 was a breakthrough in the spectrum swap deal with the defence ministry. Discussions over spectrum exchange between the two ministries have been going on for several years. The consensus is a positive development for the industry.

As per the deal, DoT will give 15 MHz of spectrum in the 1900 MHz band to the defence forces in return for the same quantum of spectrum in the 2100 MHz band. The additional spectrum will allow operators to improve their 3G network capacity and coverage while also providing an opportunity to telecom companies that do not have 3G spectrum at the moment.

However, the government has decided against selling these airwaves along with spectrum in the 900 MHz and 1800 MHz bands in the auctions, which is against the recommendations of TRAI. Had the government put up these airways for sale, there would have been more rational bidding on account of the availability of higher spectrum. This would have enabled operators to divert more capital towards deploying networks and improving capacity and coverage.

Digital India programme – A promising step

During 2014, the new government launched the Digital India programme to ensure digital connectivity in urban and rural areas. The vision of the programme is to provide “every citizen with infrastructure as a utility” and ensure their digital empowerment while also giving them “access to governance and services on demand”. Under the programme, the government has identified nine pillars of growth: broadband highways, universal access to mobile connectivity, a public internet access programme, e-governance services, e-Kranti, information for all, electronics manufacturing, IT for jobs, and early harvest programmes.

The government will integrate all its existing schemes and projects into the Digital India programme, although these could be restructured. For instance, the NOFN project that aims to provide broadband connectivity to 250,000 gram panchayats has now been integrated into it. Other existing projects like the National Knowledge Network and the State Wide Area Network will also be merged with it.

The programme has been well received by both Indian and international private companies. Many foreign multinational companies like Microsoft, Google and Facebook have already shown interest in participating in it and are keen to provide technological support for enabling digital connectivity across the country. However, executing the same successfully would be a mammoth task and require enormous effort from all stakeholders. India’s geographical diversity, the limited demand in rural areas, and varying technological requirements are all aspects that will pose a stiff challenge.

Additional unlicensed spectrum for mobile data traffic offloading

Keeping in mind the rising need for offloading mobile data traffic, service providers have been increasingly using unlicensed spectrum in the 2.4 GHz band, particularly in dense urban areas. However, with the increasing deployment of Wi-Fi solutions in this band, the government is considering seeking TRAI’s views on freeing up spectrum in the 60 GHz band for more data traffic offloading to avoid any spectrum crunch. It will also ask TRAI to suggest changes in the licence norms and interconnection pacts of internet service providers with mobile operators to provide these Wi-Fi data offloading solutions.

This is a positive move for the industry as operators have been witnessing a surge in data traffic on their networks, which is resulting in congestion and affecting user experience. Providing additional unlicensed spectrum to telecom operators will also enable the government to achieve its objective of offering Wi-Fi services in public places, including in the 45 cities identified by DoT. Providing Wi-Fi services in these cities is among the objectives of the Digital India programme.

Hoping for a positive 2015

Even though 2014 was significantly better for the telecom industry compared to the previous two years, uncertainty continued to surround several important regulatory issues. The industry is now hoping that the government implements all regulations that are awaiting cabinet approval. This would allow private operators to plan their business and investment strategies accordingly and send a positive signal to investors about the new government’s ability to carry out reforms as well as provide a stable policy and regulatory environment.

Among the regulations that need clarity, those related to M&As and spectrum trading and sharing should be on top of the priority list. The current norms have not received a positive response from the industry, and they need to be revisited. The whole exercise of formulating and implementing new regulations becomes futile if it does not yield the expected results.

Another important industry demand is a clear roadmap for spectrum auctions, which has been reiterated by TRAI. This would ensure visibility regarding the quantum of spectrum that would be available with the government in the future, thus helping operators, especially those whose licences are due to expire in the coming decade. A clear spectrum roadmap, along with M&A and spectrum sharing and trading guidelines, would help the industry grow at a similar pace as in the latter half of the past decade.

As far as the Digital India programme is concerned, the government needs to iron out issues like right-of-way hurdles, low consumer demand in rural areas, and inadequate spectrum availability to ensure the development of sustainable businesses.

The new government has its work cut out for 2015, and the way its plans are executed will define the telecom industry’s short-term outlook.