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Death by Regulations: Indian Telecom

The gap between policymaking and regulation in Indian telecom is slowly killing operators in the country

Published: Jun 19, 2012 06:55:23 AM IST
Updated: Jun 19, 2012 12:11:55 PM IST
Death by Regulations: Indian Telecom
Image: Adnan Abidi/ Reuters
Kapil Sibal, Minister of Communications and Information Technology

“It is ‘permissible’. But not ‘permitted.’ ”

Kapil Sibal’s words had the effect of a stun grenade in the room full of CEOs of leading Indian mobile operators. For a minute or so, their brains, arguably amongst the sharpest in the country and capable of processing incredible amounts of complexity, froze, trying to parse the meaning.

It was late 2011 and the operators were in an elevated crisis mode.

After spending billions of dollars on buying scarce spectrum a year ago to launch 3G services, they had been served a shocker by the Telecom Regulatory Authority of India (TRAI) in October. They were told to cancel all their 3G roaming agreements in states and circles where they did not own the underlying spectrum.

Using a kitchen sink approach, TRAI and its cohorts in the Department of Telecom (DoT) came up with a list of reasons on why 3G ‘intra-circle roaming’ ought to be banned: Loss of revenue to the exchequer, cartelisation, roll-out obligations, quality of service, and even national security.

But the operators who had collectively paid over $11 billion for their spectrum (the same would be worth just over $9 billion today, thanks to the depreciating rupee), must have anticipated exactly that. Shrewdly, they had written to the DoT before the auctions asking if intra-circle roaming would be permitted. And the DoT replied in writing that it was.

So that’s exactly what they asked Sibal during the closed-door meeting, “But you said it was permitted?”

Incumbents in the Crosshairs
Picture this for a moment: An old, wounded and hungry dinosaur going about in a forest full of flora and fauna—nearly blind, unpredictable and incapable of straight thinking, yet still capable of inflicting massive damage through just a swish of its tail.

That is the Indian telecom regulatory trifecta, composed of the Ministry of Communications, the DoT and TRAI.

It’s usually hard to make sense of their arbitrary and mischievous actions, easily a global case-study on how not to regulate. But with the benefit of hindsight, one common theme connects together the large majority of their moves since the 2010 3G and 4G auctions: Targeting profitable incumbents.

Let’s begin with the “permissible-permitted” kerfuffle around intra-circle roaming. Given that nine bidders were fighting for three or four operator slots in each state or metro during the 3G auctions, it followed that no one emerged with spectrum pan-India.

So, by banning intra-circle roaming, TRAI was effectively preventing private operators from offering 3G services to all their customers. More importantly, it restricts the possibility of a pan-India 3G offering by any operator.

An analysis of other significant regulations makes it clear that the unstated target of telecom regulation in India since 2010 have been the leading incumbents—and by that I mean profitable and well-run businesses not necessarily the earliest to enter the space—namely Bharti Airtel, Vodafone and Idea.

‘Lingchi’, a feared and ancient Chinese torture meaning ‘death by a thousand cuts’ would be one way to describe what these incumbents are being put through. The punishment was reserved for the severest and rarest of crimes and consisted of progressive cuts to the victim’s body, over periods ranging from a few hours to sometimes even a few days, till death.

In much the same way, the effect of most recent telecom policies seems intended at bleeding away all advantages that operators have painstakingly built over the years, in almost all cases at an enormous cost. For instance, Vodafone alone is estimated to have spent over Rs 55,000 crore in India over the last five years. Some of the other most egregious examples of this include spectrum ‘refarming’, doing away with roaming charges, taxing tower companies and reducing termination charges.

Take ‘refarming’, internationally taken to mean the reassignment of spectrum from low-value activities, like terrestrial TV transmission or 2G mobile telephony, to higher-value ones. What the TRAI proposes in India is ‘redistribution’ instead, taking away all the 900Mhz spectrum held by the oldest operators, and auction it to a larger pool of operators. If the intended impact of this refarming is to allow 4G services on certain bands of spectrum, why not let existing operators do that, especially given that spectrum and technology are already de-linked?

“Since we’ve moved to a regime where spectrum is being charged at market prices, if Airtel wants to hold on to its 900Mhz spectrum it should be allowed to outbid others for it,” says Professor Rohit Prasad, an associate professor at Management Development Institute (MDI) Gurgaon and a regulatory expert on telecom.

The impact of zero roaming charges on Airtel and Idea are estimated to be 4 to 5 percent of revenues. Taken together with the ban on intra-circle 3G roaming, it would appear the regulator wants to simultaneously curtail the reach of roaming agreements and make them less profitable. It is, of course, no one’s case that Indian roaming tariffs are so high that this would be warranted.

Similarly, the introduction of an 8 percent licence fee for tower companies is in effect a double tax for those mobile operators that also happen to co-own tower companies. Who are they? Bharti Airtel, Vodafone, Idea, Reliance Communications, Tata Teleservices, Aircel and BSNL.

By proposing to reduce ‘termination charges’ to zero—the charge paid by a subscriber’s mobile operator to another, to whose network the call is being made to—TRAI wants to subsidise newer and smaller operators at the cost of older and larger ones.

