-

The Department of Telecommunications (DoT) has recently announced merger and acquisition (M&A) guidelines for the telecom sector, based largely on the recommendations brought out by the Telecom Regulatory Authority of India (TRAI) in 2007.

According to DoT officials, a revision in policy was necessary in view of the rapid pace of growth and the challenges faced by the telecom industry. The previous M&A policy was drafted about four years ago, when the total mobile subscriber base stood at 33.58 million. Today, with over 260 million mobile subscribers and an average addition of 8 million subscribers a month, the dynamics of the industry have changed. Moreover, the dearth of spectrum poses a real challenge for the industry, especially in light of the fact that the number of operators is likely to double from the current 12 with the entry of new players.

Taking this reality into account, DoT has announced significantly tougher M&A norms, making consolidation among the existing players not only expensive, but also more difficult. The government's objective is to ensure that the telecom market at all times has more than eight operators in every circle, thus leading to increased competition. DoT has specifically put in a clause of pre-approval before any merger. It has also laid down that no M&A of telecom licences will be sanctioned if the number of service providers in any circle falls below four.

DoT has also lowered the threshold of the combined market share of merged entities from 67 per cent to 40 per cent, above which a merger will be prohibited. This, it hopes, will keep monopolistic trade practices at bay. As a DoT official puts it, "The Indian phone market is too big to allow any entity to have over 40 per cent market share."

The guidelines further insist that the "merger of licences will be restricted to the same service area", implying that an operator offering services in a northern state will be debarred from merging with another operator offering services in, say, Tamil Nadu or Karnataka. Then again, mergers will be allowed only between one cable modem termination system (CMTS) and another CMTS operator, and between one unified access service licence (UASL) and another UASL operator.

On the equity clause, the new policy remains unchanged. An operator cannot hold more than 10 per cent equity stake in a rival operator in the same circle. This is expected to prevent existing players from picking up stake in a second entity. This move is, however, at variance with TRAI's recommendation of 20 per cent for the same clause.

Further, DoT has proposed a threeyear lock-in period and a requirement for prior permission before any merger. This will effectively stop new players from selling and existing players from buying stake within the stipulated period.

The guidelines include several measures related to spectrum –­ a reflection of the government's determination to check spectrum hoarding and optimise utilisation of the scarce resource. DoT has taken a tough stand on spectrum retention by operators. While it allows the merged entity to be entitled to the total amount of spectrum held by the merging companies, it has put in a stiff rider according to which the new entity has to meet the subscriber criterion within three months. Failing this, it would have to surrender the licence. In case some spectrum is still held by the merged entity after the expiry of three months, the charge for it would be doubled every three months. The guidelines also stipulate surrender of excess spectrum by the merged entity. They also talk about a spectrum transfer charge and a periodic financial penalty, if excess spectrum is not surrendered, the details of which are to be specified later.

The focus on optimising spectrum usage and maximising revenue from it is quite evident in the new rules. However, the rapidly growing telecom industry is none too happy with the guidelines. "We are studying the guidelines. There seems to be ambiguity in the rules and we will write to DoT seeking more clarity. In any case, these stringent M&A norms will practically translate into no M&A deals in the Indian telecom sector for the next three years," claims T.V. Ramachandran, director-general, Cellular Operators Association of India.

Market analysts are also concerned about the fact that in its revised M&A norms, DoT has not mentioned anything about acquisitions. There is also no mention of the rollout obligations stressed upon by TRAI in its recommendations.

Telecom analyst Mahesh Uppal notes, "It is a bit of a mess for everyone. The existing players will be hit as they can't buy for three years. New players won't be able to sell and it will not help the consolidation of the industry either."

For new players such as Videocon, Swan, S Tel and Unitech, the three-year lock-in period will definitely be a damper. New to the workings of the telecom industry, these companies have been on the lookout for strategic partners to bring in expertise. While they can bring in strategic investors by selling a maximum of up to 74 per cent stake to new global majors or other domestic companies looking to enter the telecom market in India, they can do so only after completing three years in operation.

The new entrants also cannot sell to existing players like Bharti Airtel, Idea Cellular or Vodafone that have a dominant market share in most of the circles they operate in. For instance, companies like AT&T which has been talking to a number of new telecom licence holders including Aircel, Videocon and Idea Cellular for re-entering the Indian mobile space, the new M&A guidelines may put paid to their plans. They certainly cannot hope to make a quick buy as they would have to wait for three years before they can acquire a controlling stake in any of the new telecom companies.

According to operators, several clarifications are required to the guidelines. For instance, Venugopal Dhoot, chairman, Videocon, says, "It is unclear whether the three-year lock-in period will be applicable only for merger deals or whether it will include acquisitions as well. Besides, operators want to know whether the three-year period is applicable only to the new entrants or to the existing operators with new licences as well."

Pre-approval is another area that operators are planning to seek changes in. According to operators, pre-approval for any deal cannot be obtained as talks between companies are conducted at the highest levels of confidentiality. According to law, if DoT were to be informed of this, the same information has to be furnished to the Securities and Exchange Board of India. This, in turn, would violate the non-disclosure agreement that two companies enter into, when they are in talks for a merger. "On most occasions, as was the case with the Hutchison-Vodafone deal, several players were in the running; the pre-approval clause, if extended to them, would mean that each of the companies would need a pre-approval to move ahead on the deal. This makes no sense," comments a senior Aircel executive.

In sum, while it is evident that DoT is keen to retain a high level of competition in the telecom industry, operators fear it may be at the cost of further consolidation in the sector. The last, clearly, has not been said on the matter.

DoT's revised guidelines for M&As