There are many more examples—framing mergers & acquisitions policies in a way that large operators will never be able to make meaningful acquisitions, wilfully delaying Qualcomm’s 4G spectrum by nearly two years and then penalising the company itself for the delay; keeping current owners of 800Mhz and 900Mhz spectrum out of auctions for 700Mhz. The list is long.

At the root of this, lies the way in which telecom regulation has evolved in India. While internationally the trend has been towards a convergence between policymaking and regulation in the hands of the same body, in India, successive governments have sought to create a wider gap between policy (which they insist on retaining) and regulation (which is with TRAI).

This separation not just goes against international trends, it goes against the convergence that is taking place in the sector itself.

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(This story appears in the 22 June, 2012 issue of Forbes India. To visit our Archives, click here.)

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  • Uj

    Cutting out all jargon and convoluted arguments, as a common citizen and a telecom subscriber, I think that: (1) If the government agreed to allow intra circle 3G roaming prior to 3G Auction, then they should honor it. Contracts have to be sacrosanct. (2) Even if this kind of 3G roaming was let\'s say, a grey area prior to auction, CONSUMER INTEREST COMES FIRST. This 3G roaming is giving customers more choice, so how can that be wrong?? And how much revenue loss are we talking about? Is there no end to Government Greed after already earning 70,000 crores from 3G? I think any opposition to (1) or (2) is either driven by vested interest or by a lack of understanding about basic goals of telecom policy.

    on Jun 25, 2012
  • Vikram

    The real cartel is the government and not the corporates. The political class has nothing at stake but only to gain. The telcom saga is a classic case of upholding the law by subverting the principles.

    on Jun 19, 2012
  • Om

    Poorly written article. Sounds more an article from an Entertainment magazine. You lost credibility as soon as I read the over-exaggerated, over-dramatized, superbly ridiculous and amazingly hilarious comparisons to \"An old, wounded and hungry dinosaur\" and later \"Lingchi\". lol. Please, you are writing for Forbes, not Femina.

    on Jun 19, 2012
  • Nitin

    Agreed that its a deterrent for big company investment, but, isn\'t it fair that the Indian Government is trying to encourage a lot of competition by ensuring big players dont end up monopolizing the market?

    on Jun 19, 2012
  • Gp

    Wow. Did you actually write this yourself or just jotted down dictation from some telco PR firm? While the regulator may be looking particularly incompetent these days, the primary duty of the regulator is to prevent cartels, monopolies or anything else that hurts the end user or the country. I am amused that you talk of the whole 3G roaming issue as one where the operators acted smartly and did the right thing. They did not. They found loopholes and exploited them, thus acting against the spirit of the conditions of the auction. The major contention was with Intra Circle Roaming where subscribers of a non 3G telco could get 3G by logging onto networks of telcos who have the spectrum for 3G services. For this, there must be an agreement between the 3G and non 3G circle to provide access to the latter\'s subscribers within the same circle. Since this was a method to overcome the disadvantage a operator faced by not bidding for spectrum for a circle, meaning that bids were potentially lower, the government was within its rights to be annoyed. If 3G roaming had been allowed well beforehand, the top 3 telecom operators would have split circles up between themselves and herded all their subscribers into the same chunk of spectrum. They would have saved enormous amounts of money. I am sure they are still doing this. Airtel, for example, did not bother with buying 3G spectrum in the very lucrative Maharashtra circle, probably knowing that Vodafone and Idea had it already. They later bought 4G spectrum in the state. Heck, even the recent tariff drop for 3G services was co-ordinated to such an extent that all operators dropped rates within a span of 24 hours, and all 3G operators have exactly the same rates for 3G services now. If this is not a cartel-like behaviour, I don\'t know what is. Why were rates reduced if it was indeed a cartel? I don\'t know. But it was probably to spur adoption, and try and monetise their own 3G based services rather than real competition. Pricey 3G services have been a bottleneck in the spread of 3G data use. Besides 4G is barely months away. (Well, it is actually here already thanks to Airtel but equipment is pricey and so are tariffs). I\'d love to see real data on 3G and 4G subscribers if it is available anywhere.

    on Jun 19, 2012
    • Rohin Dharmakumar

      Dear GP, I'm flattered you think PR firms of large Telecom operators think me important enough to feed me inside information and policy arguments. In that you're either over-estimating the roles and responsibilities of most PR firms; my importance in the larger scheme of things; or both. That said, the world (and our own earlier policy regulations) are moving towards delinking telecom services from the underlying spectrum bands. Which means once a company pays a fair market price (and there's zero dispute that the leading incumbents did that) for spectrum, it should be allowed to offer whatever services it wants on that. That convergence is the way devices, technologies and regulators are moving towards the world over. The only reason our regulators wouldn't want that is so they can exercise their subjective power on what a company can or can't do. There is no reason whatsoever to defend such a view. Even if that weren't true, how would you parse DoT's following response to the leading operators around Feb 2010: "The roaming policy is applicable to the licences and not to specific spectrum bands. Hence roaming will be permitted."? (Source: Lastly, its not always a cartel when prices drop around the same time. In a competitive market players often have no choice but to match the falling prices of a large competitor. If you suspect there is collusion involved, try putting in a complaint with the Competition Commission of India?

      on Jun 19, 2012
  • Abraham Paul

    NTP 2012: Much a do about nothing. Will have reverse effect to PAN India service and Rural Telecom growth:

    on Jun 19, 2012